Oil ended the trading day at $90.46/bbl.
Fow what it’s worth, I think that the price is actually lower for Canadians than it was post Katrina, since with their currency appreciating against ours, this is the equivalent of about $74/bbl two years ago.
Dr. Roubini reminisces aboutr how he was thought a lunatic in his latest blog post. A governor of the Chilean central bank commented “Usually at this kind of meetings I used to hear that the views of Nouriel Roubini about an impending financial and real hard landing are from the Moon. But this year there are plenty of “lunatics” around!“
Just so you know, these were the good doctors predictions form a year ago:
I would also note, that I have been predicting much the same since before December 2003, and additionally, I’ve been commenting on the downward pressure on the dollar, which I believe will lead to sever (double digit) inflation, though this may already have occurred, given how much the BLS and other governmental entities collude in tweaking the numbers to generate low numbers.
I can’t give an exact date and time, but I expect the dollar to weaken to more than $1.50:1.00€ before years end. 5 Years ago it was about $0.95:1.00€, and a few years befoire that, it was $0.72:1.00€.
So the dollar has fallen 50%.
The German-based Energy Watch Group has released a study indicating that peak oil has already passed, and production will now decline by 7% a year.
Even if they are only half right, this will not be pretty, and by the end of 2008 we could see $200/bbl oil.
Here is the chart: 
As the folks at calculated risk explain, the subprime resets will be done with in a year or two, but then the Alt-A and Option ARM mortgages kick in.
Alt-A may not be that bad, it’s basically the bottom end of prime, kind of like being slightly pregnant, but the Option ARM mortgages are a different story. A lot of these folks are paying the minimum, which means that they are going deeper and deeper into debt as we speak.
This will get uglier before it gets better.
Banks are continuing to take losses and write down loans.
Poor quarterly results from banks across the US over the past two weeks suggest credit problems once confined to high-risk mortgage borrowers are spreading across the consumer landscape, posing new risks to the economy and weighing heavily on the markets.
This is not a problem limited to one portion of the market. It is wide spread, and it is systemic, driven by the Fed’s, specifically Alan “Bubbles” Greenspan’s, decision to create a credit bubble to address the dotcom meltdown of 2000-2001.
Too many people owe too much money, and much of this money should never have been lent out in the first place.
For a while, I have been talking a bit about the dangers of highly complex and highly leveraged financial instruments, and how they might contribute to a crask.
It appears that some folks at Barron’s Magazineare now beginning to have the same concerns.
Let’s give some background on how a lot of these instruments work:
Investing on Margin:
What happens here, is that you borrow money from your broker to purchase stock, which is the collateral to the loan. Let us assume that you want to purchase stock for a company, you have $10,000 to spend.
If the costs $10/share, you can buy 10,000 shares. If the price goes to 11, you make $1,000.
Let us assume that you were to buy those shares on margin. The current US margin limit is 50% (correct me if I’m wrong), so with your $10,000, and the borrowed $10,000, you could buy 20,000 shares, and when they went to $11, you would make $2000, which after loan and margin fees would be around $1700.
The problem is that if the stock drops to $5.00, you will have lost all of your money.
If the stock drops to $3.00, you owe money to your brokerage.
Leverage can improve the upside of investments, but at the risk of significantly larger downside risks.
Securities Futures:
These are similar to commodities futures, except that deal with entities rather than stocks and bonds. They lack the justification that commodities futures do: If a tire manufacturer gets a large OEM contract from General Motors, there is a real business case for them to lock in the price of rubber with a futures contract, but a stock future’s contract is just speculation.
You make money with an appreciating stock by purchasing a contract to sell a stock purchased today at a later date, and you make money with a depreciating stock by purchasing a contract to sell a stock today that you are buying at a later date.
Generally, you only have to put down the cost for the contract, and ;”>not the cost of the security, so where a typical margin purchase may be 50% leveraged, stock futures might be more than 90% leveraged.
Obviously, if one is in possession of ;”>inside information both of margin purchasing and futures can greatly increase the return on this information for an unethical broker.
Just so you know, leverage has increased markedly over the past few years, see below for a picture of the roughly 300% increase in Margin since 1990.
It should be noted that the use of leverage, specifically margin purchasing, was one of the major causes of the stock market crash of 1929. It forced people who got margin calls to unload into a collapsing market. It is why the loan to value rate was set to about 75% in the 1930s (and subsequently lowered to 50% in the mid 1970s).
It should be noted that none of these techniques aid ;”>investors, they aid ;”>speculators, and they provide perverse incentives for people to cheat in some manner or another.
The repackaged loans that are currently weighing on the market are a rather similar sort of leverage, where the idea was that by packaging a large number of loans together, you would spread the risk of any individual loan defaulting, which allowed people to trade these securities in a brisk, and potentially lucrative manner, particularly for the brokers, who got a commission on each sale.
If we have a 1929 style crash in the stock market, or worse, a 1987 style crash in the stock market (it was a worse one day drop), the swings will be exacerbated by people who will be forced by their brokers to sell on the drop on a roller coaster ride.
If we were to return to the Depression era regulations that FDR implemented, much of the instability and speculation that causes this risk would be eliminated, but it would take years for the exotic financial instruments to work their way out of the market, so it is likely too late now.
What, the CEO of Countrywidemay have dumped his stock when he got advance notice in violation of insider trading law???
Don’t make me quote Claude Rains in Casasblanca.
Here is the CEO in an industry that has largely depended on a pump and dump mantality, and has increasingly relied on the ignorance of its customers for its business, and we are supposed to be Suprised when it turns out that there are indications that perhaps the senior management did not scrupulously follow the rules????
Well, knock me over with a sledge hammer.
Highly recommended. This guy is the one on NPR. Comcast must DIE! dot com
Actually, I have no deathwish for Comcast or any other gigantic, blundering, greedy, arrogant corporate monstrosity, What I do have is the earnest desire for such companies to change their ways. This site offers an opportunity — for you to vent your grievances (civilly, please) and for Comcast to pay close attention.
I advise you to include your customer number in your post; this will give Comcast the chance to contact you and work on your problem. If it does so, I encourage you to post an update, giving credit where credit is due. Meantime, be aware you may be the target of online fishers trying to get personal information from you. DO NOT REPLY TO EMAILS CLAIMING TO BE FROM COMCAST. Deal with them only by phone.
Congratulations. You are no longer just an angry, mistreated customer. Nor, I hope, are you just part of an e-mob. But you are a revolutionary, wresting control from the oligarchs, and claiming it for the consumer. Your power is enormous. Use it wisely.
— Bob Garfield
Martin Wolf has a fascinating essay on how the “mixture of crony capitalism and gross incompetence” in the Anglo-Saxon Model of capitalism (Basically the sort of high finance practiced in the US and the UK, is headed for a fall.
His points:
I agree with him that these presage long term changes in the financial markets:
Experience teaches that big financial shocks affect patterns of lending and spending across the world. Originating, as it does, at the core of the world economy, this one will do so, too. The question is how stable and dynamic the world economy that emerges will be.
Go to his article to see the graphs.
Some background for those too young to remember: On October 19, 1987, the Dow collapsed, losing 22.6 %, and the S&P 500 fell by 20.4 percent. This was the largest single day loss in the history of Wall Street.
I recall turning on the news 10 minutes late, and seeing that the 2nd story of the day was that we had “shelled an Iranian oil platform”. I was surprised, and I wondered what on earth happened to bump a story like that off the lead*. As I found out later, that story about the naval engagement was even bigger than I had thought. It was not just shelling an oil platform, it was the largest surface engagement since the end of World War II, with half the Iranian navy being sunk.
Nouriel Roubini has an article in Foreign Policy, Have We Learned the Lessons of Black Monday?, which asks that question.
His answer, and mine, are both an emphatic “No”, though for different reasons.
Dr. Roubini looks at the market fundamentals, and draws some disturbing similarities with 1987, while I look at the increasing pace of deregulation of securities markets since the Carter administration, and draw parallels with 1929.
Non only have we not learned lessons, but we have unlearned lessons, because too many people make too much money as a result of this stupidity.
*Yes, the good old days, when They Who Must Not Be Named would never be given the lead story on the evening news.
Ezra Klein, once more showing that he writes better than I ever will. comments on McCain’s healthcare proposal
It’s another of these plans to sprinkle magical tax credits all across the land that will incentivize folks to buy less health insurance, but do absolutely nothing for the cost of care. Families get a $5,000 tax credit to help them buy insurance, and they can keep what they don’t use, and so the hope is, they’ll buy plans with higher deductibles, be unable to afford the deductibles, and will thus buy less care. It’s like if I tried to make food cheaper by encouraging you to diet.
I love that line on dieting, and it cuts every Republican healthcare plan to the quick.
Oil is now above above $89, given further shortages, and a falling dollar, $100/bbl oil will be here soon.
The Dollar has hit a new low vs. the Euro, it broke $1.43, and is not sitting at $1.4291:€1.
At the rate that this is going, the dollar will break $1.50:€1 by year’s end.
This will force interest rates up, and the credit crisis will get much uglier.
As strange as it may sound, he is actually in the minority with this moderate common sense idea.
Nobel economics winner says market forces flawed
By Jon HurdlePRINCETON, New Jersey (Reuters) – Societies should not rely on market forces to protect the environment or provide quality health care for all citizens, a winner of the 2007 Nobel Prize for economics said on Monday.
…
He goes on to explain that things like the environment and healthcare are nt private goods, but public ones, and that pure market theory screws them up.
The US had net sales of minus $69.3 billion in August, a positive sales of $60 billion. To put this in perspective, the last time that net sales of long-term securities such as bonds, notes and equities was this bad was when Russia defaulted on its debt.
The dollar is near ist historic low versus the Euro, and the weakness of the dollar is also driving higher oil prices.
This will place further upward pressure on interest rates, to pull the money back, which could make the current situation even more precarious.
Not surprising. Were I a home builder right now, I’d be in the fetal position shrieking, “Tekeli-Li!”.
It’s the lowest number ever, but I still expect the Fed and Wall Street to be Surprised when it gets worse.
It seems rather complex, and I’m having a problem wrapping my head around the finer points, so I started with a principle that has never failed me, that it is a Bush initiative, so it will be a failure.
I am drawing on what is to my mind the single wisest thing written thus far this millenia, by one Daniel daves, this is a truism about the Bush and His Evil Minions™:
But it does inspire in me the desire for a competition; can anyone, particularly the rather more Bush-friendly recent arrivals to the board, give me one single example of something with the following three characteristics:
- It is a policy initiative of the current Bush administration
- It was significant enough in scale that I’d have heard of it (at a pinch, that I should have heard of it)
- It wasn’t in some important way completely fucked up during the execution.
So I start from the assumption that it’s screwed up. Then I looked at what was going on with this fund, and it appeared that banks were investing in their own brokerage funds, which is generally not allowed in the US, and was a primary cause of Japan’s financial crisis that ran over a decade, and I am even more convinced that this will be ineffective at best, and harmful at worst.
Then I asked myself the question that Nouriel Roubini, has been asking, “Is this this a liquidity crisis, or an insolvency crisis?” I.E. Is the problem that the money has stopped moving because of fear, and when things get back to normal, everything will be fine, or is the underlying value of the assets in these funds far less than previously reckoned?
Obviously, if it is the former, it’s a matter of reassuring markets with some sort of capitalist WD-40, but if it is the latter, then these funds, and some of the companies, will go bust no matter what is done, and any bailout scheme is simply an attempt to pass the losses off on unsuspecting rubes.
I lean toward the the latter, particularly since there is SIGNIFICANT federal support of the plan, because the Treasury department had to waive significant regulations regarding cross-ownership to allow this plan to come into being.
Then I read Dr. Roubini’s analysis on the bailout fund, “Super-Conduit or Super-Bailout Shell Game?“, (warning: it’s a bit dense), and he seems to agree: this is about attempting to pass the losses downstream.
It’s really pretty simple. In 2002, over a thousand people in the country starved to death. In 2005, they had a famine crisis that had NGOs scrambling. This year, there is a 400 ton surplus of Corn (maize) much of which is alleviating the hunger in neighboring Zimbabwe.
So, what happened? The government ignored the free market fundamentalists, who are less idealogical than Osama bin Laden, and they did the right thing.
To quote Paul Harvey, and now, the rest of the story.
“What is different [this year] is the access to inputs,” explained Patrick Kabambe, permanent secretary in the Ministry of Agriculture and Food Security. “People are so poor they use recycled seed and no fertilizer. They can’t meet their needs that way and they grow no surplus. People sink deeper and deeper into poverty. It’s a vicious cycle. We had to do something.”
Starting in 2006, and on a larger scale this year, the government distributed coupons to low-income farmers to allow them to purchase 50-kilogram sacks of fertilizer for 950 kwacha($7) rather than the market price of 4,500 kwacha. As a result, the average farmer’s yield jumped to two tonnes a hectare from 800 kilograms.
Malawi had this program throughout the 1990s, but in 2000, donor nations insisted that they scrap the program, saying that it “distorted the market”.
Some blame fell on poor rains, but it was also true that the 75 per cent of the population who are subsistence farmers could not afford either fertilizer or seeds.
That left them vulnerable to what the development industry calls “shocks” – such as one household member contracting HIV or malaria and being too sick to farm – leaving them with too little to eat and forced to sell items of value to survive. At the same time, larger farmers and traders capitalized on the poor harvest by stockpiling, while the government made decisions that were both ill-advised and corrupt, and mishandled the national strategic grain reserve. The next few years were a disaster.
And the cost?
The fertilizer subsidy cost the government $62-million – 6.5 per cent of the total government budget, a “whack of cash” in the words of one top economist – but that pales in comparison to the $120-million the government spent importing food aid in the 2005 famine. And the sale of maize to Zimbabwe and other countries will inject an additional $120-million into the national economy, a sizable figure here.
I’ve come to believe that a lot of international aid is really about making sure that the economies do not develop, so that, when a famine hits, subsidized western farmers can make a killing selling food aid.
The deficit is ballooning, and as a result, sales of Treasuries may increase by 50%.
This kind of shock to an already precarious bond market could send interest rates skyrocketing, as public and private compete in the market for capital.
If correct, and I am not an economist, we could see s significatn (more than 1%) increase in interest rates in the next 6 months.
Bushonomics.
Barry Ritholtz at the big picture has a post showing that the money supply grew at an astonishing 24.3% according to the St. Louis Fed’s financial data.
Note that this number does not include the Fed’s rate cut or the emergency injection of money by the world’s central banks to stabilize the dollar.
More dollars chasing the same amount of goods equals inflation, in this case, it looks like double digit inflation, and probably the dollar falling of a cliff in currency markets.