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17 February 2009

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Patrick Lang

All

Why is Lazard Freres not involved in this devloping crash? pl

Brett J

re: general topic, I caught this Financial Times article on Wal-Mart's profits : WM 'accounted for 50 per cent of all US retail growth during 2008 – while its full-year global sales passed $400bn for the first time, and profits hit $13.4bn.'

http://www.ft.com/cms/s/0/1e2cef8e-fd23-11dd-a103-000077b07658.html?nclick_check=1

Big doggin' it. No question that if this powerhouse stays profitable (and nimble! Impressive for their size...) during this economic-bottom-dropping-out, they're going to become even more potent on the upswing, eating up the markets that others are dropping out of. They're keeping up their cash flow and have momentum as we race to the bottom.

Buy (mental) stocks in Chipotle (burritos) and condoms, too, from what i hear.
---
Pat - great (and hard to disagree with) Joel Garreau quote. Makes one wonder how the US would've developed if it were the case (A beach-bum mentality instead of a Puritan one? Only a dream in Rio...)

McGee

Colonel,

Complete aside from a Boston guy. Fort Devens is now a Federal Prison. If there are any former ASA folk on this blog, they would probably chime in that nothing has really changed.....!

BTW great thread. I've learned more from following the links posted here than anything I've read recently in the mainstream media.

jonst

Leila,

You wrote: 'We have a long way to go before we are as bad off as the Lebanese in the 70s-80s, and they survived."

Man, that is settin the bar pretty low I'd say.

My picks?

Most major banks are toast. They will be nationalized.

Ten years for the commercial and real estate markets to come back to where they where in 2000.

If the Defense Dept, Medicare/Medicaid are not reined in we are gonna be in real trouble for a long time.

General deflationary trend for 2-3 years. Then comes inflation as we print money to sustain a standard of living we can't afford. i.e. two wars. Huge military.

Those are my 'picks'

Mike D

There is an interest on this blog of urbanites that want to grow their own as a hedge against the collapse of the economy. You need to meet Sharon Astyk:

http://sharonastyk.com/

Frontline had a program devoted to this present economic problem broadcast on 2/17/09--the usual type of program we now expect--lots of drama without a lot of facts. 10 minutes worth of data drawn out over 60 minutes of television. Very sad. The real story is that there is widespread criminality involving the best educated people in America. Something went wrong, and we are going to have to suffer through it. I call this the "Age of Stupidity." There have been other such Ages.

Read Astyk and enjoy.

regards

Mike D

mlaw230

The new housing program, although too small, is going to go a long way toward drawing a line under the drop in RE values, but only if the Bankruptcy provisions are approved too. That and 2-3 years of inflation should make Americans secure in their homes once again.

More broadly, one wonders if we are not seeing the beginning of a great "leveling" across the globe caused by globalization.

If we ultimately devalue the dollar, either expressly or through inflationary deterioration, it could well be that asset rich developing countries experience a sharp uptick in the value of their currency.

Imagine the "stimulus" if millions of Brazilians, Iraqis, Saudis, Chinese and Indians suddenly entered the consumer market?

1) Seize the big banks and sell them for parts.

2) Devalue the dollar by 30% and the euro by 50%.

3) Revalue the currencies of Mexico, Brazil, Iraq, China and India by 300-400%.

Desperate times call for desperate measures.

Leila Abu-Saba

Hey Mike D, thanks for chiming in on Sharon Astyk, I've been talking up her blog here for a while. Now I don't look like such a crank. I think those of you worried about the money ought to have a look at her place. She seems like she might be "out there" but she has just drawn conclusions about our future and is making preparations accordingly. Also writing books & blog about those preparations so we can all follow along at home.

My opinions re: food storage and preparation strongly shaped by her blog. I don't know if I think things are going to be as bad as she predicts. But I think many of her measures are sensible in any case.

dilbert dogbert

Re: Calculated Risk
Comments are very uneven. Every once in a while a good set of arguments get posted but most of the time comments are just venting.
The meat of CR is the Ubernerd posts on the mortgage industry by the late TANTA.
We miss her wit and wisdom.
TANTA-VIVE!
CR posts a lot of "chart porn" which illustrates the state of the economy.
Re: RE
Irvine Renter has good stuff of the state of Orange Co Calif real estate and good stuff on how we got to where we are in real estate.
Thanks all for the high level of most of the comments at SST.

DaveGood

mlaw230

why devalue the the US dollar by 30 per cent but the Euro by 50?

Are you arguing that the actual value of goods, services, and commodities produced within the Euro zone has been substantially less over the last thirty years then America's?

Europe's biggest economy has earned massive favourable trade balance consistently, Producing goods the world wants, despite having spent the last 20 years funding the rebuilding of an entire country (East Germany).

Can America say the same?

Why on earth would it benefit anyone in America, (never mind the citizens of those countries who will be extremely pissed off if this happens).... too make, for example the peasants of China, whose savings funded the Republican engineered "Boom" and it's two west Asian Wars, of the last decade pay twice over?

To tell them, we've enjoyed the results of all your hard work, and your savings, now we are going to make sure you won't get most of it back?

Inflation is a method used by those in debt to cheat those who they owe to money too... and it won't be forgotten, not by the millions of Brazilians, Iraqis, Saudis, Chinese and Indians who loaned dollars to the Bush Government and who you now say should be paid back with pennies.

DaveGood

regulararmyfool

How about those carefully regulated and audited insurance companies?

You have not seen jack yet.

Wait till someone at one of the large insurance companies blows the whistle on what they actually have in the vault.

If, after an unexpected audit by some internationally recognized non-US auditors, they are shown to be in fine shape, give them the banks.

If not, then kiss your home insurance, car insurance and health insurance, goodby

charlottemom

Real Estate bottoming is coming in waves. CA, AZ, NV, FL, MI all seem to be the hardest hit, but even they have not hit bottom. Wait til California goes bankrupt, Chrysler (maybe GM too), gaming industry "folding" (Trump bankrupt, Wynn?), tourism busted (FL); it'll get worse before it gets better in these and other regions for reasons we haven't even thought of.

For instance, here in Charlotte, we'd experienced slight downtick in real estate in the last year but had more or less held values until... Wachovia fell and BofA is falling (yes, I think receivership and restructuring is in its future). This is happening quickly and housing prices picking up to the downside fast.

What I'm trying to say is the economic contraction will be across the board - asset classes, industries, regions, and don't think it will fully "make the rounds" and be done with until 2012ish as a guess.

Obama Home Rescue Plan

Because we are nowhere near the housing bottom, I fear the gov attempt to put in a false floor on housing will fail. Homeowner Rescue Plan like its cousin the Stimulus Plan is destined for a sequel. See you at Homeowner Rescue II as re-modified mortgages are re-re-financed after prices continue to fall. Seems like the poor homeower debtslave will continue as such (with a ballooning interest rate no less) as the overleveraged investor/speculator gets off. (I know Obama says no, but read the plan and judge for yourself)

More Gov money relief for "illiquid (real estate) assets" is similar to problem with banks which are trying to lift "mark to market" on their illiquid assets. Buyers/Sellers are not agreeing on the market valuation. Gov stepping in the "set the price." Has that ever worked in economies?

RE Banks
If US doesn't take over these zombie banks, they will overtake us. Nationalize tarp banks all of them...receivership, restructure, reset. And get on with it.

No one wants to face the dire fact that we - country, company, citizen are broke and will need adjust to a new poorer life.

P.s. re Lazard - in charlotte they've picked off a few locally connected, Waspy i.b.ers from BofA, Wachovia and are setting up a new office. As a boutique firm they've been off the radar during th FIRE implosion, kinda like Perella. And yet why that is, I'm not sure...Hmmm


greg0

Michael Angelo,
Something to warm your heart: "If Gov. Perry rejects Texas' share of the federal aid, our state could lose as much as $27 billion to invest in infrastructure - funds that could create or save an estimated 269,000 jobs."
http://www.txdemocrats.org/media/top_story/perrys_obstructionist_antics

curious

2) Devalue the dollar by 30% and the euro by 50%.
3) Revalue the currencies of Mexico, Brazil, Iraq, China and India by 300-400%.
Posted by: mlaw230 | 18 February 2009 at 05:31 PM

you know that would be one cool experiment to run. (You forget Japan and russia. One is global consumer electronic, machine and car industry, the next one is european energy source and big market.)

essentially that proposal would be for US economy to export its way out of the debt trouble. changing around currency has been done several time. (Bretton wood, Plaza accord, and last G20 meeting were essentially the world top economy rigging the exchange because the number doesn't add up.)

but current Brettonwood II mechanism is definitely broken and unsustainable. China and Japan both hard peg their currency against dollar. Saudi/middle east also hard peg their currency.

the combination effect: US domestic economic policy isn't big enough anymore to drive the planet. Japan alone was able to alter dollar trend, and now china doing the same, even more efficient. essentially suspending dollar strength way up high to create market. US consumers and living standard shot up, but industry become uncompetitive.

if china/india/brazil currency shot up 300%, price of commodity (coal, oil, steel, lumber) will shot up for US market. Electronic and consumer product (walmart/best buy/garment) price will shot up 300% too. for period of time at least until manufacturing supply pattern changes. price of gas will goes to $3-4, unless we force saudi to keep their peg. But saudi economy will be pretty much destroyed, since they will experience 100-200% inflation. Price of walmart/electronic item will go up by 300%. A pair of shoes will go for $200-300 bucks, basic TV will be $1500-2000. A pair of jeans will be $200. a paperback novel will cost $30. This is basically, what people are paying in Tokyo.

that's basically what happens in iceland. (price of every imported item suddenly goes up by 5-20 times.)

Rural, small town, suburban standard of living will be pretty much destroyed. The price of everything will shot up by 3-500% due to transportation cost. But urban and manufacturing center will thrive.

advantage: dollar is global currency and have license to print money. the first 4-5years of economic transition can be paid using free money.

curious

And by the way, if banks want Uncle Sam to buy all those "toxic" assets, the government is now going to do it alongside private capital. These investors aren't going to overpay, so that game is up as well.

Since Mr. Geithner's plan has been unveiled, the stock prices of the financial sector are off about 19%. This is not necessarily a bad thing. The banks were expecting another handout.

While it was not his intention, the reality is that Mr. Geithner is going to confirm the insolvency of the financial system. Once we face this truth, there really isn't much left to do but nationalize.

http://online.wsj.com/article/SB123491676536704371.html

Clifford Kiracofe

The Federal Reserve System should be nationalized as was the Bank of England after WWII. The BOE, despite its name, was a privately held monopoly since its founding in the late 17th century by Mr. Paterson etal. The US FED, similarly, has private and shadowy shareholders. A full accounting is needed these days of who owns what with respect to the FED. We need a Central Bank, but an authentic FEDERAL one not some shadowy privately held affair.

I do not think nationalization for the commercial banks etc. is the best option. Rather, orderly bankruptcy and reorganization would be my preference. Of course, the strictest possible REGULATION by federal and state authorities of financial institutions is required and a sina qua non.

Industry has become the servant of banks rather than the reverse which is the proper relationship.

We are paying the price for our usual national lack of memory and the power of vested interests and lobbies. We have been through all this since the late 19th century. Interstate commerce began to be REGULATED by the FEDERAL government in the late 1880s. Thus, the principle of federal regulation of aspects of interstate commerce was adopted. Then we had the Progressive Era follow on and significant further regulation was established over various industries.

Then we had the reaction of Wall Street and Big Business in the 1920s who followed the Italian Fascists very closely as TIME Magazine covers with Mussolini indicated. And if that wasn't enough the 1933 edition of FORTUNE praising Fascist Italy and its business and government made the point to slow learners. Time-Life was in the hands of Henry Luce, a Skull and Bones/Yale member like many of the American oligarchy (President Bush41 and 43, Senator Kerry and so on.) FDR was perfectly familiar with the Wall Street and Big Business oligarchy by virtue of his own social background in high society. Thus, he continued the Progressives' battle against vested interests in his New Deal.

This gave rise to the Wall Street creation of the "American Liberty League" an organization modeled on Continental European Fascism particularly Italian and French. See Wiki.

Some background on our situation can be found online in an 1982 interview with Norman Dodd (1899-1978), a retired Wall Street banker. He worked for Bankers Trust Company in the 1920s and 1930s after graduating Philips Andover Academy and then from Yale. He was a cousin of the Rockfellers through the Aldrich family and thus in high social circles and well connected. After leaving Bankers Trust, he worked with the Wall Street brokerage firm of Delafield and Delafield specializing in securities analysis. He later in the 1950s was asked by Congressman Reese to be research director of the Reese Committee to Investigate Tax Exempt Foundations because of his intimate knowledge of the ways of Wall Street and financial oligarchy.

Lazard? Just another part of the cosmopolitan financial oligarchy but a very signifcant one historically in its support for European fascism. for example. The analysis would involve the London, Paris, and New York offices of Lazard from say the early 1900s on.
http://video.google.com/videoplay?docid=-7373201783240489827

mlaw230

David Good and Curious: I am not an economist. My post was more or less a thought experiment based on the following:

1) The dollar and the euro are inevitably in for some inflation, and as compared to deflation that is a good thing.

2) If inflation is inevitable what will happen next?

In my opinion, the benefits of "globalization" have never quite trickled down to the citizenry because developing nations tend to keep their currency undervalued. I am sure that this is so to encourage investment, employment etc... Also, however there is the tendency of the elite to earn in dollars and pay in local currency, a pretty good deal if you can get it.

Nevertheless, the "savings" of Chinese workers and others has been kept at the sovereign level and in dollars. It never quite got to the workers.

Consequently, although one can not deny that the situation in many developing nations has improved, they have not quite developed the enormous middle class it requires to run a consumer economy.

The effects here would be enormous and perhaps unpredictable, but if the average Chinese income were suddenly 500% higher as compared to the dollar, and that pattern prevailed, one would expect a change in manufacturing patterns based on productivity rather than hourly cost.

The Chinese and Developing Nations "savings" have been frittered away, already, its gone, the only way to make it right is to revalue. As for Europe, my impression is that the Euro is much weaker than the dollar for the time being, that may change, but devaluing it further than the dollar could be an advantage to encourage reinvestment.

JTCornpone

I've been in the dentist's chair for the last couple of days and missed the beginning of this thread. I wanted to comment even if it's too late and no one is reading on this topic anymore.

I think as others have said the crisis is a result of greed and power. I cannot say which is the chicken and which the egg. The solution will not be a grand plan (which we should attempt anyway) but good old human muddling through.

I am not smart enough to do this analysis numerically but my general feeling is that things will not reach the level of financial armageddon. Institutions will fail, large ones, but there is a much larger underlying base for the survival of smaller institutions and consumption than in the 30s. PL and I are examples at hand. Military retirees and social security recipients are very numerous and will have guaranteed spendable income barring a very improbable utter catastrophe. Most folks in this demographic have stable housing within their means and generally do not engage in risky financial dealings. They will continue to spend reliably and sensibly. This is a new sustaining element in the economy compared to the past. Our impact may equal something like the WPA in economic impact.

While growing up I was regaled with so many dire (and funny) tales of the depression from my father whose extended family had to consolidate into a single not so harmonious household to survive that I turned out to be somewhat of a financial ant as opposed to a grasshopper. Had I anticipated the present conditions two years ago I might not have decided to tear down my paid for dilapidated doublewide for a mortgaged steel framed energy star house but at least I halved my energy bills for life and improved my hurricane protection (Florida) immeasureably. If the absolute worst of the worst happens I can retreat to my fishing cabin in the Ozarks which I built out of cash on hand and has laughably small taxes and live entirely on my social security checks and (maybe)state raised trout.

I believe in saving as much as you can and if you do spend invest in future savings. Spending on future savings helps the economy and you simultaneously. The part of the stimulus package which supports infrastructure and future energy savings is right on target in my opinion. Any tax cuts I get I will save until an opportunity to spend for my future betterment comes along. Don't get me wrong--I am not a miser. One should spend recreationally provided you follow the philosophy that you can afford anything you want so long as you only want what you can afford. The government on the other hand lives forever and never has to reckon up as long as it can carry the payments. I believe they should salvage institutions and spend to save jobs.

Leilas comments on gardening are right on point in thinking survival. It's in part a resurrection of WWII victory gardens. We cannot all live on universal subsistence gardening but it again provides a floor sustainable economy in supplies , seeds, etc., and food production and something satisfying to do. You don't have to dig up your yard. There are commercial container-based growing systems which can be home brewed which can grow astonishing amounts of vegetables on a patio. I have had amazing results with the commercial ones but will make my own from now on. See here

http://www.josho.com/gardening.htm

and here

http://www.wisefarmer.com/growbox/index.htm

I'm going to recycle my 5 gallon kitty litter buckets for these.

I hope things aren't as dire as WR Cummings projects but he did trigger a thought. There was an analog in the 20s to our crashing leveraged instruments based on mortgages. Then shares in stock trusts were the rage. Problem was that trusts often held not shares in companies but shares in trusts which held shares in trusts, etc. When the actual shares in companies at the bottom of the chain went down a little the pile of trusts utterly collapsed because there weren't enough actual shares in companies involved to satisfy demand for redemptions. A mortgage based Ponzi and a stock based Ponzi are little different in their effects when a perturbation hits the system and the bigger they are the harder they fall.

I think Texas is doing well due to huge savings realized by skimping on merge ramps on their interstates. They're about two cars long. This will prove short sighted. When they no longer can afford to drive vehicles with large enough V8 engines to merge safely, so many will perish attempting to access their highway system that their tax base and economy will completely fail.

Unlike Rush, I hope Obama and the country succeed. I never thought Rush would ever ally himself with Bin Laden but there it is. Apparently Obama, like the Shadow, has the power to cloud mens' minds.

I'm saddened by the individual pain we will suffer but I think we will muddle through as a country. Good luck to us all.

JT

euclidcreek

Mr. Stress writes: one of my favorite nasty Texas lines "If the nation ever needs an enema Texas is the right place to put the hose"

optimax

An interesting article in the NYT December, 30, 1892. Shows things haven't changed except for journalism and malleability of Presidents.

http://query.nytimes.com/gst/abstract.html?res=9F04E1DA1F31E033A25753C3A9649D94639ED7CF

curious

watch out, all those banking scandal is about to reveal major political corruption.

on top of that, this is down economy, a lot of the most powerful people need cash. (enter drug money) They better keep track of all those high power weapons and munition dump.

http://www.talkingpointsmemo.com/archives/2009/02/how_sir_allen_greased_the_skids_in_dc.php

We're learning that one of the ways Sir Allen Stanford plied U.S. lawmakers was through a little-known non-profit group called the Inter-American Economic Council. At one point, the group was focused on easing the restrictions that the Patriot Act imposed on offshore banks like Stanford's. Zack Roth has the background on Stanford's relationship with the group -- and pictures of Stanford attending an IAEC event with lawmakers in Washington.

Late Update: I'm not sure "little-known" is the best description of this group. Last year's keynote speaker at IAEC's annual awards gala, which is held at the headquarters of the Organization of American States in Washington, was Rep. Charlie Rangel (D-NY). In 2006, when Sir Allen was given the group's top award, President George Bush and First Lady Laura Bush were the honorary co-chairs of the event. Tickets for this year's black-tie affair, set for next Friday, are $500 apiece, and sponsorships of the event go for as much as $250,000.

http://www.foreignpolicy.com/story/cms.php?story_id=4684&page=2

The cartels have responded to Calderón’s war with the kind of buchon savagery that so struck me upon returning to Mexico. In addition to fighting each other, the cartels are now increasingly fighting the Mexican state as well, and the killing shows no sign of slowing. The Mexican Army is outgunned, even with U.S. support. Calderón’s purges of hundreds of public officials for corruption, cops among them, may look impressive, but they accomplish little. The problem isn’t individuals; it’s systemic. Until cities have the power and funding to provide strong and well-paid local police, Mexico’s criminal gangs will remain a national threat, not a regional nuisance.

There’s little reason to believe 2009 won’t look a lot like 2008. And there’s reason to fear it will be worse. The financial crisis is hitting Mexico hard. How long it can hang on is unclear. The momentum still favors the gangs, meaning the bloodshed will likely subside only when they tire of warring.

curious

very cool article

http://www.boingboing.net/2009/02/23/recipe-for-disaster.html

A year ago,it was hardly unthinkable that a math wizard like David X. Li might someday earn a Nobel Prize. After all, financial economists—even Wall Street quants—have received the Nobel in economics before, and Li's work on measuring risk has had more impact, more quickly, than previous Nobel Prize-winning contributions to the field. Today, though, as dazed bankers, politicians, regulators, and investors survey the wreckage of the biggest financial meltdown since the Great Depression, Li is probably thankful he still has a job in finance at all. Not that his achievement should be dismissed. He took a notoriously tough nut—determining correlation, or how seemingly disparate events are related—and cracked it wide open with a simple and elegant mathematical formula, one that would become ubiquitous in finance worldwide.

For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.

His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.

Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril.

David X. Li, it's safe to say, won't be getting that Nobel anytime soon. One result of the collapse has been the end of financial economics as something to be celebrated rather than feared. And Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees.

curious

instability and volatility is growing again. Thanks to uncertainty in banks nationalization. (citi and BoA are insolvent.)

http://news.bbc.co.uk/2/hi/business/7907117.stm

Asian stocks fell sharply on Tuesday amid renewed fears over the health of the global financial sector and after US stocks hit a near 12-year low.

Japan's Nikkei index closed down 1.46%, the Hong Kong index was down 3.6% and the Shanghai index fell 4.3%.

South Korean shares dropped 3.5%, while indexes in Singapore, Taiwan and India shed more than 1%.

Most Asian indexes had risen on Monday on hopes the US government was to increase its stake in Citigroup.

However, no formal move was made. US regulators said they were considering boosting government ownership in financial institutions, but without going all the way and nationalising them.

On Monday in the US, the Dow Jones Industrial Average closed down 250.9 points, or 3.4%, at 7,114.8, its lowest level since October 1997.

The tech-heavy Nasdaq index closed down 3.7%, while the Standard & Poor's 500 index fell 3.5% to 743.33, its lowest finish since 11 April, 1997.

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