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Wednesday, December 31, 2008

Merry Christmas and a Happy New Year!

I hope everybody is enjoying the holidays. Regular posting and trading will resume shortly.

Thursday, December 18, 2008

Greenspan Sees Market Rebound

I trust Alan 'The Maestro' Greenspan! He knows what he's talking about...

Oh wait.

He didn't see the tech bubble...

He helped cause the Real Estate bubble by cutting and leaving rates near 1%...

He encouraged the move into variable rate and exotic mortgages by Joe Sixpack...

He didn't see the real estate bubble...

He didn't see the credit bubble...

He didn't see the derivatives bubble...

But he can see equities rebounding.


Greenspan Says Financial Markets May Rebound in 6 to 12 Months: "Financial markets, which have been depressed by “fear” not seen since at least the 1930s, are likely to rebound in the next six to 12 months, former Federal Reserve Chairman Alan Greenspan said in a commentary published by The Economist online.

“Markets are being suppressed by a degree of fear not experienced since the early 20th century (1907 and 1932 come to mind),” Greenspan said in the commentary. “Human nature being what it is, we can count on a market reversal, hopefully, within six months to a year.”

A stabilization in home prices, which will allow financial institutions to judge the value of collateral underlying mortgages and mortgage-backed securities, is likely in 2009 and is another “critical piece” to ending the turmoil, the former Fed chairman said.

The Treasury’s $250 billion in investments in the equity of American banks has halved the gap between the London Interbank Offered Rate and the overnight index swap rate, an indication of progress, Greenspan said.

“While helpful, the Treasury’s $250 billion goes only partway towards the levels required to support renewed lending,” he said. “Temporary public capital injections into banks” should help lead to stability and “arguably provide far more benefit per dollar than conventional fiscal stimulus.”"

I too believe we'll bounce significantly... but only to dive into abyss after.

Credit Suisse Will Pay Bonuses With Illiquid Assets

Put another way, Credit Suisse is basically admitting they've got more crap than cold hard cash... and will henceforth be paying out in crap.

'Illiquid' is Wallstreet speak for 'worthless'. If you don't believe that, I've got a fund for you called the Super Hyper Madoff Ponzi Ultra fund that just can't loose...

Credit Suisse to Use Illiquid Assets to Pay Bonuses (Update1): "Credit Suisse Group AG’s investment bank has found a new way to reduce the risk of losses from about $5 billion of its most illiquid loans and bonds: using them to pay employees’ year-end bonuses.

The bank will use leveraged loans and commercial mortgage- backed debt, some of the securities blamed for generating the worst financial crisis since the Great Depression, to fund executive compensation packages, people familiar with the matter said. The new policy applies only to managing directors and directors, the two most senior ranks at the Zurich-based company, according to a memo sent to employees today.

“While the solution we have come up with may not be ideal for everyone, we believe it strikes the appropriate balance among the interests of our employees, shareholders and regulators and helps position us well for 2009,” Chief Executive Officer Brady Dougan and Paul Calello, CEO of the investment bank, said in the memo.

The securities will be placed into a so-called Partner Asset Facility, and affected employees at the bank, Switzerland’s second biggest, will be given stakes in the facility as part of their pay. Bonuses will take the first hit should the securities decline further in value.

“It’s monstrously clever,” said Dirk Hoffman-Becking, an analyst at Sanford C. Bernstein Ltd. in London who has a “market perform” rating on Credit Suisse stock. “From a shareholders’ perspective it’s great because you’ve got rid of some of the assets and regulators will be pleased because you’ve organized a risk transfer.” "

Banking Index, Now or Never

Wednesday, December 17, 2008

We Got That Major Accumulation Day

In Drift Higher Into Year End I wrote into the comments on the chart: "A major accumulation days is required for this 'rally' to be anything more than just a 'bounce'."

That occurred yesterday after the Fed decision.

Today the markets held up well despite some nasty news. Expect another quiet day tomorrow as these recent gains are digested... and looke for a sneaky, low volume blast higher on Friday into the weekend.

No Inflation "IF IT IS HOARDED"

This is a follow up to some of the comments to the post Welcome to a Free Money World!

From the post Money Supply, Hoarding, Gold, Deflation: Tin Foil Hats: "For the hyperinflationists out there, a massive increase in money supply IF IT IS HOARDED would still result in deflation."

The above chart from the Federal Reserve Bank of St. Louis is of Excess Reserves of Depository Institutions (EXCRESNS). This rather large and sudden jump can only signify one thing: BANK HOARDING.

Bank hoarding can also be seen via the absolute collapse of money velocity. Just take a look at the M1 Money Multiplier (MULT) from the Federal Reserve Bank of St. Louis. Banks don't lend, so you can't spend. Everything stops.

Stare into the abyss of deflation. All the money in the world is useless if it doesn't move...

Tuesday, December 16, 2008

Welcome To A Free Money World!

Welcome to a free-money world!

After this there ain't nothing left in the arsenal but to print bling directly and to cram that green straight down your throat... whether you like it or not.

Fed Cuts Rate to Zero-0.25%, Will Use All Tools (Update1): "The Federal Reserve cut the main U.S. interest rate to “a target range” of between zero and 0.25 percent and said it will do whatever is needed to end the longest recession in a quarter-century and revive credit.

The Fed “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” the Federal Open Market Committee said today in a statement in Washington. “Weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”"

Relax. This isn't inflationary at all. Not right now. Not yet.

“Forget about inflation. There has never been in the history of the world an inflationary run while land prices were declining. The amount of debt being destroyed as the monster of a debt bubbles implodes will suck down all asset prices and just absolutely collapse the velocity of money.” -TheFinancialNinja, 09/10/08

Well, we now have sufficient data to see the absolute collapse of money velocity. Just take a look at the M1 Money Multiplier (MULT) from the Federal Reserve Bank of St. Louis. Stare into the abyss of deflation. All the money in the world is useless if it doesn't move...

From the post Money Supply, Hoarding, Gold, Deflation: Tin Foil Hats: "For the hyperinflationists out there, a massive increase in money supply IF IT IS HOARDED would still result in deflation."

I repeat what I said in Inflation, Deflation, Money Velocity and Gold: "I’m firmly in the deflationist camp.”

Related Posts:
I Give You The Stupidity Trap... Errr... Liquidity Trap
Fed Admits Quantitative Easing
Zero Rate World, The Age of Free Money: We’re Doomed
ZIRP, Zero, Nada, Free Money and a Big Mess
Money Supply, Hoarding, Gold, Deflation: Tin Foil Hats
Japan Stuck, Quantitative Easing in the US
Closer to ZIRP, Liquidity Trap, Lost Decade
Japan v2.0: GLOBAL Liquidity Trap
Japan v2.0
The Lost Decade
Stimulus Package: Does it Even Work

Drift Higher Into Year End

Monday, December 15, 2008

Fred Thompson: Spend Your Way To Prosperity

"This holiday season, be extra nice to the kids. Bless their hearts. They have no idea whats in store for them. But of course that's their problem. Our job; your job this holiday season is to follow the lead of our government.

Spend more than you can afford. More than you can ever possibly pay back.

Ask not what your country can spend for you. Ask what you can spend for your country. Isn't that what made America a great country?

Happy Holiday Season." -Fred Thompson

Ranting About The Bad Economy and Poor Judgment After The Fact

A comment from the post The Current Economic and Political System Makes Me So Angry:

"Hi, you might be right about the bad economy and poor judgement, but what purpose does it serve to keep ranting about it now after the fact. We get it."

First, HeadlineCharts is a great blog that I visit daily. The charts and analysis are excellent.

Second, will somebody please explain to HeadlineCharts why we need to keep ranting about the bad economy and poor judgment "after the fact". Fight amongst yourselves...

(I'm traveling. Posting will be weak and sporadic, but I will tackle this subject later in detail.)

Financial Ninja or Ponzi Ninja?

A comment on the post Ponzi Schemes, Madoff and Falling for it Everytime:


I don't mean this in an offensive way, but a simple thought exercise for you.

You have been a successful trader over the years, I'm guessing with "much better than normal" results.

Trading stocks (not investing capital in a company, mind you) isn't a real business, is it ? check. Abnormal returns ? check. Aren't you also part of a Ponzi scheme ? Well, you maybe be smart enough to time your entry and exits.. just like some guy who sold a buncha houses in 2006 ? Isn't there a very thin line here ?

I'm interested in hearing your thoughts on this."

So, is trading nothing but another version of a Ponzi scheme? Is the Financial Ninja nothing more than a Ponzi Ninja? Fight amongst yourselves...

(I'm traveling. Posting will be weak and sporadic, but I will tackle this subject later in detail.)

Make or Break Time...

Friday, December 12, 2008

Ponzi Schemes, Madoff and Falling For It Everytime

Greed makes you do stupid stupid things...

This story has been well covered by other bloggers so I won't get into it except to say that Ponzi schemes are so simple I'm always amazed at how people get sucked into one. Sometimes whole countries get sucked into massive Ponzi schemes.

For example, in 1997 Albanians actually rebelled when a giant Ponzi scheme imploded in The Lottery Uprising.

Now you may think to yourself, "Ha! But I'm way smarter than the smartest Albanian. I would never get sucked into a giant Ponzi scheme."

You'd be wrong off course. What did you think these were:

1) The Internet Bubble?
2) The Real Estate Bubble?
3) The Commodities / Oil Bubble?
4) The Credit Bubble?
5) The Emerging Market Bubble?

You see, these were all gigantic Ponzi schemes. The definition of a Ponzi scheme is: “A fraudulent investment operation that involves promising or paying abnormally high returns ("profits") to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business. It is named after Charles Ponzi.[1] A Ponzi scheme has similarities with a pyramid scheme though the two types of fraud are different.”

That also pretty much describes the Anglo-Saxon way of life to me.

Madoff Securities’ Auditor Generated ‘Red Flags’ (Update1): “Aksia LLC, an adviser to hedge fund investors, warned clients not to put their money with Bernard Madoff after learning of “red flags” at his company, including that its books were audited by a three-person accounting firm.

Bernard L. Madoff Investment Securities LLC used Friehling & Horowitz, an auditor operating out of a 13-by-18 foot location in an office park in New York City’s northern suburbs. Madoff was charged by federal prosecutors yesterday with running what he said was a $50 billion Ponzi scheme. The auditor signed off on Madoff’s annual financial statement through Oct. 31, 2006, according to a copy obtained by Bloomberg News.

New York-based Aksia urged clients last year not to invest with Madoff’s firm after learning the identity of the New City, New York-based auditor, according to Jake Walthour, head of advisory services at Aksia. Friehling & Horowitz included one partner in his late 70s who lives in Florida, a secretary, and one active accountant, Aksia said.

“Our judgment was swift given the extensive list of red flags,” Aksia wrote yesterday in a letter to clients.

The copy of the four-page report, dated Dec. 18, 2006, attested that the financial statements of Madoff’s securities firm were “in conformity with accounting principles generally accepted in the United States.”


The financial analysis said Madoff Securities had $1.3 billion in assets, including $711 million in marketable securities and $67 million in U.S. debt. Member’s equity, the firm’s net worth, was $604 million, according to the document.

Aksia’s Jim Vos said he spent several months probing Madoff’s firm on behalf of clients, only to recommend against investing in it. Vos, who had an investigator stake out the New City office, said eight “feeder funds” invested about $15 billion with Madoff. Vos declined to name the clients.

“I’m shocked by how investors turned a blind eye to returns that were too good to be true, constant steady small positive monthly returns,” Vos said. “When something is too good to be true, it probably is.”

Madoff, the founder and namesake of his firm, was arrested yesterday in New York on federal charges that he defrauded investors of what he said was $50 billion. Madoff, 70, was released on $10 million bond by a judge in Manhattan federal court. Charged with one count of securities fraud, he faces as much as 10 years in prison and a $5 million fine if convicted.

Madoff’s Lawyer

Dan Horwitz, a lawyer for Madoff, didn’t return a call seeking comment. Janice Oh, a spokeswoman for Interim Manhattan U.S. Attorney Lev Dassin, declined to comment. David Friehling of the auditing firm didn’t return a call left at his office.

Many questions remain unanswered, including whether Madoff’s clients actually lost $50 billion and who audited his firm’s books. Madoff told senior employees that the firm was insolvent and “had been for years,” prosecutors said in a criminal complaint.

Among the other “red flags” cited by Aksia was the “high degree of secrecy” surrounding the trading of the feeder fund accounts, which provided capital to Madoff Securities, and its use of a trading strategy that appeared “remarkably simple,” yet “could not be nearly replicated by our quant analyst.”

Tight Pants, Tye-Dyed

Friehling & Horowitz operates from a storefront office in the Georgetown Office Plaza in New City, sandwiched between a pediatrician’s office and another medical office. An office for the Rockland County Bar Association is also in the building.

A woman who works in a nearby office, who didn’t want to be identified, said Friehling doesn’t come to the office regularly. When he does, he is the only person there.

Another woman in a nearby office, Leslie Cousar, said the man who comes to the auditor’s office does so for 10-to-15 minute periods, and wears tight pants and tie-dyed shirts. Cousar said she never saw anyone else going to the office during the day, but at about 5:30 p.m., another man would show up and use the location.

“He’s in and out of there,” Cousar said.”

The Current Economic and Political System Makes Me So Angry

"What is outrageous economically and is outrageous morally is that normally in times like this, people who are competent and who saw it coming and who kept their powder dry go and take over the assets from the incompetent. What's happening this time is that the government is taking the assets from the competent people and giving them to the incompetent people and saying, now you can compete with the competent people. It is horrible economics." -Jim Rogers, Jim Rogers Calls Most Big US Banks "Bankrupt"

The current economic and political system makes me so unbelievably angry.

Chart of Pompous Prognosticators

Click here to see what all the 'Pompous Prognosticators' (aka Serial Bottom Callers) had to say all the way down between 1927 and 1933.

Lemme get you started:

1) "We will not have any more crashes in our time."- John Maynard Keynes in 1927

Astute readers may recall how I feel about the economic theories of John Maynard Keynes from the post Economic Policy Based on Failed Economic Theory: Just Stupid.

Thursday, December 11, 2008

Eight Really, Really Scary Predictions

8 really, really scary predictions: “Dow 4,000. Food shortages. A bubble in Treasury notes. Fortune spoke to eight of the market's sharpest thinkers and what they had to say about the future is frightening.”

1) Nouriel Roubini
2) Bill Gross
3) Robert Shiller
4) Sheila Bair
5) Jim Rogers
6) John Train
7) Meredith Whitney
8) Wilbur Ross

Some of these guys (gals) know what they’re talking about and called it. You know who they are. One of them makes me sick to my stomach (Bill Gross. Nothing but a sad little sophist) and another is really clueless (Sheila Bair. Waaaay too stupid.).

Russian Ruble Devaluation

In Could it Happen to the Russian Bear? I wrote:

“Capital flight is a terrible thing. It happened to Iceland in Iceland Melts, 77% Single Day Drop. In Iceland: What Happens After Imploding? the immediate consequences become apparent. They are not pretty.

Could it happen to the great Russian Bear too?”

Well, it has finally started to happen. Russia is now abandoning the insane defense of the Ruble and letting the currency devalue. Some institutions within Russia are calling for a one time, sudden 20% devaluation over the Christmas holidays when nobody’s watching…

Russians Buy Jewelry, Hoard Dollars as Ruble Plunges (Update1): “Moscow resident Tima Kulikov banked on the full faith and credit of the U.S. government, not the Kremlin, when he sold his biggest asset for cash.

The 31-year-old director of a social networking Web site initially agreed to sell his apartment for rubles, then cringed at the thought of the currency weakening as it sat in a lockbox pending settlement of the contract. It wasn’t until the buyer showed up with $250,000 stacked in old mobile-phone boxes and stuffed in his pockets that Kulikov closed the deal.

“The exchange rate we agreed on wasn’t great, but I did it because the money’s going to lie there for a month,” Kulikov said. “Put it this way, the ruble’s more likely to have problems than the dollar.”

Russians are shifting their cash into foreign currencies and buying things they don’t need as the economy stalls and the central bank weakens its defense of the ruble, signaling a larger devaluation may be on the way. The currency has fallen 16 percent against the dollar since August, when Russia’s invasion of neighboring Georgia helped spur investors to pull almost $200 billion out of the country, according to BNP Paribas SA.

The central bank today expanded the ruble’s trading band against a basket of dollars and euros, allowing it to drop 0.8 percent, said a spokesman who declined to be identified on bank policy.

With the specter of the 1998 debt default and devaluation in mind, Russians withdrew 355 billion rubles ($13 billion), or 6 percent of all savings, from their accounts in October, the most since the central bank started posting the data two years ago. Foreign-currency deposits rose 11 percent.”

Russia Devaluation Gathers Pace as Central Bank Loosens Control: “Russia devalued the ruble for the fifth time in a month, widening its trading band against the dollar and euro after reserves fell $161 billion as the central bank tried to defend the exchange rate.

Bank Rossii extended the amount the ruble can decline against a target exchange rate to 7.7 percent, from 6.7 percent yesterday and 3.7 percent a month ago. The band was widened on both sides by 30 kopeks today, said a spokesman who declined to be identified on bank policy. The currency weakened 0.7 percent against the basket used to manage its fluctuations.

“They don’t have a choice but to let it weaken and the faster they do it the better,” said Beat Siegenthaler, head of emerging markets strategy in London at TD Securities Ltd. “Regular weekly steps are now the most likely scenario.”

Russia has drained 27 percent of its reserves since the start of August to stymie a 16 percent decline in the ruble versus the dollar as tumbling oil prices, the war in Georgia and the worst global financial crisis since the Great Depression caused investors and locals to remove about $211 billion from the country, BNP Paribas SA data shows.

The world’s biggest energy producer is suffering as the price of Urals crude, its main export blend, has dropped 71 percent from a July record to $40.32 a barrel, below the $70 average required to balance the nation’s 2009 budget.

The ruble fell 4.7 percent against the central bank’s dollar-euro basket in the past month. Goldman Sachs Group Inc. predicts the sliding price of oil will force a ruble drop of as much as 25 percent over the next 12 months. Troika Dialog, Russia’s oldest investment bank, is calling for a one-time, 20 percent devaluation in late January, when there is less risk of bank runs during the New Year’s holidays. UniCredit SpA forecasts a 15 percent decline by end-2009.”

Wednesday, December 10, 2008

Post Economic Crisis Corporate Logos

I Give You The Stupidity Trap... Errr... Liquidity Trap

“No one has ever paid above and beyond their interest income to be in a fund. But if we see another cut, we’ll likely see negative yields.” –Peter Crane

I give you the Stupidity Trap… errr… the Liquidity Trap

Treasury Bills Trade at Negative Rates as Haven Demand Surges: “Treasuries rose, pushing rates on the three-month bill negative for the first time, as investors gravitate toward the safety of U.S. government debt amid the worst financial crisis since the Great Depression.

The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent, the lowest since it starting auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills today at zero percent for the first time since it began selling the debt in 2001.

“It’s the year-end factor,” said Chris Ahrens, an interest-rate strategist in Greenwich, Connecticut, at UBS Securities LLC, one of the 17 primary dealers that trade directly with the Federal Reserve. “Everyone wants to be in bills going into year-end. Buy now while the opportunity is still there.”

The benchmark 10-year note’s yield tumbled 11 basis points, or 0.11 percentage point, to 2.63 percent at 4:48 p.m. in New York, according to BGCantor Market Data. The 3.75 percent security due in November 2018 gained 31/32, or $9.69 per $1,000 face amount, to 109 23/32. The yield touched 2.505 percent on Dec. 5, the lowest level since at least 1962, when the Fed’s daily records began.

The two-year note’s yield fell 10 basis points to 0.84 percent. It dropped to a record low of 0.77 percent on Dec. 5.

If you invested $1 million in three-month bills at today’s negative discount rate of 0.01 percent, for a price of 100.002556, at maturity you would receive the par value for a loss of $25.56.”

Awesome. Just awesome. What could possibly go wrong in a zero rate world? Oh wait, all those under funded pension plans can’t earn the yields they need to fund the outrageous promises that were made to indignant, arrogant Baby Boomers during this Age of Entitlement.

*** Astute market watchers may recall that it was the low rate world created by Alan ‘The Maestro’ Greenspan that inspired pension plans to ‘reach for yield’ and migrate into securitized debt such as Mortgage Backed Securities (MBSs) and Collateralized Debt Obligations (CDOs) in the first place. All aboard the failroad? Good. Giddy up! ***

Money-Market Fund Yields May Fall to Less Than Zero, Crane Says: “Investors in money-market mutual funds that focus on U.S. Treasuries may lose money for the first time if the Federal Reserve cuts interest rates next week and yields become too small to cover expenses.

Record-low yields on government debt have already led money-market funds to waive fees to keep returns positive. If the Federal Open Markets Committee, as expected, cuts its target rate, some Treasury funds may allow returns to turn negative, said Peter Crane, president of Crane Data LLC, a money-fund research firm in Westborough, Massachusetts.

“No one has ever paid above and beyond their interest income to be in a fund,” Crane said. “But if we see another cut, we’ll likely see negative yields.”

The U.S. Treasury sold $27 billion of three-month bills on Dec. 8 at a discount rate of 0.005 percent, the lowest since it started auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills yesterday at zero percent for the first time since it began selling that debt in 2001. Money- market managers could impose a system of incremental debits or charge monthly account fees, Crane said.

Institutional money-market funds that invest only in Treasuries and related repurchase agreements had an average seven-day yield of 0.12 percent, after fees, as of Dec. 8, according to iMoneyNet, a research firm also based in Westborough. The average institutional Treasury money fund charges a management fee of 0.29 percent, Crane said.

Money-market funds are considered the safest and most liquid investment after bank deposits and Treasuries.

Their shares sell and are redeemed at $1 each, and the income generated by their investments is credited daily to a shareholder’s account. At the end of every month, the credits are paid either in cash or by giving the investor more shares.

Daily Charges

According to Crane, if a fund’s expenses exceed its income, accounts could accrue daily charges instead of credits. The fund would then settle the charges at the end of the month by taking shares away.

Such charges aren’t the same as breaking the buck, which happens when investment losses cause a money fund’s net asset value to fall below $1 a share. In September, the Reserve Primary Fund fell to 97 cents a share because of losses on debt issued by the bankrupt Lehman Brothers Holdings Inc. triggering a run on U.S. money-market funds. It was the second money fund ever to break the buck.

Instead of charges, money funds could introduce a monthly account fee that is taken out in shares, Crane said. Either way, investors would lose money, he said.

No New Cash

Of the 500 largest U.S. money-market funds, 41 have daily annualized yields at or less than 0.05 percent, including four funds with zero yield. The 41 funds are probably waiving all or part of their regular fees to keep from taking money out of principle, Crane said.

Falling yields on Treasuries led some Treasury-only funds, including those run by JPMorgan Chase & Co. in New York and Boston’s Evergreen Investments, to turn away new investors. Barring new customers protects returns for investors already in the funds because managers don’t have to buy as many new Treasuries with yields lower than current holdings.

The Federal Open Markets Committee is scheduled to meet Dec. 16 in Washington. The panel is expected to halve its target rate to 0.5 percent, according to the average estimate of 72 economists surveyed by Bloomberg.”

Related Posts:
Fed Admits Quantitative Easing
Zero Rate World, The Age of Free Money: We’re Doomed
ZIRP, Zero, Nada, Free Money and a Big Mess
Money Supply, Hoarding, Gold, Deflation: Tin Foil Hats
Japan Stuck, Quantitative Easing in the US
Closer to ZIRP, Liquidity Trap, Lost Decade
Japan v2.0: GLOBAL Liquidity Trap
Japan v2.0
The Lost Decade
Stimulus Package: Does it Even Work

The Really Scary Fed Charts Series:
1) Really Scary Fed Charts, Why Bernanke Will Furiously Cut
2) Fed CHANGES Really Scary Fed Charts
3) Really Scary Fed Charts: MARCH
4) Really Scary Fed Charts: APRIL
5) Really Scary Fed Charts: MAY, False Alarm?
6) Really Scary Fed Charts: JUNE, ‘Just’ 1% of GDP Now
7) Really Scary Fed Charts: JULY, More of the Same
8) Really Scary Fed Charts About to Get Crazy Scary
9) Really Scary Fed Charts: OCT, Now Crazy Scary
10) Really Scary Fed Charts: NOV, US Bankrupt?

S&P 500: Bottom at 400! "Results Always Horrific"

“The S&P may plunge another 55 percent to a trough of 400 by 2014.” –Russell Napier

Yikes. I’m one Bearish ninja, but I thought we’d bottom out somewhere in the 600’s on the S&P 500. A bottom somewhere in the 400’s is some serious cliff diving.

Mind you, read the article carefully. One of the conditions for a low of 400, is that “deflation sets in”. While I’m in the Deflationist camp I do realize that Ben ‘Helicopter’ Bernanke will do (and already is doing) everything in his power to prevent deflation. I just don't think he's succeeding...

Q Ratio defined, including formula here.

Q Ratio Signals ‘Horrific’ Market Bottom, CLSA Says (Update1): “A global stock slump may have further to go, according to Tobin’s Q ratio, which compares the market value of companies to the cost of their constituent parts, CLSA Ltd. strategist Russell Napier said.

The ratio, developed in 1969 by Nobel Prize-winning economist James Tobin, indicates the Standard & Poor’s 500 Index is still too expensive relative to the cost of replacing assets, said Napier. While the 39 percent drop in the S&P this year pushed equity prices below replacement cost, history suggests the ratio must sink further as deflation sets in, he said. The S&P may plunge another 55 percent to a trough of 400 by 2014, the strategist said.

“Things have always looked absolutely terrible at the bottom,” said Napier, Institutional Investor’s top-ranked Asia strategist from 1997-1999. With deflation “the value of assets falls and the value of debt stays up, then equity gets crushed. The results are always horrific.”

Shares have fallen this year as the worst financial crisis since the Great Depression caused almost $1 trillion of losses at institutions around the globe and dragged the world’s largest economies into recession. The MSCI World Index has tumbled 44 percent in 2008, set for the biggest annual decline in its four- decade history.

Bear-Market Scholar

Napier, who teaches at Edinburgh Business School, based his S&P 500 forecast on the Q for U.S. equities as well as the 10- year cyclically adjusted price-to-earnings ratio, another measure of long-term value.

Before the trough in 2014, investors are likely to see a so-called bear market rally for the next two years as central bank actions delay the onset of deflation, he said.

The Q ratio on U.S. equities has dropped to 0.7 from a peak of 2.9 in 1999, and reaching 0.3 has always signaled the end of a bear market, said Napier, the author of “Anatomy of the Bear,” a study of how business cycles change course. The Q ratio for U.S. equities has fluctuated between 0.3 and 3 in the past 130 years.

When the gauge is more than one, it indicates the market is overvaluing company assets, while a Q ratio of less than one signifies shares are undervalued because it is cheaper to buy companies than to build them from the ground up.

At the end of the four largest U.S. bear markets in 1921, 1932, 1949 and 1982, the Q ratio fell to 0.3 or lower, and history is likely to repeat, said Napier. From the 1982 trough, the S&P 500 grew more than 14-fold to the middle of 2000, when Napier says the last bull market ended.

Quantitative Easing

Measures such as Tobin’s Q ratio and a 10-year price-to- earnings ratio are “valuable tools,” said Andrew Milligan, the Edinburgh-based head of global strategy at Standard Life Investments, which oversees about $190 billion. Milligan said he is bullish on U.S. equities for now as central bank efforts to fight deflation will push the market higher.

“For those who are worried about losing much of their investment almost overnight, very clearly you’d want to wait for those signals to give a much stronger case,” he said. The bear market will have “a painful resolution, it’s just a question of how painful, over what period of time and for what parties.”

Federal Reserve Chairman Ben S. Bernanke’s indication that he will use “quantitative easing” to prevent deflation points to a stock market rally that may last for the next two years, Napier said. With quantitative easing, a tool pioneered by the Bank of Japan, central banks can stimulate inflation by printing money and flooding the market with cash in order to encourage consumers to spend.

The government’s efforts will eventually fail as ballooning government debt devalues the dollar, causes investors to flee U.S. assets and takes the S&P 500 to its eventual bottom in 2014, Napier said.

“Bear markets always end for exactly the same reason, and that is the market begins to price in deflation,” he said. “Equities will be incredibly cheap.”

China: "The figures are horrifying."

“The figures are horrifying.” –Lu Zhengwei

While the figures may be horrifying, the charts aren’t. The first and steepest down trendline has been broken on the CBOE China Index. Prices are above the declining 20 day EMA (blue line) and up against resistance on the declining 50 day EMA (red line). For the bounce to become something a little bigger and more interesting the pivot high of 355 needs to be successfully challenged.

China’s Exports Decline for First Time in 7 Years (Update2): “China’s exports fell for the first time in seven years, more evidence that recessions in the U.S., Europe and Japan are driving the world’s fourth-largest economy into a slump.

Exports declined 2.2 percent in November from a year earlier, the customs bureau said in a statement on its Web site today. Imports plunged 17.9 percent, pushing the trade surplus to a record $40.09 billion.

China’s leaders pledged “more forceful measures” to help small companies and create jobs in statements within hours of the trade report. The export collapse intensifies pressure on the government to add to last month’s steepest interest-rate cut in 11 years, extend a 4 trillion yuan ($581 billion) spending plan and let the yuan depreciate.

“The figures are horrifying,” said Lu Zhengwei, chief economist at Industrial Bank Co. in Shanghai. “Plunging imports show that on top of faltering global demand, domestic demand is also shrinking as the economy cools.”

The yuan closed at 6.8633 against the dollar at 5:30 p.m. in Shanghai, from 6.8601 before the data was released.

Imports fell by the most since at least 1995, when Bloomberg data began, as commodity prices declined and weakness in manufacturing and construction cut demand for raw materials. The previous decline was seven years ago.

Global Growth

China’s exports quadrupled after the country joined the World Trade Organization in 2001, helping to make it the fastest-expanding major economy and the biggest contributor to global growth.

In October, exports rose 19.2 percent and imports climbed 15.6 percent. None of 18 economists surveyed on exports and 17 polled on imports predicted a decline in November.

“These are absolutely dreadful numbers,” said Mark Williams, an economist with Capital Economics Ltd. in London. “It will stoke speculation that the government will force a depreciation of the yuan. Further cuts in interest rates are pretty much inevitable.”

A breakdown in global trade finance may have been as damaging as waning demand, Williams added.

The value of exports was $115 billion, the lowest in eight months and down from a peak of $136.6 billion in July.

The yuan’s biggest one-day decline in three years on Dec. 1 prompted speculation that China may allow its currency to depreciate, helping exporters by making their products cheaper in overseas markets.

‘Moderately Loose’ Policy

The central bank pledged today to maintain a “moderately loose” monetary policy and aid small businesses, in a statement after a three-day annual meeting in Beijing where China’s leaders set economic policy.

Tax cuts, a “stable” yuan and extra efforts to create jobs will be part of efforts to maintain “stable and relatively fast growth” and ensure social stability, China National Radio said after the meeting.

At stake is the nation’s contribution to global growth, forecast by Merrill Lynch to be 60 percent next year.

China’s economy grew 9 percent in the third quarter, the weakest pace in five years. Producer-price inflation was the slowest in two years last month and foreign direct investment fell 36.5 percent from a year earlier, the government said in separate statements today.

Borrowing Costs

The key one-year lending rate has fallen to 5.58 percent from 7.47 percent in September. The People’s Bank of China has also eliminated quotas limiting lending by banks.

The government will target a minimum 8 percent increase in gross domestic product next year and the creation of 10 million jobs, the state-run China Daily newspaper reported Dec. 9. Policy makers may also roll out measures to support the stock market after the CSI 300 Index fell 61 percent this year, Merrill Lynch & Co. said.

Exporters of toys, clothes and furniture are cutting production or closing down, triggering a surge in labor disputes and increasing the risk of social unrest in the world’s most populous nation.

About half of China’s toymakers have shut down this year, with 7,000 workers losing their jobs when Smart Union Group (Holdings) Ltd. closed in Guangdong province in October.

Toy Factory Riot

Sacked workers rioted at another toy factory last month and Zhang Ping, the nation’s top planner, warned of the risk of “massive unemployment” and “social instability.”

Policy makers will keep reducing rates, along with the amount of money that lenders are required to park with the central bank as reserves, said Paul Cavey, an economist with Macquarie Securities in Hong Kong.

Gains by the yuan against the dollar will stall at least through the first half of next year, he said.

The yuan may weaken as much as 10 percent against the dollar, Morgan Stanley said last week. Commerce Minister Chen Deming denied that China would rely on the currency to help exporters, saying that “the cause of the current problem with exports is shrinking demand, not problems with currencies.”

China’s currency has gained about 20 percent since a peg to the dollar was scrapped in 2005.”

Tuesday, December 9, 2008

Rally or Just a Bounce? Update1

This is an update to Rally or Just a Bounce?

Expect a bit of a pullback this morning to work off some of the overbought readings. However, a break OUT and UP looks to be in the works.

Perma-Bears are gonna get a vicious nutshot...

Hey, it’s not just me:
Afraid To Trade: Elliott Wave 4 Rally Appears Confirmed – with targets
Corbra’s Market View: The First Higher High
Evil Speculator: Triangle Trouble

Buy Our Crap

[ HT The Big Picture ]

So true it hurts.

A real life example: My papa bought nothing but Chrysler all his life until about 1998. Since then all cars in the driveway are Hondas. My brother and sister both have their first 'new' cars now and they're both Hondas. I'm talking about vans (Odyssey), SUVs (Pilot), and cars (Civic). (The car I drive is a 2007 Honda Civic SI. (Because I need to rev and drive as fast as I trade.)

Another real life example: One of my friends has a Ford truck (F-250). He just IM'ed me to tell me he's driving his truck again. When oil was above $100 his truck sat as decoration in his driveway because he couldn't afford to fill it. No, he does not own a construction company. He's a soft as butter, suburbanite, cubicle monkey. I prefer to think of him as borderline retarded. He's also never buying a truck again.

Monday, December 8, 2008

Nassim Taleb (Black Swan): Nouriel Roubini an "Optimist"

Charlie Rose interviews Nassim Taleb, author of the Black Swan. Taleb calls Nouriel Roubini (who correctly called this economic and financial crisis) an 'optimist'. Rose has a mild heart attack, and is stunned into brief silence.

Helluva an interview. (Helluva a book.)

2008 Was So Bad, Only One Other Year Sucked More

Since 1825, the only year even comparable to this year was 1931. Simply put, in 183 years there have only been TWO years where the S&P 500 lost more than 50%.

[ HT DailyKos ]

Rally or Just a Bounce?

The S&P 500 is poised to pierce important resistance around the 895 area. On the daily chart this is a significant swing high. Note the slope of the declining 20 day EMA has flattened substantially and is now acting as support around the 875 area. The 825 and 850 areas have repeatedly and successfully acted as support last week.

On the 60 minute intraday chart the significance of the 895 area becomes even more obvious as this is also where the 200 period EMA is. Note the slope has flattened. A successful upward penetration of the 200 period EMA is now more probable.

The S&P is likely to rally to the 975 – 1000 area before the year is out. The panic months of October and November consisted of forced liquidation. The ‘rinsing’ of weak hands is plainly visible in the number of Major Distribution days (where down volume exceeds up volume by a factor of 9:1). Mutual funds and the hedgies all positioned into year end early and aggressively fearing massive redemptions (and rightly so). This means that selling has now dried up, especially as prices move off the lows. Hedges will now get triggered as this market gets hijacked by the ‘momo’ funds looking to squeeze the shorts in a low liquidity environment. Expect near parabolic moves in the really beaten up names.

A word of caution is warranted. This ‘rally’ is nothing but a ‘bounce’ until proven otherwise. The Monday after the Thanksgiving Weekend resulted in the single largest Major Distribution Day since the crisis started. Down volume exceeded up volume by a factor of 80:1. That is massive. HUGE. Until that distribution day gets answered by a massive Major Accumulation Day (or a series of lesser ones) be wary of a post holiday, early 2009 collapse in risky assets.

Thursday, December 4, 2008

Trillion Dollar Stimulus, Can Only Print That Kind of Money

This kind of money can only be printed on such short notice. With the rest of the world also in crisis mode, there just won't be enough global savings to go around.

Yes the Fed is already printing money. No that isn't immediately inflationary. First, debt destruction and therefore money destruction is massive. Second, the Fed isn't printing fast enough to even keep up with the rate of money destruction, let alone exceed it. Third, the printed money is being hoarded by the major money centre banks. So first, we deflate anyways. Ultimately we could face inflation but only if the amount of money printed far exceeds the amount destroyed.

Almost everything I was concerned about (and therefore raged about here) has come to pass...

Calls for $1 Trillion Stimulus Package Grow as Economy Tumbles: “The one thing that isn’t shrinking in the U.S. economy these days is the size of the stimulus package that financial experts say is needed to turn it around.

With automobile sales dropping, payrolls plunging and manufacturing contracting, economists from across the political spectrum are raising the ante on how much the government should lay out. Some are now calling for at least a $1 trillion boost.

Kenneth Rogoff, a Harvard University professor who was an adviser to Republican presidential candidate John McCain, and Joseph Stiglitz, a Nobel Prize winner who served in President Bill Clinton’s White House, are among those who say President- elect Barack Obama should push for a package of that size.

“They need a stimulus of $500-to-$600 billion a year for at least two years to counter what is going to be a collapse in consumption,” said Rogoff, a former chief economist at the International Monetary Fund.

That number may grow. This week brought news that the economy has been in recession for a year. Tomorrow the government will release November employment data, which economists say will show another 330,000 jobs lost, the most in seven years.

“Every day it looks like the stimulus package needs to be bigger,” said Bill Samuel, the lead lobbyist for the AFL-CIO, the largest U.S. labor federation. “You’re talking $500, $600, $700 billion or even more” for a year.

‘Things Are Evolving’

Obama, who has said that enacting a stimulus plan will be his top priority once he takes office on Jan. 20, has himself been steadily increasing the amount he thinks is needed.

Earlier in the presidential campaign, he proposed a package worth $50 billion, then raised that to $175 billion as the election approached. Advisers have since said the program may total as much as $700 billion, although that number, too, may rise.

“Congress should think in terms of $900 billion in 2009, with possibly more in 2010,” said James Galbraith, a self-styled liberal economics professor at the University of Texas in Austin who has talked with the Obama transition team about the issue. “I may be higher than they are at this point,” he said, “but things are evolving.”

Whatever its size, the package is likely to include tax cuts, aid to the states, higher unemployment benefits and increased spending on infrastructure such as roads and bridges.

‘Liquidity Trap’

New Jersey Governor Jon Corzine said Washington needs to step in because the U.S. is caught in a “liquidity trap,” where repeated interest-rate cuts by the Federal Reserve fail to boost the economy because banks don’t want to lend and skittish consumers and companies don’t want to borrow.

[ TheFinancialNinja: Closer to ZIRP, Liquidity Trap, Lost Decade, Japan v2.0: GLOBAL Liquidity Trap, Fed Admits Quantitative Easing, From INFLATION to Instant DEFLATION, Zero Rate World, The Age of Free Money: We’re Doomed, ZIRP, Zero, Nada, Free Money and a Big Mess, Money Supply, Hoarding, Gold, Deflation: Tin Foil Hats, Japan Stuck, Quantitative Easing in the US, DEFLATION is Here]

“If the government doesn’t operate to fill that gap, we are going to see not only rising unemployment but a shockingly high level of unemployment over the next 12 to 24 months,” Corzine said in Bloomberg Television interview yesterday. He called for a stimulus of “overwhelming force.”

Adam Posen, a former New York Fed official, agreed that’s the lesson to take from Japan’s experience during the 1990s, when it faced a similar situation.

“The stimulus has to come through the fiscal side,” said Posen, who has written about Japan and who’s now deputy director at the Peterson Institute for International Economics in Washington. “A package of 4 percent of GDP, even 5 percent of GDP is not unreasonable over one year.” That would equate to about $500 billion to $700 billion.

Posen said Japan’s economic-recovery packages at times didn’t seem to work because they turned out to be smaller than first announced and were slow in coming.

All About Speed

The Obama team is aware of that problem. “We hear that Japan invested over a trillion dollars in infrastructure and nothing happened,” Vice President-elect Joe Biden told a meeting of state governors on Dec. 2. “Well, it’s all about how rapidly we can get these projects up and running.”

[ TheFinancialNinja: Japan v2.0, The Lost Decade, Stimulus Package: Does it Even Work ]

While some conservative economists agree that a big stimulus package is needed, they argue that it should focus on tax cuts, not on increased government spending on infrastructure.

John Makin, a visiting scholar at the American Enterprise Institute in Washington, has advocated a temporary cut in the payroll taxes that help finance Social Security. So, too, has Stanford University Professor Robert Hall, the chairman of the National Bureau of Economic Research committee that calls the beginnings and ends of recessions.

Love That Pork

“Politicians love pork, but maybe they can be pushed toward something better,” Hall said in an e-mail message.

Because the payroll tax is paid by employees and businesses, reducing it would both give consumers more money to spend and businesses more incentive to retain staff, said Mark Bils of the University of Rochester.

Not all economists think fiscal stimulus is the answer to the economy’s ills. “There are other choices,” said Greg Mankiw, a Harvard professor who served as President George W. Bush’s chief economic adviser. Foremost among the alternatives is monetary policy, said Mankiw. The Fed can act to bring down long- term interest rates as well as short-term ones, he said.

Some bond-market investors are also worried about the swelling stimulus and the impact it will have on the budget deficit and ultimately the economy.

“A stimulus of this magnitude helps push government debt as a percentage of GDP closer to dangerous levels, when inflation and interest rates start to rise,” said Thomas Atteberry, who manages $3.5 billion in fixed-income assets at First Pacific Advisors in Los Angeles.

[ TheFinancialNinja: Federal Receipts and Outlays: The New Scary Chart? ]

‘Enormous Amounts’

Regardless of the risks, that’s where policy makers are heading, said David Rubenstein, co-founder of the Carlyle Group.

“Congress is going to spend enormous amounts of money,” he told reporters in Washington on Dec. 2. “Initially, people were talking about $150 billion, then $300 billion, then $500 billion then $800 billion. Now people are talking about a trillion-dollar stimulus package.””

Wednesday, December 3, 2008

Commodities, Metals Fall further Than During Great Depression

I don’t like the title of this article and how it is written because it is terribly misleading.

Before the great depression, commodities weren’t in nearly the same speculative bubble fueled by cheap credit as they were before their present collapse. They went parabolic this time. Oil went to $147! The CRB Index for commodities went to a record 473! Naturally these drops would be greater ‘than during the Great Depression’.

Just because they have already fallen more than during the Great Depression doesn’t mean they can’t fall further…

Metal prices fall further than during Great Depression : “The price of key industrial metals has fallen further over the last four months than occurred during the worst years of Great Depression between 1929 and 1933, according to research by Barclays Capital.

Kevin Norrish, the bank's commodities strategist, said the average fall in the price of copper, lead, and zinc has been roughly 60pc since the peak in July this year. All three metals were traded on the London Metal Exchange in the inter-war years so it is possible to make a comparison.

Prices for the three metals fell 40pc from their highs in 1929 before touching bottom in 1933, with the bulk of the fall in 1930 as the slump spread worldwide. “Lead and zinc have already lost more than they did in the 1930s,” he said.

Copper was hit hardest during the Depression, despite the electrification drive in the US and the Soviet Union, falling 70pc at one stage before creeping back in the mid-1930s. The reason was an 85pc fall in US construction, then the biggest user of the metal.

Barclays Capital said the broader equity markets are already discounting the sorts of “savage declines” in corporate profits that were last seen in the Slump. It said (trailing) price to earnings ratios are actually lower now than they were the early 1930s, with moves in credit spreads that suggest investors are anticipating depression-era levels of economic contraction.

The credit markets continued to exhibit signs of extreme stress yesterday. The iTraxx Crossover index measuring default risk on low-grade European bonds punched above 950 for the first time. The investment grade index hit 188. The spreads are now flashing the sort of danger signals seen before the collapse of Lehman Brothers in September.

Each episode of the financial crisis over the last eighteen months has been preceded by a big jump in the iTraxx indexes.”

Financial Ninja Favs: NOVEMBER

In case you missed them, here are YOUR favorite Financial Ninja posts for the month of October:

1) Really Scary Fed Charts: NOV, US Bankrupt?
2) Economic Nuclear Winter
3) How to Not Beg for Billions
4) Federal Receipts and Outlays: The New Scary Chart?
5) The Five Stages of Collapse

The most popular posts were about the Fed (again). Posts about general economic and social Armageddon are in the list for the first time such as Economic Nuclear Winter and The Five Stages of Collapse. These leads me to believe that we are getting closer to that final rinse in risky assets and put in that elusive bottom.

November was almost a record month for many reasons in many ways. Unique visitors hit 72k, and pages views exceeded 118k as the world continues to unravel.

Incoming Site Traffic:

1) Dollar Collapse
2) 321Gold
3) Market Ticker Forums
4) Financial Armageddon
5) All American Gold

These are the top 5 blogs referring traffic to The Financial Ninja for the month. All are excellent sources of financial insight and are on my daily must read list. For the first time my deflationary stance has sucked in some traffic from the ‘gold bugs’ over at 321Gold and All American Gold.

Once again: yes, the Fed is now printing money. No it won’t be inflationary. First, debt and therefore money is being destroyed far faster than the Fed is printing. Second, the money being printed is being hoarded. Third, the velocity of money has collapsed.

Baltic Dry, Global Trade Continues to Collapse

From a high of 11793 to a current low of 684, the Baltic Dry Index (BDI) has now dropped 94%.

It would appear that global trade has shuddered rather suddenly to a complete halt.

This is just one example:

ArcelorMittal Breached Charter Agreements, Louis Dreyfus Claims: “ArcelorMittal, the world’s largest steelmaker, was sued by Louis Dreyfus & Cie. SA over claims it breached agreements to ship cargoes at the end of this year.

The steelmaker said it wouldn’t make shipments agreed on under two separate contracts, commodity trader Louis Dreyfus said in lawsuits filed last month in U.S. federal court in New York. Two units of Louis Dreyfus are seeking a total of $4 million in damages, costs and interest.

Steel producers have been slashing output as demand slumps and the global economy weakens. ArcelorMittal said Nov. 5 it was cutting production by more than 30 percent as the worldwide slowdown erodes consumption by builders and carmakers.

ArcelorMittal agreed in a contract dated June 29, 2007, to ship multiple cargoes of 70,000 metric tons through 2009, one of the suits showed. Cia. Siderurgica de Tubarao, a steelmaker in Brazil owned by ArcelorMittal, also agreed in January 2004 to charter vessels until 2009, including 12 shipments of as much as 80,000 tons each this year, Louis Dreyfus said in its filing.

London-based ArcelorMittal spokesman Haroon Hassan directed queries by Bloomberg News to the company’s U.S. office, while Bill Steers, a spokesman in Chicago, didn’t return calls to his phone outside office hours. Louis Dreyfus spokesman Jean-Michel Aspar didn’t immediately return calls to his Geneva office or respond to an e-mail.

China Shipments

ArcelorMittal Brasil SA said on Oct. 31 the shipments for November and December wouldn’t go ahead, according to Louis Dreyfus’s filing to the court.

The Paris-based commodities trader also sought $9.6 million in damages, costs and interest from North China Shipping Ltd. for allegedly reneging on an agreement to ship 176,000 tons of iron ore from Brazil to China, Louis Dreyfus said in another filing to the court. Charlie Hu, head of ship leasing at North China, wasn’t immediately able to comment when contacted by Bloomberg.
A worldwide credit freeze and economic slowdown has cut demand for shipments of raw materials. Rental rates for vessels most commonly used to haul iron ore and coal have plunged 99 percent to $2,316 a day from a record $233,988 on June 5, according to the London-based Baltic Exchange.

The case is Louis Dreyfus v. ArcelorMittal, Case No. 1:08- cv-09972-PKC, United States District Court for the Southern District of New York.”

Thursday, November 27, 2008

Pirates Win, Again

[ HT: Mongoose ]

Unbelievable incompetence.

The Indian navy sunk a poor fishing ship with fishermen still onboard. How do you randomly sink a fishing ship and call it a 'pirate mothership'?

Useless tits. The ship was captured a few hours earlier. I'm sure the distress calls were still echoing across the airwaves...

Obviously the pirates don't even give a shit. They'll just capture another ship.

Official: Sunken 'pirate' ship was Thai boat: "The pirate "mother ship" sunk last week by the Indian navy was actually a Thai fishing trawler seized hours earlier by pirates, a maritime agency said Wednesday. The Indian navy defended its actions, saying it fired in self-defense.

Fourteen sailors from the Thai boat have been missing since the Nov. 18 battle, which was hailed as a rare victory in the fight against increasingly brazen pirates who have rattled the international shipping industry and created chaos in vital sea lanes. At the time, the Indian navy boasted of sinking the vessel and showed pictures of it engulfed in a fireball.

But on Wednesday a maritime agency and the boat's owner said it was actually a Thai trawler, the Ekawat Nava5, that had been boarded by pirates just hours before.

"The Indian navy assumed it was a pirate vessel because they may have seen armed pirates on board the boat which has been hijacked earlier," said Noel Choong, who heads the International Maritime Bureau's piracy reporting center in Kuala Lumpur.

One of the crew members was killed and another rescued, said Wicharn Sirichaiekawat, the managing director of Bangkok-based Sirichai Fisheries, which owned the boat. Fourteen are still missing.

Sirichaiekawat said they found out about the fate of the boat after speaking to the survivor who was rescued four days later by passing fishermen.

The Thai Foreign Ministry said Wednesday it was looking into whether the Indian navy acted correctly.

Indian navy spokesman Commander Nirad Sinha defended the navy's actions, saying the INS Tabar — a 400-foot vessel carrying cruise missiles, surface-to-air missiles and six-barreled 30 mm machine guns for close combat was acting in self-defense.

"Insofar as we are concerned, both its description and its intent were that of a pirate ship," he said. "Only after we were fired upon did we fire. We fired in self- defense. There were gun-toting guys with RPGs on it."

Later, Indian navy chief Adm. Sureesh Mehta said the ship's actions were in line with international practices.

"The rules of engagement obviously are that if you are threatened by someone, you take necessary action and that is how it is done by everybody," Mehta told the CNN-IBN news channel.

It was unclear if the Indian warship was in contact with other forces in the area, since at least some had been warned that the Thai trawler had been captured.

Sirichaiekawat said his company had contacted the International Maritime Bureau after getting messages from other boats in the region that the trawler, which was headed from Oman to Yemen to deliver fishing equipment, had come under attack.

Sirichai Fisheries requested that naval ships in the area help their stricken boat. The British navy responded, but later told the company that pirates had already boarded the ship and any attack on them could cause the crew to be harmed.

"The British navy instructed us to wait until the pirates contacted us," he said.

Secretary of State Condoleezza Rice told a State Department briefing in Washington that she was "very actively engaged" on the piracy issue.

"I had extensive discussions with the Russians, the Chinese, the Panamanians, lots of people, about the problem that is there with piracy. We will see what more needs to be done through the U.N.," she said.

Meanwhile, the International Maritime Bureau alerted the coalition forces patrolling the region and other military agencies in the area, sending them photos of the vessel, Choong said.

The Indian navy has no direct communication links to the maritime bureau, he added.

"We hope that individual navy warships that are patrolling the gulf would coordinate with the coalition forces or request information from us" to avoid such incidents, Choong added.

Choong, who had earlier praised the sinking of the vessel a "an action that everybody is waiting for," said he hoped the mistake would not hamper future operations against the pirates.

Somalia, an impoverished nation caught up in an Islamic insurgency, has not had a functioning government since 1991. Somali pirates have become increasingly brazen recently, seizing eight vessels in the past two weeks, including a Saudi supertanker loaded with $100 million worth of crude oil.

Also Wednesday, two foreign journalists were kidnapped in northern Somalia while reporting on the rampant piracy in the region, said regional police spokesman Abshir Abdi Jama.

The journalists' nationalities could not be confirmed. Jama said one was believed to be British. Foreigners, journalists and humanitarian workers are frequently abducted for ransoms in Somalia.

There have been 96 pirate attacks so far this year in Somali waters, with 39 ships hijacked. Fifteen ships with nearly 300 crew are still held by pirates, who have demanded multimillion-dollar ransoms.

At present, warships from Denmark, India, Malaysia, Russia, the U.S. and NATO patrol a vast international maritime corridor, escorting some merchant ships and responding to distress calls in the area.”

Related Posts:
NATO Finds Balls, Declares War on Pirates
Not Just Oil Tankers, Tanks and Anti-Aircraft Guns Too
Pirates: Brains, Muscles and Geeks
Modern Pirates, Somali Port of Eyl
Pirates Seize Massive Oil Tanker, Again

Helicopter Ben Taking His Chopper for a Spin

My favourite line of the day: "As a consequence, the dollar came under pressure against a broad range of currencies as markets concluded that Helicopter Ben is taking his chopper for a spin with a fistful of benjamins."

Source: MacroMan in Ricardian Equivalence

Wednesday, November 26, 2008

Huge Chart

[ WSJ ]

(Click to enlarge this super huge chart.)

Policy Based on Failed Economic Theory: Just Stupid

I can't stress how important it is to understand that economists are relying on hugely flawed theories and models when looking at the economy. Economic policy is being made off the neo-classical theory of economics. This is just a fancy way of describing current mainstream economic theory. This neo-classical theory of economics forms the basis for all the crap your politicians and their advisors keep trying. The greatest failed experiment of this theory is the practical implementation Keynesian and Neo-Keynesian economic policy. Today, right now you are witnessing the implementation of Keynesian theory to its absolute maximum limits with a policy of ZIRP and quantitative easing.

Of course this cannot work and it never has. Neo-classical economic theory is fatally flawed from its very first basic premises. They are:

1) People have rational preferences among outcomes that can be identified and associated with a value.
2) Individuals maximize utility and firms maximize profits.
3) People act independently on the basis of full and relevant information.

This entire theory and all the economic policy that is born of it hinges on these three basic premises. The first one is completely ridiculous and obvious to anybody that isn’t a socially inept, ivory tower, academic, economic nerd. (Clearly these guys have never interacted with the female species in person before. Hahaha.) The assumption is that individuals choose the best action according to stable preference functions and constraints facing them. Simply put, if you prefer beer over liquor you’ll consistently drink beer at parties. No flip flopping allowed. No randomizations allowed. No ‘living in the moment’ allowed. This brings me to premise number two. Individuals maximize utility and firms maximize profits. Basically you drink your beer to the point of being pleasantly buzzed and then you stop. You never get smashed because a massive hangover clearly does not maximize utility. The third premise states that you will act independently and have all the relevant information to make the best choices. This means that you happily drink your beer and won’t get persuaded to do a round of shots with your friends. You clearly know that one round leads to two and you’ve got to work tomorrow. When your drunken friend gives you a stock tip you act independently and only after you’ve figured out everything humanly possible about the company and the industry. You aren’t at all persuaded by the fact that all your friends jumped on the stock and are making a killing. You stay completely level headed all the time.

The fact that we keep going thru economic and financial manias, bubbles and busts does not seem to deter the economic eggheads that continue to employ these theories literally like zealot Bible thumpers.

You’d figure that the Tulip Mania, South Sea Bubble, Dot Com Bubble, and the current Real Estate Bubble (to name a few) would be more than enough evidence to absolutely destroy all three of these premises.

The truly successful traders and investors of course know all this already. They thrive in a chaotic, irrational and uncertain environment.

This Economy Does Not Compute: “A FEW weeks ago, it seemed the financial crisis wouldn’t spin completely out of control. The government knew what it was doing — at least the economic experts were saying so — and the Treasury had taken a stand against saving failing firms, letting Lehman Brothers file for bankruptcy. But since then we’ve had the rescue of the insurance giant A.I.G., the arranged sale of failing banks and we’ll soon see, in one form or another, the biggest taxpayer bailout of Wall Street in history. It seems clear that no one really knows what is coming next. Why?

Well, part of the reason is that economists still try to understand markets by using ideas from traditional economics, especially so-called equilibrium theory. This theory views markets as reflecting a balance of forces, and says that market values change only in response to new information — the sudden revelation of problems about a company, for example, or a real change in the housing supply. Markets are otherwise supposed to have no real internal dynamics of their own. Too bad for the theory, things don’t seem to work that way.

Nearly two decades ago, a classic economic study found that of the 50 largest single-day price movements since World War II, most happened on days when there was no significant news, and that news in general seemed to account for only about a third of the overall variance in stock returns. A recent study by some physicists found much the same thing — financial news lacked any clear link with the larger movements of stock values.

Certainly, markets have internal dynamics. They’re self-propelling systems driven in large part by what investors believe other investors believe; participants trade on rumors and gossip, on fears and expectations, and traders speak for good reason of the market’s optimism or pessimism. It’s these internal dynamics that make it possible for billions to evaporate from portfolios in a few short months just because people suddenly begin remembering that housing values do not always go up.

Really understanding what’s going on means going beyond equilibrium thinking and getting some insight into the underlying ecology of beliefs and expectations, perceptions and misperceptions, that drive market swings.

Surprisingly, very few economists have actually tried to do this, although that’s now changing — if slowly — through the efforts of pioneers who are building computer models able to mimic market dynamics by simulating their workings from the bottom up.

The idea is to populate virtual markets with artificially intelligent agents who trade and interact and compete with one another much like real people. These “agent based” models do not simply proclaim the truth of market equilibrium, as the standard theory complacently does, but let market behavior emerge naturally from the actions of the interacting participants, which may include individuals, banks, hedge funds and other players, even regulators. What comes out may be a quiet equilibrium, or it may be something else.

For example, an agent model being developed by the Yale economist John Geanakoplos, along with two physicists, Doyne Farmer and Stephan Thurner, looks at how the level of credit in a market can influence its overall stability.

Obviously, credit can be a good thing as it aids all kinds of creative economic activity, from building houses to starting businesses. But too much easy credit can be dangerous.

In the model, market participants, especially hedge funds, do what they do in real life — seeking profits by aiming for ever higher leverage, borrowing money to amplify the potential gains from their investments. More leverage tends to tie market actors into tight chains of financial interdependence, and the simulations show how this effect can push the market toward instability by making it more likely that trouble in one place — the failure of one investor to cover a position — will spread more easily elsewhere.

That’s not really surprising, of course. But the model also shows something that is not at all obvious. The instability doesn’t grow in the market gradually, but arrives suddenly. Beyond a certain threshold the virtual market abruptly loses its stability in a “phase transition” akin to the way ice abruptly melts into liquid water. Beyond this point, collective financial meltdown becomes effectively certain. This is the kind of possibility that equilibrium thinking cannot even entertain.

It’s important to stress that this work remains speculative. Yet it is not meant to be realistic in full detail, only to illustrate in a simple setting the kinds of things that may indeed affect real markets. It suggests that the narrative stories we tell in the aftermath of every crisis, about how it started and spread, and about who’s to blame, may lead us to miss the deeper cause entirely.

Financial crises may emerge naturally from the very makeup of markets, as competition between investment enterprises sets up a race for higher leverage, driving markets toward a precipice that we cannot recognize even as we approach it. The model offers a potential explanation of why we have another crisis narrative every few years, with only the names and details changed. And why we’re not likely to avoid future crises with a little fiddling of the regulations, but only by exerting broader control over the leverage that we allow to develop.

Another example is a model explored by the German economist Frank Westerhoff. A contentious idea in economics is that levying very small taxes on transactions in foreign exchange markets, might help to reduce market volatility. (Such volatility has proved disastrous to countries dependent on foreign investment, as huge volumes of outside investment can flow out almost overnight.) A tax of 0.1 percent of the transaction volume, for example, would deter rapid-fire speculation, while preserving currency exchange linked more directly to productive economic purposes.

Economists have argued over this idea for decades, the debate usually driven by ideology. In contrast, Professor Westerhoff and colleagues have used agent models to build realistic markets on which they impose taxes of various kinds to see what happens.

So far they’ve found tentative evidence that a transaction tax may stabilize currency markets, but also that the outcome has a surprising sensitivity to seemingly small details of market mechanics — on precisely how, for example, the market matches buyers and sellers. The model is helping to bring some solid evidence to a debate of extreme importance.

A third example is a model developed by Charles Macal and colleagues at Argonne National Laboratory in Illinois and aimed at providing a realistic simulation of the interacting entities in that state’s electricity market, as well as the electrical power grid. They were hired by Illinois several years ago to use the model in helping the state plan electricity deregulation, and the model simulations were instrumental in exposing several loopholes in early market designs that companies could have exploited to manipulate prices.

Similar models of deregulated electricity markets are being developed by a handful of researchers around the world, who see them as the only way of reckoning intelligently with the design of extremely complex deregulated electricity markets, where faith in the reliability of equilibrium reasoning has already led to several disasters, in California, notoriously, and more recently in Texas.

Sadly, the academic economics profession remains reluctant to embrace this new computational approach (and stubbornly wedded to the traditional equilibrium picture). This seems decidedly peculiar given that every other branch of science from physics to molecular biology has embraced computational modeling as an invaluable tool for gaining insight into complex systems of many interacting parts, where the links between causes and effect can be tortuously convoluted.

Something of the attitude of economic traditionalists spilled out a number of years ago at a conference where economists and physicists met to discuss new approaches to economics. As one physicist who was there tells me, a prominent economist objected that the use of computational models amounted to “cheating” or “peeping behind the curtain,” and that respectable economics, by contrast, had to be pursued through the proof of infallible mathematical theorems.

If we’re really going to avoid crises, we’re going to need something more imaginative, starting with a more open-minded attitude to how science can help us understand how markets really work. Done properly, computer simulation represents a kind of “telescope for the mind,” multiplying human powers of analysis and insight just as a telescope does our powers of vision. With simulations, we can discover relationships that the unaided human mind, or even the human mind aided with the best mathematical analysis, would never grasp.

Better market models alone will not prevent crises, but they may give regulators better ways for assessing market dynamics, and more important, techniques for detecting early signs of trouble. Economic tradition, of all things, shouldn’t be allowed to inhibit economic progress.”