Some people are concerned about the possibility of inflation caused by the federal government "printing money", but that's only one side of the coin. Any inflation caused by the Fed can easily be dwarfed by deflationary forces (see Chapter 13 of Conquer the Crash). This is exactly what happened during the steep selloff in the stock market in 2008. A lot of investors' wealth simply vanished.
In a deflationary environment, there is a way to prosper: hold onto your dollars. Deflation reduces the number of dollars and thereby distributes their value over existing dollars.
Think of it this way. A typical graph of a market shows dollars (value of shares) on the vertical axis and time on the horizontal axis. A rising graph over time reflects a bull market in the prices of shares. Now draw another graph where the vertical axis is instead the value of dollars in terms of numbers of shares; a bull market in stocks will yield a descending graph, meaning that shares buy more dollars over time.
To help understand this, think of what is being bought and sold. On the typical graph one sells dollars to buy shares. On the second graph, one sells shares to buy dollars.
In a bear market the reverse is true. The second graph will rise, indicating a bull market in dollars as share prices fall. This is what deflation does: it increases the value (purchasing power) of your dollars, both in stocks and in everyday goods and services.
The big question is if/when we will see deflation. CtC argues a strong case for it. So the best preparation one can make is to horde dollars in the safest forms, and that means short-term debt from the U.S Treasury.
Fortunately for us lil folk the Treasury makes it simple and easy to invest. They run a website called Treasury Direct. When you set up an account there you provide the feds with the number of an account at your bank. Once set up, you can go online and schedule purchases at the dates of auction. 90-day bills are auctioned every week, for example.
Here are the results of recent auctions. The current interest rate for 90-day bills is a mere 0.05%, but don't be fooled. Plus 0.05% is better than minus anything, and that's a risk we must avoid. Investing in other debt that pays a higher yield is pointless if the issuing agency defaults on it.
What is the risk of the Treasury defaulting? Minimal, and if that should happen our geese are cooked no matter what. To prepare for that possibility some portion of the portfolio should be invested in precious metals like gold and silver, which are presently very expensive. But deflation will counter that. When people are unloading their metals to stock up on dollars, prices will fall and the old buck will buy more metal than it does today.
And finally, when the going gets tough the feds can do some crazy things. Back in 1933 President Roosevelt issued Executive Order 6102, effectively extorting gold held by individuals and businesses in the private sector in return for dollars (the post-gold-standard dollars which are backed by nothing at all). This IMO is a gross abuse of executive power, and certainly not the only one committed by FDR.
One defense against that is to hold your gold offshore. International firms like GoldMoney provide a simple, easy, and secure way to do just that.
Bottom line: every investment carries risk. But there are ways to mitigate it and prepare for hard times.
Sunday, May 22, 2011
Tuesday, April 26, 2011
Socialism is failing in Europe
The Washington Post published this article recently, revealing that things aren't all that rosy across the pond nowadays. Reporter Edward Cody observes that
Social utopia has never existed and will never exist, and the more people seek to ignore that simple fact, the more problems they create for themselves.
The ideologies of the parties in power seem to make little difference. Socialist prime ministers in Greece and Spain have been reducing pensions, limiting wage increases, and pushing retirements back. Conservatives in the UK, faced with similar budgetary realities, have been busy themselves pruning entitlements and raising tuition rates. Needless to say their constituents aren't happy. For some time now angry mobs in Greece have been rioting, committing acts of vandalism, arson, and assaulting police officers. As people in other nations feel squeezed they will express their outrage as well.
Citizens in France have begun shouldering costs of their own medical care. To ease the burden on the national health care system, people must supplement their government insurance with "private complementary insurance" plans, paid for by the insured, not the government. Even then some doctors' fees exceed the combined insurance coverage and patients must cover the shortfall.
To make matters worse, the French government is also cutting costs by not replacing some health care agents as they retire or resign. This delays processing of claims. To make things worse, the French feds have been closing local claim offices and pawning off their clients to impersonal regional centers. An insured man named Florian Andre expressed his displeasure to a reporter:
Some union organizers are seeing the handwriting on the wall:
The experience of the French alone is enough for Americans to demand that our own feds keep their mitts off our health care system. Yes, it has its problems, but NO, I don't want to find myself in Andre's position. No responsible American parent would either.
From blanket health insurance to long vacations and early retirement, the cozy social benefits that have been a way of life in Western Europe since World War II increasingly appear to be luxuries the continent can no longer afford.As the saying goes, socialism works fine until you run out of other people's money. It seems that is exactly what Europeans witness now. Faced with crumbling revenues, national governments in Europe have been forced to cut back on entitlements, much to the chagrin of millions who over decades had become accustomed to such luxuries as "Scandinavian cradle-to-grave welfare".
Social utopia has never existed and will never exist, and the more people seek to ignore that simple fact, the more problems they create for themselves.
The ideologies of the parties in power seem to make little difference. Socialist prime ministers in Greece and Spain have been reducing pensions, limiting wage increases, and pushing retirements back. Conservatives in the UK, faced with similar budgetary realities, have been busy themselves pruning entitlements and raising tuition rates. Needless to say their constituents aren't happy. For some time now angry mobs in Greece have been rioting, committing acts of vandalism, arson, and assaulting police officers. As people in other nations feel squeezed they will express their outrage as well.
Citizens in France have begun shouldering costs of their own medical care. To ease the burden on the national health care system, people must supplement their government insurance with "private complementary insurance" plans, paid for by the insured, not the government. Even then some doctors' fees exceed the combined insurance coverage and patients must cover the shortfall.
To make matters worse, the French government is also cutting costs by not replacing some health care agents as they retire or resign. This delays processing of claims. To make things worse, the French feds have been closing local claim offices and pawning off their clients to impersonal regional centers. An insured man named Florian Andre expressed his displeasure to a reporter:
“Now,” he smiled, “you have to be almost dead to get a 100 percent reimbursement.”Welcome to socialism, Mr. Andre.
Some union organizers are seeing the handwriting on the wall:
The social welfare system no longer plays its role, said Claude Bernard, a union organizer at Renault’s struggling car factory in Sandouville, a suburb of Le Havre in western France. The very system of redistributing wealth through taxes and welfare programs has been called into question.The U.S. would do well to pay attention. We remain saddled with our own welfare programs and federal taxes (FICA) that redistribute wealth.
The experience of the French alone is enough for Americans to demand that our own feds keep their mitts off our health care system. Yes, it has its problems, but NO, I don't want to find myself in Andre's position. No responsible American parent would either.
Friday, April 8, 2011
View from the top, April 2011
The consensus now is that economic recovery in the U.S., as anemic as it is, is underway. People with far more data at their fingertips than I possess have sifted through it and this is their conclusion. I don't beg to differ.
But those who concern themselves with forecasts should not let themselves be led by the nose by others who merely extrapolate current trends into the future. The stock market and the economy are living organisms, not inanimate objects; they do not conform to Newton's First Law of Motion.
The best forecasters I know of are not economists, but rather psychologists who have made their careers as both forecasters and teachers. Here's a glimpse of what they are saying today:
Dr. Van Tharp, International Institute of Trading Mastery:
Analysts at Elliott Wave International attune themselves to prevailing sentiment: is there a bullish or bearish bias prevailing among participants in a market? If so, is it extreme? In this month's edition of the Elliott Wave Financial Forecast Short Term Update, editor Steven Hochberg highlighted the results of a survey conducted by Investors' Intelligence. II polls investment managers for their opinions about the market: is it a good time to buy or sell or hold? The reading as of now is at a bullish extreme, which has reliably portended a decline in the market. One such extreme presaged Black Monday of October 1987.
The founder of Elliott Wave International, Bob Prechter, has noted that we have been for a while in an "all the same market" phase: as a rule, prices of stocks and commodities are varying inversely with that of the U.S. dollar. Headlines lately have been lamenting the slide of the dollar since a major top in mid-2010. There are very few investors to be found who are bullish on the dollar, paralleled by the extreme bullish sentiment in the stock market. The current sentiment in both markets is ripe for a reversal, implying a fall in the Euro versus the dollar to accompany a drop in the stock market. Back in 2008 when our economy was collapsing, the dollar began a strong rise versus other major currencies, which reversed its course circa March 2009 when our stock market began its impulsive advance from a major low.
In the markets for precious metals the bulls are running wild. The price of silver in particular has been soaring. Today, April 8, saw it rise a whopping 3.5%, as frenzied buyers bid up the May contract on the COMEX. The metals enjoyed a similar meteoric streak in 1980 before the bottom fell out and sentiment flipped to bearish.
Meanwhile in Europe, Portugal has joined other failing economies, appealing to the European financial community for relief from the unfolding crisis in its sovereign debt.
All these are portents of a deflationary scenario, quite the opposite of the inflation that so many fear.
But those who concern themselves with forecasts should not let themselves be led by the nose by others who merely extrapolate current trends into the future. The stock market and the economy are living organisms, not inanimate objects; they do not conform to Newton's First Law of Motion.
The best forecasters I know of are not economists, but rather psychologists who have made their careers as both forecasters and teachers. Here's a glimpse of what they are saying today:
Dr. Van Tharp, International Institute of Trading Mastery:
I've studied under Van myself; he is hardly crazy. For him to make such an extreme remark is in itself telling. Van's newsletters are available at no cost on the Web BTW.The Federal Reserve is printing money like crazy and the banks are not lending it. Instead, it’s probably going into the stock market. The bond bubble burst and that money has also been flowing into the stock market. Those inflows are holding up the stock market.
It is a crazy world.
Analysts at Elliott Wave International attune themselves to prevailing sentiment: is there a bullish or bearish bias prevailing among participants in a market? If so, is it extreme? In this month's edition of the Elliott Wave Financial Forecast Short Term Update, editor Steven Hochberg highlighted the results of a survey conducted by Investors' Intelligence. II polls investment managers for their opinions about the market: is it a good time to buy or sell or hold? The reading as of now is at a bullish extreme, which has reliably portended a decline in the market. One such extreme presaged Black Monday of October 1987.
The founder of Elliott Wave International, Bob Prechter, has noted that we have been for a while in an "all the same market" phase: as a rule, prices of stocks and commodities are varying inversely with that of the U.S. dollar. Headlines lately have been lamenting the slide of the dollar since a major top in mid-2010. There are very few investors to be found who are bullish on the dollar, paralleled by the extreme bullish sentiment in the stock market. The current sentiment in both markets is ripe for a reversal, implying a fall in the Euro versus the dollar to accompany a drop in the stock market. Back in 2008 when our economy was collapsing, the dollar began a strong rise versus other major currencies, which reversed its course circa March 2009 when our stock market began its impulsive advance from a major low.
In the markets for precious metals the bulls are running wild. The price of silver in particular has been soaring. Today, April 8, saw it rise a whopping 3.5%, as frenzied buyers bid up the May contract on the COMEX. The metals enjoyed a similar meteoric streak in 1980 before the bottom fell out and sentiment flipped to bearish.
Meanwhile in Europe, Portugal has joined other failing economies, appealing to the European financial community for relief from the unfolding crisis in its sovereign debt.
All these are portents of a deflationary scenario, quite the opposite of the inflation that so many fear.
Monday, July 26, 2010
Book review: The Big Short by Michael Lewis (nonfiction)
The Big Short is a fascinating look at the evolution of the trillion-dollar market in subprime mortgage debt, the arcane derivatives built upon it, and the greatest financial disaster of the first decade of the new millennium, whose tremors had an international impact.
At the center of the subprime crisis were novel new financial instruments devised by trading departments of large investment banks on Wall Street. One is the "credit default swap", which is simply an insurance policy indemnifying its buyer from the risk of default upon a bond issued by another agency, at the cost of a fixed annual premium based upon the assessed risk of default. The other is the mortgage bond, a pool of mortgage loans of various levels of risk; it was these bonds that some institutions wanted to buy insurance for and to make a market, other institutions would step up to the plate to accept the premiums and contract to provide insurance. One of the insurers was AIG Financial Products.
The curious aspect about the credit default swap though is that the buyer didn't have to own the insured debt. All they had to do was pay the premiums, and if the "insured" bonds were to lose value the insurer was on the hook to pay up. So why would anyone want to take the "sell" end? Simple: everyone thought the real estate market had only one way to go, and that was up. On this assumption, the likelihood of a default was so low ― or so was the belief on the Street ― that being the insurer brought easy income in the form of premiums at next to nonexistent risk. A cash cow.
The entire system was set up to make the securities as opaque as possible. This made the analysis of the true risk of ownership next to impossible. Ratings agencies Moody's and S&P were snowed as well and grossly underrated the risk of default. Only a handful of savvy players delved deeply enough into the byzantine market to conclude what know one else knew (or was willing to let on that they knew).
The complexity takes a bit of work to follow, but you too can learn what a credit default swap on a AA tranche of a sub-prime-backed collateralized debt obligation is, and have an entertaining time following the adventures of several "little guys" as they went toe-to-toe with the titans of the bond market, culminating in the demise of Bear Stearns, Lehman Brothers, and other firms who played with fire and paid dearly.
Among other titles authored by Michael Lewis is the revealing Liar's Poker, chronicling the meltdown on Wall Street during the 1980s.
Reviewer's note: The Big Short may disappoint those who wish to pin the financial crisis of 2008 upon either political party. The simple fact is that although the stage may have been set by federal legislation, it was the scheming of big players in the U.S. fixed-income markets that built an unsustainable house of cards from the products of unscrupulous lenders and their foolish and naive customers.
At the center of the subprime crisis were novel new financial instruments devised by trading departments of large investment banks on Wall Street. One is the "credit default swap", which is simply an insurance policy indemnifying its buyer from the risk of default upon a bond issued by another agency, at the cost of a fixed annual premium based upon the assessed risk of default. The other is the mortgage bond, a pool of mortgage loans of various levels of risk; it was these bonds that some institutions wanted to buy insurance for and to make a market, other institutions would step up to the plate to accept the premiums and contract to provide insurance. One of the insurers was AIG Financial Products.
The curious aspect about the credit default swap though is that the buyer didn't have to own the insured debt. All they had to do was pay the premiums, and if the "insured" bonds were to lose value the insurer was on the hook to pay up. So why would anyone want to take the "sell" end? Simple: everyone thought the real estate market had only one way to go, and that was up. On this assumption, the likelihood of a default was so low ― or so was the belief on the Street ― that being the insurer brought easy income in the form of premiums at next to nonexistent risk. A cash cow.
The entire system was set up to make the securities as opaque as possible. This made the analysis of the true risk of ownership next to impossible. Ratings agencies Moody's and S&P were snowed as well and grossly underrated the risk of default. Only a handful of savvy players delved deeply enough into the byzantine market to conclude what know one else knew (or was willing to let on that they knew).
The complexity takes a bit of work to follow, but you too can learn what a credit default swap on a AA tranche of a sub-prime-backed collateralized debt obligation is, and have an entertaining time following the adventures of several "little guys" as they went toe-to-toe with the titans of the bond market, culminating in the demise of Bear Stearns, Lehman Brothers, and other firms who played with fire and paid dearly.
Among other titles authored by Michael Lewis is the revealing Liar's Poker, chronicling the meltdown on Wall Street during the 1980s.
Reviewer's note: The Big Short may disappoint those who wish to pin the financial crisis of 2008 upon either political party. The simple fact is that although the stage may have been set by federal legislation, it was the scheming of big players in the U.S. fixed-income markets that built an unsustainable house of cards from the products of unscrupulous lenders and their foolish and naive customers.
Tuesday, May 18, 2010
As History Repeats Itself
On Newsvine where I spend most of my time blogging, a conservative colleague "seeded" this article about a recent alliance formed by the perhaps not so strange bedfellows of Turkey, Brazil, and Iran. The apparent motivation was to further the exchange of uranium among the nations. Seeder/colleague Lisa remarked, "The world indeed under President Obama each day becomes a more dangerous place."
As a harsh critic of our president's policies myself I could but concur. However there is a more to the tale than our president and these three nations, and more to the tale than this moment in time. As a schoolboy in the 1960s it was science, math, and the "scientific" aspects of English (grammar, spelling) that captured my fancy. History was just one of those subjects I had to study, and whereas I'd earn placement into honors classes in math and science, McHistory was all the administrators saw fit for this student. I got my As and Bs and that was that. Little was I to know that decades later my fascination with history would grow, and it would double as a pragmatic tool for forecasting.
As much as I agree with Lisa, I claim that with or without Obama the world becomes more dangerous. We Americans – myself among them – tend to view the world through America-centric prisms. This is not per se a problem, but I find it important to look at the big picture as well. My brother is fluent in German and frequently reads the German media to fill in his own view of the world. I've found other publications to help myself along. What I learned and some of my conclusions follow.
Mass psychology is the motive force behind all human events, from the stock market, to our economies, and to our cooperation in peacetime and aggression during times of war.
When times are prosperous, leaders make nice and people make nice. In the U.S. and in many developed nations elsewhere the early 1980s brought prosperity in spades. Reaganomics whatever that was didn't make things good; American businesspeople and their employees did. Internationally, during the 1980s the insular Soviet Union collapsed, a divided Germany united, and the EU solidified to the extent that such diverse societies could, peaking circa 2000.
But there's an ebb and flow to mass psychology, a phenomenon of nature humans will never undo no matter how hard they try. We can't but take the bad with the good, and we can't but weather out the storms or die trying. These are lessons from history, and woe unto those who don't learn from them.
History does indeed repeat itself, albeit never with such precision that one could follow it unfolding yet again step by step
After the good times crest, the pendulum reverses its swing as it has done for centuries. The Roman Republic (SPQR) fell to the Caesars and ultimately collapsed entirely. Over the course of our own history since the American Revolution the rest of the world has endured so much upheaval that a globe manufactured in 1800 would be but a curious artifact useful to a teacher of history, yet mostly useless for teaching contemporary geography.
I spend much of my spare time contemplating what's happening in the word and what events in history might well repeat. Some folks call me a pessimist, and perhaps some pessimism factors into my analysis. We're all human and subject to thinking like, well, humans. That being said, there's a good case to be made for growing animosities world-wide, with rifts deepening and nations allying for whatever reasons their leaders choose.
One need not hold a degree in political science to draw conclusions from world history. Merely reading, listening, and thinking critically can take anyone into being well informed in certain areas. Over a decade ago I stumbled onto a book for sale on eBay. Published roughly a century ago by a historian, a Professor Pribram at the University of Vienna, this book was Volume II of The Secret Treaties of Austria-Hungary 1879-1914, translated presumably from German into English and republished by the Harvard University Press in 1921. I bid and won, and for the life of me I can't remember why because aside from its title and perhaps a synopsis from the seller I didn't know what I was purchasing. Now I do.
A big topic in McHistory was world war, and not surprisingly because the Second World War was a mere twenty years in the past and many veteran survivors of the First World War (née the Great War) – my paternal grandfather among them – were alive and well. One topic stuck with me for decades: that of underlying causes and immediate causes of global war. National leaders don't just wake up one day and say, "Let's start a war." Animosities must build over time, and nations must choose to ally themselves with others for whatever purposes they seek to achieve.
The Pribram book is fascinating as it delves deeply into the machinations among leaders in Europe. The title contains the word "secret" because at the time these treaties were being forged, secrecy was paramount. Only after the war did the information in the book see the light of day, and Dr. Pribram had proven himself to be a diligient and insightful historian in researching his topic and presenting it in a most readable way. His own account ends at Page 180, and from the on to the end at Page 259 are three appendices with reproductions of documents detailing the treaties themselves and private communications among the national leaders who forged them.
It's well established that the assassination on 28 June 1914 of Archduke Ferdinand of Austria was the immediate cause of WWI, but the underlying causes arose over decades. Recalling that my book is Volume II, it begins with The First Treaty of the Triple Alliance established in 1882, ergo the war was at least thirty years in the making before overt aggression broke out.
A brief review of American history reveals economic booms and busts, natural phenomena of mass psychology. But looking closer we observe other events surrounding them.
Since emerging from the economic doldrums of the 1970s, the USA entered quite a boom, lasting through the presidencies of Reagan, GHWB, and Clinton. But the wheels began to come off during Clinton's last yera in office, 2000. The market took a dive, the dot-com boom went bust, and under at least one school of thought the Great Bull Market was over.
But that was just the opening act. Our world as Americans changed on September 11, 2001. Our federal government exhibited frightening behavior such as I'd never seen in my 55 years as a citizen. Before we knew it the Patriot Act was law and our military was shipping out to begin two foolish armed conflicts in the Middle East. Then the politicians began to polarize, each side pointing fingers at the others, both refusing to address the problems in their own back yards. The market came back, but although it walked and quacked like the Great Bull Market – complete with indexes like the DJIA eclipsing old highs – it wasn't. The big players of Wall Street though, steeped in two decades of rising prices saw what they wanted to see. As a result of investor psychology and nearly unkillable hope, bear market rallies are notorious for recapitulating fashions of the previous bull market. In the 1990s Yahoo! was a darling of the Street. Come the new milennium the big boys love Google, and as well they should. I'm a software guy and Google is one helluva company to sport on a geek's resume.
Economically though the rot was surfacing. Bubble after bubble went burst. The real estate market was perhaps the most alarming and devastating. The unholy trinity of Fannie-Freddie, greedy and reckless bankers, and greedy and/or stupid homebuyers had collectively created a time bomb of epic proportions. It was only a matter of time until the house of cards collapsed.
After peaking circa 2007, the market took the lead again and headed south like few have witnessed. Anyone foolish enough to have bet his/her retirement funds in a casino received a stinging lesson. Did they learn? Of course not.
Hope as I remarked before is nearly unkillable. Since March 2009 our markets have soared so quickly that Joe and Jane Investor are back with a vengeance. This is evident from the current spate of TV adverts from E*Trade, TD Waterhouse, et al. These companies aren't stupid. They won't place an ad unless they know there are enough potential customers to pay for the air time.
Economically the nation continues to struggle and don't let the talking heads from the White House or their pawns at MSNBC and CNN tell you any different. FOXNews business reporter Neil Cavuto is a sharpie and I figure nobody's fool, but even he could misread the tea leaves.
As for the market it's gearing up for another leg down, repeating the historic collapse of the 1930s but in a different form so few will grasp the implications until it's too late.
Across the pond is yet another repetition of history: the EU is unraveling. German leaders reluctantly acceded to pleas to bail out Greece. After witnessing the rioting by the Greeks it's plausible that the Germans were concerned about that spreading to other nations. But bailouts merely stave off the inevitable. Spain and Portugal are circling the bowl as well.
In conclusion it would do us well to recall that Europe was a flashpoint for the first two world wars. History could very well repeat itself and Europe could become a flashpoint for WWIII.
As people far out of the loop from our our Department of State and foreign ministers abroad, we individual Americans can but wonder what secret treaties are being forged today.
As a harsh critic of our president's policies myself I could but concur. However there is a more to the tale than our president and these three nations, and more to the tale than this moment in time. As a schoolboy in the 1960s it was science, math, and the "scientific" aspects of English (grammar, spelling) that captured my fancy. History was just one of those subjects I had to study, and whereas I'd earn placement into honors classes in math and science, McHistory was all the administrators saw fit for this student. I got my As and Bs and that was that. Little was I to know that decades later my fascination with history would grow, and it would double as a pragmatic tool for forecasting.
As much as I agree with Lisa, I claim that with or without Obama the world becomes more dangerous. We Americans – myself among them – tend to view the world through America-centric prisms. This is not per se a problem, but I find it important to look at the big picture as well. My brother is fluent in German and frequently reads the German media to fill in his own view of the world. I've found other publications to help myself along. What I learned and some of my conclusions follow.
Mass psychology is the motive force behind all human events, from the stock market, to our economies, and to our cooperation in peacetime and aggression during times of war.
When times are prosperous, leaders make nice and people make nice. In the U.S. and in many developed nations elsewhere the early 1980s brought prosperity in spades. Reaganomics whatever that was didn't make things good; American businesspeople and their employees did. Internationally, during the 1980s the insular Soviet Union collapsed, a divided Germany united, and the EU solidified to the extent that such diverse societies could, peaking circa 2000.
But there's an ebb and flow to mass psychology, a phenomenon of nature humans will never undo no matter how hard they try. We can't but take the bad with the good, and we can't but weather out the storms or die trying. These are lessons from history, and woe unto those who don't learn from them.
History does indeed repeat itself, albeit never with such precision that one could follow it unfolding yet again step by step
After the good times crest, the pendulum reverses its swing as it has done for centuries. The Roman Republic (SPQR) fell to the Caesars and ultimately collapsed entirely. Over the course of our own history since the American Revolution the rest of the world has endured so much upheaval that a globe manufactured in 1800 would be but a curious artifact useful to a teacher of history, yet mostly useless for teaching contemporary geography.
I spend much of my spare time contemplating what's happening in the word and what events in history might well repeat. Some folks call me a pessimist, and perhaps some pessimism factors into my analysis. We're all human and subject to thinking like, well, humans. That being said, there's a good case to be made for growing animosities world-wide, with rifts deepening and nations allying for whatever reasons their leaders choose.
One need not hold a degree in political science to draw conclusions from world history. Merely reading, listening, and thinking critically can take anyone into being well informed in certain areas. Over a decade ago I stumbled onto a book for sale on eBay. Published roughly a century ago by a historian, a Professor Pribram at the University of Vienna, this book was Volume II of The Secret Treaties of Austria-Hungary 1879-1914, translated presumably from German into English and republished by the Harvard University Press in 1921. I bid and won, and for the life of me I can't remember why because aside from its title and perhaps a synopsis from the seller I didn't know what I was purchasing. Now I do.
A big topic in McHistory was world war, and not surprisingly because the Second World War was a mere twenty years in the past and many veteran survivors of the First World War (née the Great War) – my paternal grandfather among them – were alive and well. One topic stuck with me for decades: that of underlying causes and immediate causes of global war. National leaders don't just wake up one day and say, "Let's start a war." Animosities must build over time, and nations must choose to ally themselves with others for whatever purposes they seek to achieve.
The Pribram book is fascinating as it delves deeply into the machinations among leaders in Europe. The title contains the word "secret" because at the time these treaties were being forged, secrecy was paramount. Only after the war did the information in the book see the light of day, and Dr. Pribram had proven himself to be a diligient and insightful historian in researching his topic and presenting it in a most readable way. His own account ends at Page 180, and from the on to the end at Page 259 are three appendices with reproductions of documents detailing the treaties themselves and private communications among the national leaders who forged them.
It's well established that the assassination on 28 June 1914 of Archduke Ferdinand of Austria was the immediate cause of WWI, but the underlying causes arose over decades. Recalling that my book is Volume II, it begins with The First Treaty of the Triple Alliance established in 1882, ergo the war was at least thirty years in the making before overt aggression broke out.
A brief review of American history reveals economic booms and busts, natural phenomena of mass psychology. But looking closer we observe other events surrounding them.
- In the 1840s, the stock market collapsed, our economy collapsed, and the Civil War erupted.
- In the 1930s, the stock market collapsed, our economy collapsed, and WWII erupted.
Since emerging from the economic doldrums of the 1970s, the USA entered quite a boom, lasting through the presidencies of Reagan, GHWB, and Clinton. But the wheels began to come off during Clinton's last yera in office, 2000. The market took a dive, the dot-com boom went bust, and under at least one school of thought the Great Bull Market was over.
But that was just the opening act. Our world as Americans changed on September 11, 2001. Our federal government exhibited frightening behavior such as I'd never seen in my 55 years as a citizen. Before we knew it the Patriot Act was law and our military was shipping out to begin two foolish armed conflicts in the Middle East. Then the politicians began to polarize, each side pointing fingers at the others, both refusing to address the problems in their own back yards. The market came back, but although it walked and quacked like the Great Bull Market – complete with indexes like the DJIA eclipsing old highs – it wasn't. The big players of Wall Street though, steeped in two decades of rising prices saw what they wanted to see. As a result of investor psychology and nearly unkillable hope, bear market rallies are notorious for recapitulating fashions of the previous bull market. In the 1990s Yahoo! was a darling of the Street. Come the new milennium the big boys love Google, and as well they should. I'm a software guy and Google is one helluva company to sport on a geek's resume.
Economically though the rot was surfacing. Bubble after bubble went burst. The real estate market was perhaps the most alarming and devastating. The unholy trinity of Fannie-Freddie, greedy and reckless bankers, and greedy and/or stupid homebuyers had collectively created a time bomb of epic proportions. It was only a matter of time until the house of cards collapsed.
After peaking circa 2007, the market took the lead again and headed south like few have witnessed. Anyone foolish enough to have bet his/her retirement funds in a casino received a stinging lesson. Did they learn? Of course not.
Hope as I remarked before is nearly unkillable. Since March 2009 our markets have soared so quickly that Joe and Jane Investor are back with a vengeance. This is evident from the current spate of TV adverts from E*Trade, TD Waterhouse, et al. These companies aren't stupid. They won't place an ad unless they know there are enough potential customers to pay for the air time.
Economically the nation continues to struggle and don't let the talking heads from the White House or their pawns at MSNBC and CNN tell you any different. FOXNews business reporter Neil Cavuto is a sharpie and I figure nobody's fool, but even he could misread the tea leaves.
As for the market it's gearing up for another leg down, repeating the historic collapse of the 1930s but in a different form so few will grasp the implications until it's too late.
Across the pond is yet another repetition of history: the EU is unraveling. German leaders reluctantly acceded to pleas to bail out Greece. After witnessing the rioting by the Greeks it's plausible that the Germans were concerned about that spreading to other nations. But bailouts merely stave off the inevitable. Spain and Portugal are circling the bowl as well.
In conclusion it would do us well to recall that Europe was a flashpoint for the first two world wars. History could very well repeat itself and Europe could become a flashpoint for WWIII.
As people far out of the loop from our our Department of State and foreign ministers abroad, we individual Americans can but wonder what secret treaties are being forged today.
Saturday, April 10, 2010
Credit Default Swaps: the gentle giant ... for now
One of the most dangerous form of financial contracts popular during our era is an ad hoc form of insurance called a "credit default swap". Some folks label them "derivatives", but that's a misnomer. In a nutshell the specific Wall-Street name refers to a contract to insure, just as a homeowner would sign with a licensed and well-capitalized firm. On paper it makes a lot of sense. A company holding debt wants to ensure that if the debtor defaults an insurer will step in and pay to keep the default from preventing the creditor from recovering its investment. The creditor is willing to pay a premium for this protection. Sounds like homeowner's insurance. What could be wrong with that?
Here's how it works in practice. Company A owns some debt and it's concerned about losing its principal if Debtor B defaults. Debtor B can be a corporation or a municipal or state government, or even a foreign entity. Aside from Lloyd's of London who will write an insurance policy? Someone with a lot more capital and wants to get a piece of the action (the premuim), that's who. Never mind that they're not licensed to insure against this and unregulated. The feds will look the other way if they're paid enough. (Remember how Al Capone bought off officials in Chicago to grow his business as a bootlegger?)
So Company A finds Company C who will make a deal to insure, charging a periodic premuim for the "policy". As long as the insured credit remains solvent there's no problem; Company C collects its premuims from Company A and Company A goes on merrily along believing it has paid to lay off its risk.
What happens though when the Debtor B defaults? Ideally Company C makes Company A whole and life goes on.
But here's the rub. What happens when Company C fails to assess its exposure to payouts and doubles down so to speak, loading up on contracts on the assumption that premuims will continue to roll on in and only a handful of payouts will wash ashore? What happens when a blizzard of defaults blows into town and buries Company C?
This happened in 2008. Insurance giant AIG played the role of Company C. While their suits were partying thinking the good times would never end the good times did indeed end, at least temporarily. They'd bet some of the ranch on red and the roulette wheel came up black.
After getting bailed out, did they make good on their promises to their Company A counterparties or did they just flip them the bird saying "sue us and spend hundreds of thousands of dollars in legal fees and years in court trying to collect" and hope most would assess the ROI and just go away?
I report, you decide.
Epilogue
The market in credit default swaps insures against tens of millions of dollars in default, far greater than the government can "bail out". An eagle-eyed reporter at Time magazine sniffed out the AIG debacle months before it occurred. She'd discovered that not only were insurers like AIG rolling the dice, but big banks were as well:
Here's how it works in practice. Company A owns some debt and it's concerned about losing its principal if Debtor B defaults. Debtor B can be a corporation or a municipal or state government, or even a foreign entity. Aside from Lloyd's of London who will write an insurance policy? Someone with a lot more capital and wants to get a piece of the action (the premuim), that's who. Never mind that they're not licensed to insure against this and unregulated. The feds will look the other way if they're paid enough. (Remember how Al Capone bought off officials in Chicago to grow his business as a bootlegger?)
So Company A finds Company C who will make a deal to insure, charging a periodic premuim for the "policy". As long as the insured credit remains solvent there's no problem; Company C collects its premuims from Company A and Company A goes on merrily along believing it has paid to lay off its risk.
What happens though when the Debtor B defaults? Ideally Company C makes Company A whole and life goes on.
But here's the rub. What happens when Company C fails to assess its exposure to payouts and doubles down so to speak, loading up on contracts on the assumption that premuims will continue to roll on in and only a handful of payouts will wash ashore? What happens when a blizzard of defaults blows into town and buries Company C?
This happened in 2008. Insurance giant AIG played the role of Company C. While their suits were partying thinking the good times would never end the good times did indeed end, at least temporarily. They'd bet some of the ranch on red and the roulette wheel came up black.
After getting bailed out, did they make good on their promises to their Company A counterparties or did they just flip them the bird saying "sue us and spend hundreds of thousands of dollars in legal fees and years in court trying to collect" and hope most would assess the ROI and just go away?
I report, you decide.
Epilogue
The market in credit default swaps insures against tens of millions of dollars in default, far greater than the government can "bail out". An eagle-eyed reporter at Time magazine sniffed out the AIG debacle months before it occurred. She'd discovered that not only were insurers like AIG rolling the dice, but big banks were as well:
Indeed, commercial banks are among the most active in this market, with the top 25 banks holding more than $13 trillion in credit default swaps — where they acted as either the insured or insurer — at the end of the third quarter of 2007, according to the Comptroller of the Currency, a federal banking regulator. JP Morgan Chase, Citibank, Bank of America and Wachovia were ranked among the top four most active, it said.When this gentle giant erupts into the financial nightmare from hell, we can forget about federal bailouts.
Sunday, February 7, 2010
I'm as mad as hell, and I'm not going to take this anymore!
Yesterday afternoon FOXNews ran a promo about a program that would air later that evening at 9:00 PM, a special edition of Geraldo Rivera's program, the first hour of which would be live coverage of Sarah Palin's keynote address at what was billed a National Tea Party Convention being held at a hotel in Nashville. I tuned in at 9:00 to see what Palin had to say, and to whom she was saying it to. Much to my surprise did I discover that C-SPAN was airing the address as well!
Earlier in the day, FOX had interviewed a gentleman from the Volunteer State who apparently felt that this convention had gotten too much ink whereas his own assembly of tea partiers deserved equal recognition or respect or who knows what. Although tea parties have become newsmaking bunches nationwide, evidently there's little or no true national organization. As an armchair observer it appears that the only forces that bind "partiers" nationwide is (1) a dismay at the the lack of influence constituents possess over their elected federal officials, and (2) a looming distaste/fear of mountains of legislation emanating from Congress bringing unprecedented amounts of deficit spending in a stated attempt to address the economic ills of the day. But make no mistake about it: independents and liberals has signed on to join conservatives. If you want to add your voice to those of your fellow Americans who are protesting the ills of Washington today, there are few better opportunities to do it than at a tea party.
The bailouts conducted in the latter half of 2008 under the Bush administration rang in a new era of fiscal irresponsibility in Washington, one that exposed the close ties between members of Congress and certain wealthy and powerful constituents. So far implicated in the private sector are executives of Goldman Sachs, AIG, the Big Three in Detroit; and the bosses of the UAW. Add to that favoritism the egregiously dangerous deficit spending, rising unemployment, and emerging news that the stimulus was an abject failure, and the stage is set for grass-roots protests.
The title of this article for those who don't already know is a line from the from the motion picture film Network, which came out in 1976. Films I'd learned are signs of the times. The most popular films from Hollywood are those written and directed by people who are in tune with the zeitgeist and can crank out a picture that will resonate with the current mood of their vast audience. This five-minute video from Network posted on YouTube captures what is perhaps the heart of the movie. A television newscaster stumbles in from the rain and enters the studio to go on camera as scheduled. Seated at his desk the program begins to air. The words from his mouth though don't come from the producers' script.
"It's a depression. Everybody's out of work or scared of losing their job," rants the rain-drenched anchor who remains clothed in his trenchcoat. He soon launches into a tirade, claiming that he has no solutions of his own to the threats of the depression, the inflation, the (Cold War) Russians, and crime in the streets (sound familiar?) . He then tells his television audience with a passionate grimace and tone of voice, "All I know is that first you've got to get mad!" He rises to his feet and with the thunder of a Bible-thumping preacher exhorts viewers to open the window, stick your head out, and yell, "I'm as mad as hell, and I'm not going to take this anymore!" His producer played by actress Faye Dunaway races from the control room to other offices to find out how many other cities served by her network have citizens yelling out their windows, and after learning the impact of this this evening's program, struts off down a hall gloating, "Son of a bitch! We struck the mother lode!" During the following minute or so the action shifts to a rainy city street in a thunderstorm lined by multi-story apartments. A rising cacophony ensues as apartment dwellers throw open their windows and scream at the tops of their lungs, "I'm as mad as hell, and I'm not going to take this anymore!"
Wild stuff, huh? And that wasn't even during a real depression. But Hollywood can sure dress up the drama, and Network delivered in spades in 1976. I saw it myself in a theater back then.
The collective mood of the public shifts, somewhat as a pendulum swings, from joyful to dark and back again, sometimes to mild extremes, at others to ones more severe. In 1976 the mood was rather sour, as one can infer from the litany of social ills that the newscaster was ranting about and his resonance with his audience. During the dot-com boom, the mood was just the opposite, and had a studio released Network then it would have been an abject failure at the box office simply because there was precious little to be angry about and plenty to enjoy and embrace. Beginning with Toy Story, Pixar's 3-D animated bombshells began exploding, charming both children and adults alike. The Internet and the World Wide Web arrived and ushered in a social and high-tech sea change, akin to that of the first commercial radio broadcasts of early in the twentieth century.
As surely as day yields to night, booms yield to busts. The larger the boom, the larger the bust. As booms go, the decades of the 1980s and 1990s witnessed a one of exceptional magnitude, one stoked even further by the easy-credit policies of the Greenspan Fed. After several years of retracement in the early 2000s, the economy raced ahead for its last hurrah. Those nasty bubbles then began to burst one by one, signaling the end of the party and the end of the joyful mood that had endured for over two decades.
The mood of today has the earmarks of one growing ever darker. Its shifts are gradual, so subtle that they're almost imperceptible. The mere presence of tea parties though is evidence of a dark shadow looming. As people collectively feel the squeeze, many band together and spontaneously form events like these.
We've not seen the last of the tea parties, and we've not seen the most forceful. Whereas the ones so far have been principally civil affairs, as anger rises so will numbers and violence. How they will evolve is anyone's guess, and the responses of the Republican and Democrat parties will play key roles. I am not a sociological forecaster so I will make not even a guess here.
In closing I'll merely cheer on the Tea Partiers and epitomize their emotions with a cyber-bellow:
I'm as mad as hell, and I'm not going to take this anymore!
Earlier in the day, FOX had interviewed a gentleman from the Volunteer State who apparently felt that this convention had gotten too much ink whereas his own assembly of tea partiers deserved equal recognition or respect or who knows what. Although tea parties have become newsmaking bunches nationwide, evidently there's little or no true national organization. As an armchair observer it appears that the only forces that bind "partiers" nationwide is (1) a dismay at the the lack of influence constituents possess over their elected federal officials, and (2) a looming distaste/fear of mountains of legislation emanating from Congress bringing unprecedented amounts of deficit spending in a stated attempt to address the economic ills of the day. But make no mistake about it: independents and liberals has signed on to join conservatives. If you want to add your voice to those of your fellow Americans who are protesting the ills of Washington today, there are few better opportunities to do it than at a tea party.
The bailouts conducted in the latter half of 2008 under the Bush administration rang in a new era of fiscal irresponsibility in Washington, one that exposed the close ties between members of Congress and certain wealthy and powerful constituents. So far implicated in the private sector are executives of Goldman Sachs, AIG, the Big Three in Detroit; and the bosses of the UAW. Add to that favoritism the egregiously dangerous deficit spending, rising unemployment, and emerging news that the stimulus was an abject failure, and the stage is set for grass-roots protests.
The title of this article for those who don't already know is a line from the from the motion picture film Network, which came out in 1976. Films I'd learned are signs of the times. The most popular films from Hollywood are those written and directed by people who are in tune with the zeitgeist and can crank out a picture that will resonate with the current mood of their vast audience. This five-minute video from Network posted on YouTube captures what is perhaps the heart of the movie. A television newscaster stumbles in from the rain and enters the studio to go on camera as scheduled. Seated at his desk the program begins to air. The words from his mouth though don't come from the producers' script.
"It's a depression. Everybody's out of work or scared of losing their job," rants the rain-drenched anchor who remains clothed in his trenchcoat. He soon launches into a tirade, claiming that he has no solutions of his own to the threats of the depression, the inflation, the (Cold War) Russians, and crime in the streets (sound familiar?) . He then tells his television audience with a passionate grimace and tone of voice, "All I know is that first you've got to get mad!" He rises to his feet and with the thunder of a Bible-thumping preacher exhorts viewers to open the window, stick your head out, and yell, "I'm as mad as hell, and I'm not going to take this anymore!" His producer played by actress Faye Dunaway races from the control room to other offices to find out how many other cities served by her network have citizens yelling out their windows, and after learning the impact of this this evening's program, struts off down a hall gloating, "Son of a bitch! We struck the mother lode!" During the following minute or so the action shifts to a rainy city street in a thunderstorm lined by multi-story apartments. A rising cacophony ensues as apartment dwellers throw open their windows and scream at the tops of their lungs, "I'm as mad as hell, and I'm not going to take this anymore!"
Wild stuff, huh? And that wasn't even during a real depression. But Hollywood can sure dress up the drama, and Network delivered in spades in 1976. I saw it myself in a theater back then.
The collective mood of the public shifts, somewhat as a pendulum swings, from joyful to dark and back again, sometimes to mild extremes, at others to ones more severe. In 1976 the mood was rather sour, as one can infer from the litany of social ills that the newscaster was ranting about and his resonance with his audience. During the dot-com boom, the mood was just the opposite, and had a studio released Network then it would have been an abject failure at the box office simply because there was precious little to be angry about and plenty to enjoy and embrace. Beginning with Toy Story, Pixar's 3-D animated bombshells began exploding, charming both children and adults alike. The Internet and the World Wide Web arrived and ushered in a social and high-tech sea change, akin to that of the first commercial radio broadcasts of early in the twentieth century.
As surely as day yields to night, booms yield to busts. The larger the boom, the larger the bust. As booms go, the decades of the 1980s and 1990s witnessed a one of exceptional magnitude, one stoked even further by the easy-credit policies of the Greenspan Fed. After several years of retracement in the early 2000s, the economy raced ahead for its last hurrah. Those nasty bubbles then began to burst one by one, signaling the end of the party and the end of the joyful mood that had endured for over two decades.
The mood of today has the earmarks of one growing ever darker. Its shifts are gradual, so subtle that they're almost imperceptible. The mere presence of tea parties though is evidence of a dark shadow looming. As people collectively feel the squeeze, many band together and spontaneously form events like these.
We've not seen the last of the tea parties, and we've not seen the most forceful. Whereas the ones so far have been principally civil affairs, as anger rises so will numbers and violence. How they will evolve is anyone's guess, and the responses of the Republican and Democrat parties will play key roles. I am not a sociological forecaster so I will make not even a guess here.
In closing I'll merely cheer on the Tea Partiers and epitomize their emotions with a cyber-bellow:
I'm as mad as hell, and I'm not going to take this anymore!
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