Tuesday Melt [Guess Direction Here] Blogging

On Tuesday before the open the credit market signs are good - 3 mo LIBOR is down 22 basis points to 3.83% and the 3 mo T-bill yield is steady at 1.23%, so the TED spread is down.

Gold is also down (Dec futures at $779/oz.) which may be a flight from quality or yet another sign of a strong dollar - the Euro is down again, with the Dec future at 1.32.

However!  At 10:30, the S&P 500 is down 4 at 981 (up from the open.)  VIX is down to a still high 53.

Today is pay-up day for the Lehman credit default swaps.  Reuters says not to worry; making it through the day without some other firm announcing a ghastly surprise would be nice.  That said, the settlement amounts have been known for over a week, so regulators and lenders should have already been alerted if anyone has a liquidity or solvency problem due to Lehman.  One hopes.

Comments

[kim]

Up, up, and away. The momentum shift to McCain ought to buoy the market.
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[PaulL]

If Obama wins, one of the biggest factors, maybe the biggest, will be that President Bush was rolled by Paulson into becoming panic-stricken four weeks before the election. Bush did not need to go on TV with fear in his eyes, with his hands clutching.

If something like this needed to be done, a big IF, it could have been done calmly and without resort to all the nonsense about it has to be done now, it has to be done by Wednesday, it has to be done by Friday, it has to be done as soon as the Jewish New Year celebration is over.

[kim]

Provoked by Soros et al or not, there was a tsunami approaching and Bush's response was correct. That it was terrible for McCain is either an unhappy co-incidence or supports that idea that it was timed. Bush, and McCain, would have come off even worse had Bush done nothing.

Innocent of this or not, Soros is a bad guy. This we know.
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[kim]

If it was timed, it was too early, and Joes the Plumbers overcome Joes Soros Stalins pretty regularly.
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[kim]

Pretty amusing if this was all instigated just to give Obama a temporary, Bradley negated, lead. Pretty unamusing under other scenarios.
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[Charlie (Colorado)]

Paul, the proof is in the pudding. The market was already collapsing and credit was already frozen when Paulson and Bush spoke. You just didn't notice. Now the market is straightening out and the credit market is opening up again.

So if you think this wasn't the reason for the recovery in credit and such, explain your theory. Show your work.

Realize that you're in the position of saying "even though the predictions of what the effects of the credit freeze would be, and even though the predictions of what the effects of the rescue plan would be, have all come true, I think I was right that the credit freeze wouldn't matter and the rescue plan wouldn't help".

[PaulL]

Kim,

My emphasis is on hysteria, panic, and fear. President Bush did not act calm or reassuring, as he should have done.

I didn't advocate doing nothing. No matter what idea is advocated, the next economist over is going to have a different idea about the best way to handle it.

But whatever policy was decided upon, it should have been done in a cool manner, without resort to whipping up fear and creating immediate, near immediate, and pretty near immediate deadlines. That only made things worse.

[PaulL]

Charlie,

I am certainly no economist.

Kim,

I don't generally believe in conspiracy theories. But it doesn't seem like much of a stretch to figure that Schumer wanted a bank run in the summer (IndyMac letter made public) and figured any economic crisis would be good politically for Democrats.

[bad]

Charlie

Are there companies currently (since the bailout) still unable to meet payroll because of the credit crunch?

[Charlie (Colorado)]

I don't think we can call it "melt" much any more. Dow opened -150 after a 405 point previous day on really tiny volume; most people who went to bed long are staying long, a very few are cashing out.

[thelonereader]

Great PaulL we got your point-should have been calmer---now move on already.

[kim]

Well, Paul, we disagree. I didn't view his public appearance. There was a catastrophe looming and his and Paulson's actions have stopped it. Had we a press worth a damn they'd be praising the pair and damning Obama for his part in the prelude, and hero-worshipping McCain for his efforts a few years ago to regulate it.

You've been victimized by the lying press. Do something about it. Get your helper out front.
=========================================

[glasater]

PaulL--the problem was not GWB--it was 535 prima donnas.

[jean]

You got those partners from Goldman who made tens of millions getting us into this mess.Now they are on the other end getting us out.I don't think it was a conspiracy.It just makes me mad

[Charlie (Colorado)]

bad, it's hard to say "yes" or "no". We do know that measures of the credit market's health are better --- the dollar LIBOR is down significantly again, TED spread is down to 2.5 percent --- and we know that, for example, California was able to buy commercial paper against future revenue again. The problem is that commercial paper and interbank loans are pretty much an "open outcry" market, although I don't think there are trading pits, really. Someone announces to all the other players "I've got a billion in cash at 3 percent" and someone else says "I need a billion dollars over night and I'll pay 2.7 percent" --- then if the deal doesn't happen the player change their bids and offers until one of them says "I have a billion at 2.83 percent" and another one says "Mine!" and the deal is done. (Its complicated by credit ratings; effectively, there are different markets with different prices for different credit ratings.)

What was happening was that California was looking at the commercial paper market and no one was even saying "I have a billion to lend", not at any price. That's not happening as much now, although things aren't completely better.

The thing is that it's hard to get from there to knowing whether Larry's Chevy can get money from their credit line with GMAC, and to know if the reason Larry can't get money is because of the credit crunch or because Larry's a deadbeat.

[Charlie (Colorado)]

Jean, I understand, but they were just doing what the market was telling them to do: it was saying "we reward this behavior" and they said "so we'll do that! Yay!"

The people to be mad at are the ones who forced all this paper onto the market. They all live in DC.

[glasater]

Really great article that mentions Anna Schwartz who co-wrote a book with Milton Friedman "A Monetary History of the United States" (1963).

In the 1930s, as Ms. Schwartz and Mr. Friedman argued in "A Monetary History," the country and the Federal Reserve were faced with a liquidity crisis in the banking sector. As banks failed, depositors became alarmed that they'd lose their money if their bank, too, failed. So bank runs began, and these became self-reinforcing: "If the borrowers hadn't withdrawn cash, they [the banks] would have been in good shape. But the Fed just sat by and did nothing, so bank after bank failed. And that only motivated depositors to withdraw funds from banks that were not in distress," deepening the crisis and causing still more failures.

But "that's not what's going on in the market now," Ms. Schwartz says. Today, the banks have a problem on the asset side of their ledgers -- "all these exotic securities that the market does not know how to value."

"Why are they 'toxic'?" Ms. Schwartz asks. "They're toxic because you cannot sell them, you don't know what they're worth, your balance sheet is not credible and the whole market freezes up. We don't know whom to lend to because we don't know who is sound. So if you could get rid of them, that would be an improvement." The only way to "get rid of them" is to sell them, which is why Ms. Schwartz thought that Treasury Secretary Hank Paulson's original proposal to buy these assets from the banks was "a step in the right direction."

The article mentions that at age 92 her mind is just as sharp as ever. What an inspiration.

[Rick Ballard]

"The people to be mad at are the ones who forced all this paper onto the market."

You're stinting on giving credit where credit is due. It takes an economist trying to effect social change to put together the rationales for something as complicated and silly as MBS. The pols just pushed the tools created by the economists.

[jean]

Charlie--I know your right I'm angry at Barney Frank and that bunch.I can't understand why the Republician party isn't screaming about this.Everytime I look at Paulson can't help but think about the millions he made at Goldman.I guess on the whole I'm just really tired of "the smartest man in the room" syndrome

[Pofarmer]

I can't understand why the Republician party isn't screaming about this.

Best think I can figure is that McCain's trying not to burn any bridges, or something.

[Tom Maguire]

If something like this needed to be done, a big IF, it could have been done calmly and without resort to all the nonsense about it has to be done now, it has to be done by Wednesday, it has to be done by Friday, it has to be done as soon as the Jewish New Year celebration is over.

Exactly, because Congress is so reliable about suspending their scheduled recesses and moving legislation quickly in a calm, reasoned, unhurried atmosphere.

As to the "Big IF" about whether something needed to be done: I have a mental picture of Bernanke and Paulson at the helm of the Titanic and various irate passengers shouting "Hey - you turned the boat so hard I spilled my champagne".

[rhodeymark]

Rush just played fresh clips of Barney with the Money Honey, saying "the fundamentals are sound - it's the psychology that's bad". Isn't that what McCain said that got the Dems panties in a bunch? Why yes, yes it is.

[Boatbuilder]

I'm still at a loss as to why McCain somehow gets blamed for this. The normally sensible Dan Henninger of the WSJ had a hysterical piece last week calling the bailout "McCains's Katrina, because McCain suspended his campaign and the Republicans didn't (initially) pass the bailout.

My sense of the public (as opposed to the Wall St/Washington) take is that nobody knew what was happening except that something drastic needed to be done, and that McCain suspended the campaign (to the extent anyone cares) to work on it. The fact that the bill passed a few days later after not passing because some Republicans, and a bunch of Democrats didn't like it doesn't seem to make a hell of a lot of difference as far as McCain is concerned, because practically nobody outside of Wall St. liked it.
It now appears to be having a calming effect on things, which is what it was supposed to do. Why doesn't McCain get some credit for being statesmanlike and demonstrating a willingness to take on the issues. (OK, I know why, but it still pisses me off).

[sbw]

Ah, PaulL, you remind me of that famous Alexander Haig remark, "As of now, I am in control here in the White House."

Of course, he wasn't, but what did it matter.

You are entitled to your opinion of what Bush should have said and how he should have said it, but I remind people regularly that while everyone is entitled to an opinion, you don't have to know anything to have one.

Oh, and my opinion -- and I don't need to know anything to have it -- is that you are dead wrong.

And if you want a second opinion, yer ugly, too. Or was that Groucho Marx' opinion?

[Rick Ballard]

Jean,

Here is a very long tick tock piece on "Goldman in Crisis". You have to read it carefully (with a huge BS strainer) but my take away is that Goldman rolled craps on the come out, 4 on the second come out and followed up with a nice 7 on the next roll. There's no 'smatest in the room' in that piece - just "Where's the mop? - Somebody grab a bigge bucket."

They will be limping badly from this for quite a while.

For those watching the market - the dip came on news that the Fed was backing up redemptions at the mutuals. "Everybody" is mopping up 2 and 3 year Ts at the moment. I couldn't guess how long 'everybody' will be happ with those stunning 1.58 and 1.23% annual yields.

[jean]

I'm also at a loss for how any of this bailout money is fixing the root problem.I'm not against the bailout,but I haven't heard a word about repairing the faulty loan situation.I don't see anyone stepping up in favor of tougher lending policies.Hope I'm wrong

[sbw]

Jean, what the hell do I know, but if you are smart enough not to make the same mistake over the next year or so, it's likely that investment institutions will be similarly careful.

Which is a long way around saying that the actual re-write of the regulations can afford to be patiently undertaken.

[Charlie (Colorado)]

Jean, the bailout money isn't fixing the root issue, but then it wasn't supposed to. To repeat an analogy, Paulson et al were in the position of someone dealing with an accident victim with serious burns and a bleeding major artery: you just can't treat the burns until the bleeding stops.

[jean]

Thanks everyone.I would feel a whole lot better if I thought ACORN,The Congess And
The ACLU would stop forcing banks to make bad loans.Nothing against Goldman,but they are the kings of the MBA smartist guy syndrome.

[Charlie (Colorado)]

Okay, the Dow tested 9000 and didn't like it. I say it closes up on the day.

[Rick Ballard]

"I haven't heard a word about repairing the faulty loan situation."

Jean,

That's sort of interesting. I see the Fed and OCC collecting and presenting more information than ever with their studies of actual mortgage default circumstances. I imagine that is a prelude to setting new underwriting standards for whatever entity takes the place of the FMs. The information that I see being produced focuses upon FICO scores and loan to equity ratios so that's where I would bet the changes will occur. If the entity formerly known as FMs will not buy a loan where the applicant's FICO is less than 680 and the LTV is greater than 85/15, then very few of those loans will be made. Here is a decent article on the damage which foreclosure will do to a person's FICO. I would note that someone tossing in the towel is very unlikely to be approved for a loan of any sort within three years of foreclosure and that the actual hit to your FICO is between 200 and 280 points so you can take a look down at the penalty rate on the 'Under 540' line being assessed as a minimum. The illustration used is for another home loan but the penalty will apply to all credit for at least three years.

I suppose an argument could be undertaken as to whether or not the penalty assessed is sufficient to achieve behavior modification but my main point is that penalties are assessed and the Fed and OCC will definitely be modifying loan standards.

As to punishment for the fools who came up with the scheme in the first place - Lehman and Bear Stearns were publicly executed, Countrywide was fed to Bank of America etc. I would have preferred a few hangings and a horse whipping or two but the good old days are gone.

There is some small satisfaction from seeing the "smartest guys" revealed as being unworthy of their publicity but I prefer the Lehman, Bear Stearns outcome myself. At least those Boards of Directors can't do any more damage.

[jean]

Rick Thanks, hope your right about the loan process. What % of americans have a mortgage?I'm guessing 50%.Of that 50% only 3% are in default.That sure is a small % of americans for all the damage done

[Another Bob]

Charlie (Colorado) (and Rick Ballard):

Do you have opinions regards the correctness and accuracy of (stock market) technical analysis generally, and of Elliott wave theory specifically?

My initial impression is it amounts to reading of entrails.

[Rick Ballard]

Cripple Fight!!

You have to read the Goldman piece I linked above to get the humor on this one. The first piece outlines Goldman's need to attract a depositor base, now that it has decided that regular banking is the new and coming thing.

What to do, what to do - hey, let's stab Citi! Our investment guys can issue a "PU - what a stinker!" forecast that will be sure to drive some Citi customers right into our arms!

Such lovely, lovely people.

[Charlie (Colorado)]

Do you have opinions regards the correctness and accuracy of (stock market) technical analysis generally, and of Elliott wave theory specifically?

Well, as you might note from talking about "tested XXXX" and such, I'm a little bit of a technician. The thing is, though, I don't think it's because there is anything essentially right about technical analysis; I just know there are a lot of technicians out there, so I suspect technical analysis is a self-fulfilling theory: if there's a head-and-shoulders in the chart, all the chartists are going to say "ooh, there's a head and shoulders" and do what that suggests to them.

I also have a competing theory based on the idea of the market as a collection of independent actors connected by communications lines with a finite bandwidth --- so there is a "correct" price, but the market never exactly converges on it, there's hysteresis.

[Charlie (Colorado)]

Elliott wave theory does strike me as entrail-reading. At best. Biorhythms.

[Charlie (Colorado)]

Oh well. Dow closed down.

[Rick Ballard]

The Fed just put out a Deadbeats 'R' Us map with county level delinquency rates. It makes it very easy to confirm or deny suspicions concerning the impact of CRA. Take a look at SoCal and the Bay Area in CA before jumping to what may be unwarranted conclusions. They might be wholly unwarranted though - take a look at Cook County.

Jean,

In rough numbers:

Total occupied units - 115 million
Total owner occupied units - 75 million
With mortgages - 58 million
Currently in foreclosure - 925,000 or 1.6% (that's not total for the year, which will be much higher).

BobS,

Me no follow charts. Brain too small.

[cathyf]

The thing that worries me is the straight up demographic pressures. Sure, the CRA and the ACORN demonstration in the bank lobby did their part to get the lending-to-deadbeats market to flow over to suprime mortgages, but I think that the bigger problem is that there is too much capital sloshing around because of the baby boomer demographic bulge.

The fundamental mechanism of retirement savings works like this:

-- In the present, you work, for pay. In other words, you use your labor to produce something that people are willing to give you money for. Some of that pay you consume immediately, while some of it you "save".

-- The money that you save is used in other enterprises, mingled with other people's labor, to produce things of value. Your savings are called "capital" and you get paid for the use of your capital in those enterprises.

-- At some point, you have enough capital saved up that you can afford to live off of the income from your capital without having to put any more labor in. This is called "retirement".

Ok, a couple of things to understand about this system:

When you are old, the income from your accumulated capital is not just a matter of how much capital you have accumulated. In order for capital to have value, there must be profitable uses for the money -- which is obviously dependent upon the labor of those future employees in those enterprises, and the customers of those future enterprises.

Because of the shifting demographics (simply the shifting ratios between working young people and non-working retired people) there are significant supply and demand factors going on. People older than the baby boomers and in the front part of the baby boom have been able to have great retirements out of relatively smaller savings because all of those baby boomers still working create a large demand for their savings, and pay generous returns. But people on the back end of the baby boom (like me -- born in 1963) are going to face much smaller investment returns just because there are so many of us trying to throw our money at relatively smaller numbers of working people.

People (rightly enough) complain that social security is a ponzi scheme. But that misses the point -- all retirement schemes have the ponzi characteristic of being dependent upon the labor and productivity of future workers in order for non-working retired people to have investment returns to live off of in the future. The only way that this works with the predicted demographics is if workers become inexorably more productive as time goes on. (It also works if there is some mass event that kills off huge numbers of old people without killing off too many young people, to rebalance the demographics. Perhaps we should be subsidizing junk food :-))

Productivity does increase inexorably, unless we seriously screw things up. Things that screw up productivity are political, cultural and religious systems which reward sloth and punish prosperity; wars and/or natural disasters which simply destroy property; political, cultural and religious systems which reward ignorance and stupidity and punish learning and intelligence. The irony, of course, is that such nonsense is increasingly tolerated with increasing wealth. Quite simply, the more resources we have above subsistence level, the more resources we have to waste on such foolishness before it kills us all.

Anyway, my concern is that in these waves of throwing money at bad investments the only thing which seems to be changing is the current fad of bad investments. Before giving mortgages to people who couldn't afford them, we were giving money to people to sell pet food on the internet. What worries me is that I seriously wonder if the root of the problem isn't simply that there is too much capital chasing too few good investments, and so the excess capital is going to have to go to bad investments. Doing things like fixing the subprime mortgage problem still doesn't fix the root problem -- which is that the only way to stop making bad investments is if we can come up with more good investments.

We have tended to take the complacent attitude that rises in productivity are wonderful "found money" rather than the predictable results of technological and intellectual advances. But they are not. They can only take place in the context of protection of property rights, and we get a lot more advances a lot faster if we have a culture which respects those who create these advances rather than constantly abuses "the rich" or "middle-classness".

[clarice plumber]

cathyf, I hate the generation after mine with a passion--maybe we can just steal their stuff and we won't have this problem of"too much capital chasing too few good investments".

[Charlie (Colorado)]

We have tended to take the complacent attitude that rises in productivity are wonderful "found money" rather than the predictable results of technological and intellectual advances. But they are not. They can only take place in the context of protection of property rights, and we get a lot more advances a lot faster if we have a culture which respects those who create these advances rather than constantly abuses "the rich" or "middle-classness".

What she said.

[Charlie (Colorado)]

cathyf, I hate the generation after mine with a passion

HEY!

[clarice plumber]

Are you a boomer, Chaco? I figured you were younger. The kids who went to school in the late 60's--you know thw Clinton's class..those born about 1947-8 just after the war. Miserable, spoiled wastrels.

[Rick Ballard]

They can only take place in the context of protection of property rights,

Excellent comment, Cathy. The move towards 'globalization' is an attempt to mitigate the demographic changes which you describe by underwriting capitalism in other parts of the globe. The problem comes when the "other parts" do not have adequate protection of property rights. The current rush to get dollars is a very good illustration of that fact. What capitalist in his right mind would want dollars after the Chairman of the Federal Reserve and Secretary of the Treasury have promised to turn on the printing presses full blast and ordered newer, bigger ones to boot?

The answer is most Asian and South American capitalists. I don't believe much thought has been given to the probable consequences of this series of events outside of the US. The OPEC Secretary General is now talking about a "huge oversupply" - and he's right. Maybe 4 MBD huge. Who will make the production cuts? Venezuela? Iran? Russia? China is already reporting factory closings and growing unrest. As is India.

Not one of those countries has reliable property rights and every capitalist living within them knows it. And wants out - or dollars in the US for the day his capital is seized.

What a wonderful opportunity.

[clarice plumber]

**Clintons'**
As usual, Cathy's comment was stellar, of course even though I joked around.

As to this"
Not one of those countries has reliable property rights and every capitalist living within them knows it. And wants out - or dollars in the US for the day his capital is seized" isn't it Ponce DeLeon (true name) who argues that because there is no title system for the property of the poor their shanties, small businesses etc are unavailable to them as a capital asset. He is trying or was trying to set up a title system in the mpost impoverished areas of South America.

If you haven't read "The Perfect Latin American Idiot" you can't truly understand how much attitudes and social structure play in the impoverishment of much of Central and South America--it's not a lack of natural resources.

[cathyf]

I hate the generation after mine with a passion

Hey! That would be my generation! 1963 was the largest birth cohort in the history of the US up until that year. The baby boom went bust in 1965 -- there was a slight drop from 63 to 64, but a clearly precipitous drop in 65. The 63 record stood for another couple of decades, although it has now been surpassed. (I used to work for a boss who was an urban demographer in a previous career, so I know all that trivia, but it's a decade old. Interestingly enough, at that job my entire department of 5 people were born in 1963.)

Seriously, the baby boom baby bust cycle is a lot more important than just the baby boom. (Boomers, of course, can't accept that they might just be part of the story.) It's this demographic bulge followed by a hole that leaves us with the wrong capital investments all the way along the way on both sides.

[jean]

as a 48er I would guess 99.9% of boomers didn't demonstrate,and have lived very decent lives.Unfortunately it was the small % that have gotten all the press.The resentment toward these characters is probably greatest within the boomer group.

[clarice plumber]

All right, the two of you persuaded me I'm wrong. You get to live and keep your stuff.

[Charlie (Colorado)]

Are you a boomer, Chaco? I figured you were younger. The kids who went to school in the late 60's--you know thw Clinton's class..those born about 1947-8 just after the war. Miserable, spoiled wastrels.

Yup. Born in '55. Mother born in '35. And I don't know I disagree with you --- having worn a uniform (ROTC) 70-73.

[Charlie (Colorado)]

All right, the two of you persuaded me I'm wrong. You get to live and keep your stuff.

now all we have to do is convince the other boomers.

[jean]

That's ok think how bad we normal boomers feel knowing there is a whole group of our generation that turns our stomach.

[Rick Ballard]

The Mystery of Capital by Hernando De Soto (Peruvian cousin of Ponce de Leon). He does lay out in fair detail the plight of those lacking the 'connections' necessary to maintain and hold real property in South America. The Asian problem is similar but not identical.

Metes and bounds are not unknown in Asia. It's just a history of enforcement that is missing. Still.

Cathyf - you actually hit it just right. The impact of the Baby Bust ends in 2022. Honest. The twelve years between 2010 and 2012 are the demographic 'hole' which immigration has been filling (legal and illegal). The current unpleasantness may have some impact upon the famous SS deficit. I've been watching for an influx of retirees into the benefits system and it hasn't started yet.

[PeterUK]

Clarice,
"The kids who went to school in the late 60's--you know thw Clinton's class..those born about 1947-8 just after the war. Miserable, spoiled wastrels."

Yes,and weren't they a bloody nuisance? Borrowing clothes,getting between you and their older siblings,stealing your cigarettes and trying to get into your clubs.
WE invented the Sixties and they misappropriated them and claimed them as their own.The major part of the cultural achievements of the era were by War Babies,the Boomers were just the audience.
Always running into some geezer who claims to have "Been there".The buggers were still at school!

[jean]

Think about my poor sons age 23 and 20.Look at all those awful things demonstrating against the war and for Obama.My sons will spend the rest of their lives in the shadow of those numbskulls

[clarice plumber]

"Hernando De Soto " AHA--That's it Rick--I had the wrong damned explorer..Now his notion is so simple it is utterly brilliant, isn't it? It's been in front of everyone and until he came along no one else noticed it. TITLE..

[PaulL]

Interesting post on CDS at powerlineblog.

LUN

Extract of last two paragraphs:

***So what happened?...well...first there was an "auction" on October 10...to determine the payout to buyers of protection. The auction determined payout was about 91¢ on the dollar of bond face value --pretty high, but not surprising since Lehman's assets became worthless, so only about 9¢ on the dollar is available for recovery. Then, part 2 took place today. The sellers of the CDS settled with the buyers. And NOTHING happened...or, rather, the sellers shelled out about $6 billion or so to the buyers and everyone went home. No CDS counterparty failed to perform! The cash collateral margining mechanism worked just fine. A handful of small hedge funds might fail...because they typically borrow to meet their CDS collateral margin calls...so lenders to those funds may have a problem, but NOT the CDS counterparty. But so far none has.

And the overhang?...well almost all of it is HEDGED, i.e., offsets other obligations...when these were all netted....the actual required payout was LESS THAN 2% of the notional amount of the CDS contracts.***

[Rick Ballard]

Clarice,

It's the enforcement structure that isn't there. The hundreds of years of dry, dull boring case law that set all the precedents for the weak to protect themselves from the powerful. The tedious Anglo-Saxon Domesday business.

If you'd like to have fun playing Battleship for a while, the Saudi position vis a vis an oil glut is very interesting. Oil under $70 could break both Chavez and the Iranians. Russia is a $2 whore in the business and not a member of OPEC at any rate. The Saudi fields have been refreshed and they are quite capable of turning a 4 MBD glut into a 5.5 MBD glut - and driving the price south of $40 if they want. The Russians will pump away all the while.

A tax break to the entire world and one which destroys both the Persians, whom the Saudis despise heartily, and the Commie in Venezuela.

When this chapter of economic history is written I hope the foresight of The House of Morgan and that of HSBC (which I unwittingly and stupidly disparaged) receives its due. Part of the ploy by the Arsonists Brigade was to drive gold through the roof and increase the climate of fear by doing so. JPM and HSBC took large positions in the market and have successfully blocked the ploy to this point. The Peaker idiocy is deader than a door nail, the gold bugs are bleeding to death and the credit death spiral was blocked. All that remains is the hunting down and imprisoning of George Soros and his henchmen.

[PaulL]

Saudi Arabia had oil down to $10 a barrel sometime in the 1990s. I believe that was to ruin the chance of shale oil production in Texas, if I remember correctly.

What did Iran do at the time? It costs the Iranians more than that to produce it.

[PaulL]

On second thought, shale oil wouldn't have been in Texas. I might just be off on the years, too. Never mind.

[Rick Ballard]

PaulL,

You're right about the Saudis knocking out shale (which they wouldn't mind doing again, as well). There was a helluva nice shale oil boom in CO up until the early-mid '80s as well as a nice drilling boom down around Midland, TX. The Iranians need at the time wasn't nearly as high as it is today and they couldn't forestall the Saudis anyway - they just sat there and took it.

[Charlie (Colorado)]

Paul, that's pretty much what we thought to start with; it wasn't that the securities had no value, it was that they were illiquid. So now we see that sure enough they were worth nearly the face value, so it looks like the cost is going to be small, or even negative.

[Rick Ballard]

Shoot - the Iranians were undergoing some unpleasantness with their neighbor in the '80's as well. He was a Sunni fellow with some designs on their production as part of his overall plan to unify the entire ME production under Baghdadi control. The Saudi move was designed to be a little unhelpful to him as well.

[PaulL]

Charlie, what's with this "we thought"? I'd never heard of CDS before all of this, except the kind kids played before they got into MP3s.

[Rick Ballard]

Charlie,

You may be a little cavalier in your dismissal of the pay out. Some of the players paying out didn't have the money to do so - and they were great big EU banks. It's true that the net might have been small but the amount of dough changing hands wasn't. AIGs hit alone was a lot more than $8 billion and I'm not sure they were the biggest loser.

[PaulL]

And if the Obama is elected, shale oil doesn't have a chance in the U.S. It causes global warming, don't you know. Right, Kim?

Thank goodness that there are places like Fort McMurray in Alberta, where whole towns are created out of nothing to produce shale oil. Yes, it's Canada, but it's better in North America than elsewhere.

[Pofarmer]

One of the disturbing things about an Obama election with falling oil prices is that you can gaurantee that he'll diddle with windmills and solar and not work on the basic oil infrastructure. I sure hope that the McCain/Palin team won't be so short sighted.

[Rick Ballard]

What really doesn't have a chance are the super dumb ass solar wind mill subsidy chewers. Shale and tar sands are OK down to $40. I still haven't seen production cost numbers out of the deep water BP Thunder Horse play but the preliminary guesstimates put lift cost at $15 or so. It still makes good money at $40.

I wonder if the Russians will blow up the Baku line to lower supply.

[Charlie (Colorado)]

Paul, check this Google search.

You may be a little cavalier in your dismissal of the pay out. Some of the players paying out didn't have the money to do so - and they were great big EU banks. It's true that the net might have been small but the amount of dough changing hands wasn't. AIGs hit alone was a lot more than $8 billion and I'm not sure they were the biggest loser.

Yeah, but $10 billion here and there, it's not like *serious* money.

Seriously, that, as they say, is how the markets are supposed to work. As long as the financial system keeps working, then suffering the wages of stupidity doesn't bother me as much.

[Rick Ballard]

Charlie,

Doesn't bother me at all either but I believe that it was substantially more than $10 billion and I believe that UK banks plus UBS and a few others had more exposure than we know of. I'd like to know the names of the payees.

Pofarmer,

Do you think even Barack H.Obama can blow enough smoke to convince people that the AGW nonsense is still alive when the temperature keeps dropping? "Who ya gonna believe, me or your lying eyes?" isn't a long term winner.

[Jane Plumber]

Hey! I'm a boomer, born in '52. For decades I thought I was the youngest person around cause I wasn't born in the '40's.

How things change!

[Pofarmer]

Rick,

It won't take AGW for them to find a reason not to drill. There's always the pollution bogeyman or all manner of other excuses to use.

Ya'll kind of tripped my brain on something else I've been thinking about. I'm a relative babe in the woods here. '70. Anyway, one of the difficulties my generation has is competing with all the pent up capital that the boomers have. They can bid the price of resources above normal returns, well, just because they have the money and they can.

[Rick Ballard]

"one of the difficulties my generation has is competing with all the pent up capital that the boomers have"

Huh uh. Patience - it all flows (not drips) down and the succeeding generation (being abnormally smaller) is going to be abnormally richer - if the damn Dems don't steal the capital to buy votes. You're actually seven years shy of the beginning of your most productive capital accumulation years. 45-55 are the real build up years and 'second half' boomers (born '58-'64) are still in the middle or just beginning. You're in the 'bust' and you're going to do extremely well. If the Dems don't tax away every dime to buy every bum in the US his own house.

[Pofarmer]

Responding to waaayyyyyy up thread on charting.

The way I use charting is basically to establish and look at trends. We can look at long term trends, say in the Dow Futures, and say that certainly we are in a down trend, and it's not broken, or anywhere near it. You can do it for just about anything. Now, the tricky part, obviously, is when you are trying to call a change in the trend in the middle of the game. Looking at any chart you will probably see any number of formations that could have been a head and shoulders, could have been a bear key or bull key reversal, could have been setting up a pennant formation, etc, etc, and then get swallowed up in the movements of the makret. However, charting is just a smaller part of technical signals. Back in my college days I had a graduate level management and marketing class that was basically about trading strategies. Most of us in it were from production ag type backgrounds. The professor was a little short dumpy dude in horn rimmed glasses that didn't look like he would have sense enough to come in out of the rain. The deal was, at the beginning of the course he made a trade, and with the proceeds he would take the class out to supper, and we would all make trades and see how we did. Well, we all poured over the fundamentals, supply and demand, weather forecasts, etc, etc,. Some folks made a trade, got on the wrong side, got out, got on the wrong side of another trade, etc, etc, and really wracked up some seriuos losses(on computer simulation only). I think I made one trade, and basically wiped out about even. Our professor made one trade with, I don't remember the starting amount but I think it was $1000. Well, he traded the technicals, maybe traded into another position one time, and at the end of the course took us all out for supper AND drinks at a local pub. He was a really cool guy. I learned a lot in his class. Mainly what I learned was that I wasn't mentally situated to play the futures markets.

[sbw]

"Miserable, spoiled wastrels."

Hittin' pretty close to home, Clarice.

[RichatUF]

Read a story over at National Review and took a look at the AOL straw poll to cheer me up. NR has a story flagged up that Obama's campaign isn't getting the walking around money to PA and Gov. Rendell is shrugging his shoulders. Don't know if he'll get to them next week, but it seems like a bit of a blind spot-if Obama wants turn out in the cities, he's got to pay the ward heelers.

The straw poll (yes I know it's only an internet poll) has been an oddity everytime I've looked at it. It currently has McCain winning 46 states and 56% of the popular vote. That's a dream but some of the stuff the MSM has been flagging up doesn't seem to be much better than internet polling anyway.

I'd also like to direct everyone's attention to Jim's great link on the dead thread from this morning, Obama's Hypnotic Effect. The paper it links to is great for those interested in Obama's peculiar linguistics, speechifying, and body language clusters. The paper itself is long (60 pages), could use some copy editing, and needs an executive summary. However it is fantastic:

Barack Obama’s speeches contain the hypnosis techniques of Dr. Milton Erickson, M.D. who developed a form of “conversational” hypnosis that could be hidden in seemingly normal speech and used on patients without their knowledge for therapy purposes....Obama is not just using subliminal messages, but textbook covert hypnosis and neuro-linguistic programming techniques on audiences that are intentionally designed to sideline rational judgment and implant subconscious commands to think he is wonderful and elect him President.

[Pofarmer]

Also from another thread. I made a small point about businesses operating with too much debt. Now, obviously I have an operating line, and some Capital debt. Most businesses do. Maybe what I really meant was leverage?

Let's take a company like Circuit City. They've had phenomenal growth, gone public, yada, yada, I imagine they are leveraged to the hilt. A couple bad months and they are closing 150 stores. Same thing with Starbucks. One week I was watching a program on what great managers and what a great model that company was. Literally the next week they announced closing 800 stores. We need to get away from models that produce phenomenal growth, but are just too brittle to withstand any adversity.

[PaulL]

Rich, that hypnosis paper is fascinating. I think "hypnosis" as a term generates laughter or disbelief. I think it'd be more effective if the paper just called it "manipulative techniques." Anyway, it makes a great case that Obama is using zillions of manipulative techniques.

[Rick Ballard]

"Maybe what I really meant was leverage?"

Yep. Leverage is the thrill and the bane of a Circuit City. Or Citibank. It doesn't take much of a down market to put a highly leveraged company so far under water that they never make it back to the surface. I used that in the illustration on buying the house in SD but I wasn't particularly clear about it. Once debt service exceeds income then Retained Earnings are being eaten and if you're leveraged 30:1 they get eaten pretty quickly. Toss in a few trading losses and bad loans to get the blaze started and you can burn a bank down in short order if it's working from a 30:1 base.

That's pretty much a proven fact now - a year ago I would have been scolded for my ignorance concerning the Marvelous and Very Special and Very Secret Knowledge that allowed All Risk to be Modeled Completely Out of Existence.

Then I'd be told about the Magical Properties of an Algorithm that was 1,000% guaranteed to turn Common Lead into 24ct Gold.

[clarice plumber]

Man ,Rick ,you are so far ahead of me on this leverage thingy--I've just figured out Synergy..How taking one company that's so- so and adding it to another so-so company makes it into a must have stock worth a gazillion dollars. But that was the prior bubble,wasn't it?

[Charlie (Colorado)]

Actually, Circuit City has been tanking for more than a year; the price dropped below $2 in July. Where ever you got the notion that it was a company with amazing growth and management has to have been more than a couple years old.

On Starbucks, I don't think I'm surprised they're closing stores. I'm out in the suburbs, and there are at least 5 Starbucks within a mile of me, two of them literally across the street from one another. They've got something close to 17,000 stores, so we're talking about 5 percent.

[Rick Ballard]

Clarice,

Leverage isn't exactly new - the New Thing was the Magical Risk Eliminating Algorithm (shhh... don't tell anyone - it's top secret). It really worked quite well when the switch was in the Up position. There have been some small problems with the switch in the Down position. Some survivors are undoubtedly working on a New and Very Improved version this evening.

They'll peddle it right along with the SoLunar Windmills.

[clarice plumber]

I hope this time S.C.A.M. gets there first.

[clarice plumber]

What's the big whoop about no brain scans being contained in the packet of medical reports Biden produced to the press? I mean how can you scan something that isn't there.

[Elliott]

RNC spends 150k on Palin's clothes and the press is outraged, even though the wardrobe will fetch mind boggling sums when it's auctioned for charity. The real scandal remains that the RNC wasted a single penny defending Lincoln Chafee in 2006

[clarice plumber]

Isn't that the truh. Elliott--they gave him the money without even making him promise he'd support the president's judicial nominees, and of course he took the money and did not.

[Elliott]

Greetings to the morning brigade!

[Elliott]

By the way, here's the full text of the letter (quoted in the AT article on the Catholic vote that Clarice linked on the other thread) sent by then Cardinal Ratzinger in 2004.

[M. Simon]

Elliot,

Mornin'.

I want to pound this for the next 14 days or so:

Don't give it to him. Make him steal it.

[Pofarmer]

Geez Elliot. The comments to that article are priceless, too. I wonder what Barack Husseins suits cost? I wonder when we're going to find out that most of Barack Husseins "small donor" money was really foreign funds, or money "unbundled" from much larger donations. I really do loathe the MSM right now.

[rhodeymark]

Good morning - I saw that Penny Press link at Doug Ross' directorblue site last week and mulled it over before forwarding and linking. The NLP and "conversational" hypnosis techniques were widely used in sales as well. Before the Intertubes, I sold encyclopedias for a season after leaving the military. i was shocked that "training" took a full (unpaid) week. Only one day was spent on the actual product (Collier's set, plus bonus books) and the rest was spent on - you guessed it - pacing & leading, distraction, emotional bonding, etc. with practice sessions. I never could understand the (wildly successful in direct sales) trainer instructing us to "look up the street and point at nothing" while trying to gain access to a person's home. These are proven techniques, perfected by ElectroLux salesmen over countless door knocks, to overcome rational objection.

[srp]

I just want to link to this paper from the Minneapolis Fed. It pretty conclusively refutes the idea that we needed a bailout in order to unfreeze the credit markets, because in actuality they never froze. No fancy econometrics, just raw Fed data on loan volumes over time. The graphs are pretty convincing.

http://www.minneapolisfed.org/research/WP/WP666.pdf

I'll be annoyingly reposting this link on future threads so that we can restore a reality-based discussion about current policy. It looks like the "rejectionist" wing of the Republican caucus had the right idea after all.

[Rick Ballard]

"The graphs are pretty convincing."

They sure are. Especially that one on page 16 showing the total commercial paper outstanding dropping from around $800 billion just before the Lehman BK (on September 10) to $625 billion on October 8. Thank God credit didn't really didn't freeze up.

[kim]

Rhodeymark, Encyclopedia Americana here. I was good at it too; probably should've stuck with it, but I got tired of lying to people to get in the door.
===================================

[Thomas Esmond Knox]

Rick, my info is that the AIG damage was $6.2 million (that's million)on the Lehman settlement. These numbers are way way smaller than predicted or confidently demanded by the panic merchants.

It's unbelievable. Maybe I didn't buy enough.