Friday, March 30, 2007
Thursday, March 29, 2007
Tuesday, March 27, 2007
To me, that sums up the essence of what socionomics teaches. To someone like myself, that places a huge premium on "rational" thought, digging for facts, etc. this was a hard lesson to internalize.
For those of you that still may be hesitant to accept that, I give you a glaring example - a precursor, in my opinion, of dark times to come in the real estate market.
A blogger who goes by the name "Marinite" posts fairly regularly on the real estate situation in Marin County, California. Marinite thinks that property prices got way out of line with what the market could realistically hold up and thus classified it as a bubble. This infuriates those who belong to the Holy Church of Real Estate.
On February 19th, Marinite reports the following:
I should also say that last week I received an email that appears to be a death threat. Hate mail is one thing and aggravates me to no end. I've received hate mail from almost the day I started this blog. But death threats are something else altogether. I know real estate is an emotional topic for some, and here in Marin it is akin to an outright fanatical religion. I don't know if this email was for real or just a cruel joke. The email simply read:
I swear if I ever find you your dead.
Marinite took it seriously enough to stop blogging for awhile, until recently returning to the scene with the aptly titled Marin Real Estate Bubble: A Letter to a Terrorist
On the face of it, this incident doesn't seem terribly significant (except of course to Marinite). Think for a moment, though about the anger (and obvious lack of command of basic English grammar) of the anonymous person who emailed in a death threat to someone who occasional posts their thoughts on real estate. This email was probably a very frustrated individual who has screwed his or her financial life by taking out a mortgage too big for their situation. What happens six months from now, assuming current trends hold and millions of others are facing the same thing? Statistically, some of these folks are going to move from threats to action - and the rage will flow like a river of lava all across formerly "hot" markets.
Now would be a good time to be consider what you'd do if violence began erupting in your community. Always be prepared.
This could be the Russians trying to stir things up, or this could be an actual leak. I personally regard it as the former, but with two U.S. carrier groups in the Persian Gulf, with the Iranian kidnapping of 15 U.K. sailors and marines and with an ongoing covert war between the West and Iran, the potential for a blow-up in the next few weeks is high and rising.
by Webster G. Tarpley
The long awaited US military attack on Iran is now on track for the first week of April, specifically for 4 AM on April 6, the Good Friday opening of Easter weekend, writes the well-known Russian journalist Andrei Uglanov in the Moscow weekly “Argumenty Nedeli.” Uglanov cites Russian military experts close to the Russian General Staff for his account.
The attack is slated to last for twelve hours, according to Uglanov, lasting from 4 AM until 4 PM local time. Friday is a holiday in Iran. In the course of the attack, code named Operation Bite, about 20 targets are marked for bombing; the list includes uranium enrichment facilities, research centers, and laboratories.
The first reactor at the Bushehr nuclear plant, where Russian engineers are working, is supposed to be spared from destruction. The US attack plan reportedly calls for the Iranian air defense system to be degraded, for numerous Iranian warships to be sunk in the Persian Gulf, and the for the most important headquarters of the Iranian armed forces to be wiped out.
Again, this isn't sourced as well as I like. The link to the actual Russian source for this article is in Russian and French, but I don't see English, so can't vouch for translation errors. Just another data point on the great curve of collapse...
Monday, March 26, 2007
In Socionomic Alarm Number One, I briefly highlighted a story that ties racism to subprime lending practices. That chorus is growing louder:
Foreclosure Wave Bears Down on Immigrants
by Kirstin Downey, Washington Post
Immigrants are emerging as among the first victims of a growing wave of home foreclosures in the Washington area as mortgage lending problems multiply locally and across the country.
Nationally, 375,000 high-interest-rate loans were made to Hispanics in 2005, and nearly 73,000 of them are likely to go into foreclosure, said Aracely Panameno, director of Latino affairs for the Center for Responsible Lending. About 1.1 million homes in the United States are expected to go into foreclosure in the next six years, and many native-born Americans are likely to be stuck with burdensome loans. But immigrants are getting hit first in part because their incomes tend to be lower and many have lost construction jobs.
Unfamiliar with the U.S. mortgage market, unable to speak or read English well and vulnerable to the blandishments of real estate professionals who told them property values always rise, many immigrants are struggling to deal with high mortgage payments as their homes sag in value, making it harder to escape the loans by selling.
Think long and hard about this. We are just in the opening innings of the subprime shakeout. If the rot in mortgage underwriting has infiltrated Alt-A, then we are looking at a calamity, not an isolated segment of the market.
Recall that back in March of 2006, Hispanics were able to organize millions of people to march in the streets of over 100 U.S. cities over a proposed immigration reform bill. This protest had the equivalent of roughly 20 divisions of light infantry marching in the streets of every major U.S. metro area - plus hundreds of thousands of supporters not of "infantry age". These potential troops were well-disciplined enough to avoid violence and make their point. Oh yes, and in many cases, these marches included individuals carrying the banner of a foreign nation on U.S. soil, protesting internal U.S. lawmaking.
I realize the "20 divisions of light infantry" reference is an odd way to frame this issue, but fast-forward to today. Potentially millions of hispanics could face severe economic problems on two fronts - the decline in employment in the building trades and the potential loss of their investment in a house. Right now, as the article makes clear, the anger is still localized to their families and friends.
It won't be for much longer. How will that anger express itself in your community?
- What is the ethnic makeup of your community? How vulnerable will it be to a downturn in the housing market?
- Does your community have a history of ethnic tension?
- If the building trades were to face a major slowdown, how would that affect the hispanic community in your city or town?
- What level of protest did your community see in March of 2006?
- Do you own rental property that is occupied by individuals employed in the building trades? Are you educated on your responsibilities as a landlord regarding eviction under the law in your state or city?
- How bad will it get where you live should foreclosures continue at their current pace?
- Are you prepared to handle a sustained downturn in housing?
Saturday, March 24, 2007
Iran in Sailors' 'Confession' Claim
via The Press Association
The Iranian military has questioned 15 detained British soldiers and said they confessed to illegally entering the country's territorial waters.
Iran has accused Britain of "blatant aggression."
The tough comments came after Britain demanded the return of the sailors and denied they had strayed into Iranian waters while searching for smugglers off Iraq's coast.
The eight Royal Navy sailors and seven Royal Marines were taken to Tehran for questioning, and a top military official, Gen Ali Reza Afshar, said they "confessed to illegal entry into Iran's waters."
Plus, El Presidente Ahmadinejad has canceled a trip to New York to address the UN.
- Make sure you have extra gasoline, a bike or some version of personal transportation on hand or available should an asymetric shock such as war in the Persian Gulf restrict petroleum supplies for a time
- If petroleum supplies did hit a snag, what would that do to the long-haul trucking industry in the U.S.? How much food do you have on-hand, right now?
- Is your job dependent upon easy access to gasoline or diesel?
- If you haven't done your KRSoE Gambler's Analysis of your situation, do it this weekend.
Have a great weekend.
Friday, March 23, 2007
Filtering Out the Noise
by Kevin Kerr for The Daily Reckoning
Sometimes when I turn the TV on and listen to the commentators talk about commodities I cringe. For years the media treated commodities as a secondary asset class, or worse, a form of legalized gambling - to some extent they still do. Their understanding of how the markets actually function is rudimentary at best. Now I’m not saying these journalists are not intelligent - some of them are brilliant. They just don’t understand how the commodities markets work. But yet they have such power that when the camera light goes on millions of people hear and believe what they say. Having done a lot of television and print media myself, I know that they can be very powerful tools but, as they say in the Spiderman movies “with great power comes great responsibility.”
Anyway, let me be clear - I make use of the media and information superhighway every day. While I have colleagues who are deep philosophical thinkers who don’t even own a TV, I have five computer screens in my office and two televisions. Does this make me non-philosophical and obtuse? No, because most of the time I keep the volume on the TV down, which improves my IQ immensely.
Distractions of any sort when trading can be of little or no value. The TV blaring opinions that change moment-to-moment can be one of a trader’s most useless tools. A friend and colleague of mine, we’ll call him Jack, used to work in the office across from mine. Jack is one of the best currency traders I know and he and I come from the same mold. Jack never had a TV in his office; he thought it was worthless and that what was said was mostly drivel. For the most part he was right. More importantly, Jack’s point was that TV offered him nothing beneficial for his trading--it only interfered with his system and was a distraction; in other words, just noise. I agree with Jack. I also feel that staring at a trading screen all day long is useless.
Click Here for the rest of the article...
- Ability to control costs once the plant is built - the only wildcard here is the kneejerk anti-nuke eco-fascist opposition. Controlling costs serves both consumers and shareholders in a responsible manner.
- The ability to lessen our dependence on foreign oil (by switching to nuclear electricity we can then make the painful leap to electric automobiles for consumer transportation over the coming decades)
- You can actually breed more fuel than you consume in some reactor designs
- Employing Americans to do meaningful work at good pay
And that is just a start. That said, recently, an expert out of MIT is saying that the U.S. will be facing a nuclear fuel shortage in the coming years due to underinvestment in the fuel cycle. If I understand it correctly, part of his thesis is that the reliance on Russian HEU and not on mines has weakened the supply at the same time that China, India and others are sewing up uranium supplies around the world - potentially leaving the U.S out in the cold.
I personally believe that while the MIT expert certainly has a point - this potential crisis is a great chance to get creative. Any potential shortage could be met by recycling existing rods (we'd probably have to partner with Europe to do this at first until we could build a reprocessing facility here) and also by moving to some version of a Thorium-based fuel cycle.
Thorium is mildly radioactive, but when bombarded with neutrons, a new isotope is created - Uranium-233 - a fantastic nuclear fuel. Various versions have been or are being tested. Some involve just leaving Thorium seeds or blankets in a reactor for years at a time, others involve chemical separation (reprocessing) and the making of fuel rods utilizing U-233.
Other stop-gaps are available as well - using U.S. warheads to downblend, using existing U-233 stockpiles (that are slated to be disposed of as "waste!") and going to advanced fuel element design.
Basically, I guess I'm saying, this potential supply crunch could be a blessing in disguise for the industry.
Hat tip to Eric McErlain over at NEI Nuclear Notes for posting the study on his blog.
Wednesday, March 21, 2007
Shocked! Shocked I say! Subprime lenders targeted blacks, hispanics, poor people
Here's where socionomics pays off. For those with an eye this mess, it was going to be clear that the polarization and anger that occurs when social mood turns down was going to manifest itself with charges of racism. The time to prepare was 2005. Now, I'd say keep a close eye on how your community handles things as mood continues to turn down.
The fact that these individuals who took out liar loans with huge pre-payment penalties and ugly resets should have read the fine print and studied the details of taking out a huge loan is irrelevant. Tell me how it is going to look when a bunch of overfed and overtan banksters get grilled before a Congressional committee on this issue. They will try to talk about "providing a service for the less fortunate" or "they should have read the fine print." The Congresscritters will eat them alive.
Think further about the potential for property rights violations (squatting) and even violence when the Man comes to evict these people from "their" home.
This is only getting started.
Don't worry. The REITS and Hedge Funds have it all hedged appropriately. It's not a big part of their business. Remain calm. Take out a liar loan with a huge prepayment penalty, pay way too much for a house in Phoenix and everything will be fine.
Tuesday, March 20, 2007
A very interesting article has been posted by Pete Kendall over at Sociotimes about New York City and how things have fluctuated there over the decades with the waning and waxing of mood and money.
A Bear Market Bolt Strikes at the Heart of New York City
By Pete Kendall, March 19, 2007
Last week we got the following communication from JL, a subscriber/resident of Manhattan’s east side: “First time in memory that you had two major shootings on back-to-back days in Manhattan (Harlem then the Village). NYC residents have pretty much become ever more complacent about crime and quality of life (and constant higher real estate prices) over the past 20 years. Looks like it is ‘game over.’”
Combined with outraged claims of racism surrounding three indicted NYC police officers and a rising incidence of crime in big cities across the country, I had to agree that the shootings might be socionomically significant. I didn’t post anything, however, because two shootings does not a constitute a trend. But the contagious quality of the latest “Madison Square Garden Basketbrawl” has all the elements of a kick-off event in a good old fashioned, Big Apple bear market.
And, in the spirit of the KRSoE, do a Gambler's Analysis of that megalopolis and see what you come up with.
Monday, March 19, 2007
Ask yourself what the reaction would be if that had been a uranium mine.
Ridiculous. Coal mining kills hundreds every year. It spews filth into the atmosphere sickening or killing countless more each year.
Nuclear power could, especially if we were allowed to reprocess and recycle the waste, provide massive amounts of power at a fixed cost and with a tiny waste stream. Imagine a power source that produced about a basketball court's worth of solidified waste each year that could be stored safely? Imagine if we were allowed to go further with fast neutron research and learn to transmute ALL the waste?
But never let the facts get in the way of a good dose of hysteria. Ugh.
Sunday, March 18, 2007
I guess you need to go to where the soon-to-be-searching-for-a-new-career-opportunity types come to see if their lender is about to enter the death spiral.
The thesis comes from a few lines in Rogers' famous hit The Gambler, a bit of distilled wisdom that could serve are the base for many MBA courses in a better world:
You got to know when to hold 'em, know when to fold 'em.
Know when to walk away and know when to run.
You never count your money when youre sittin' at the table.
There'll be time enough for countin' when the dealin's done.
As an introductory course to the KRSoE, here's your first homework assignment:
1. What are you "holding" right now?
What asset classes constitute your main holdings? Residential Real Estate? Royalties from patents or other intellectual property? Equities? A little cash?
What debt do you carry? Is it credit card debt? Personal loans? Home loans? Money owed to a bookie with ties to the local mafia (you were just sure Duke was going to whip VCU, weren't you)?
2. When might you reach your "folding" point?
What segment of the economy is your job located in? Are you in the production side of the house - ag, metals, equipment manufacturing, etc.? Are you in the guvmint side as either an employee or contractor? Or in services?
What would have to fold to affect your employment status or the status of your small business? What different levels of slowdown would affect a nail salon but leave an ethanol plant up and running? How about residential real estate and all those who thought they had solid jobs with subprime lenders?
3. Take five minutes and seriously consider what would have to happen to make you walk away from your current lifestyle/job/town? What would have to happen to make you run?
This is a serious question, the answer to which I hope you never have to implement - but in a world that has, at least for a decade or so, ignored the downside to risk, a little healthy dose of scenario planning can go a long way.
4. What money are you counting on that might not be there once the dealing is done?
Anyone who had tech stocks back in the spring of 2000 can tell you that paper "assets" can up and blow away like a fart in the wind when the market turns. Another fun thought - let's say you live in a neighborhood of 200 homes. Do you realize all it takes is four or five people in your entire neighborhood to sell at a low price to revalue what your home is "worth?"
Thanks again to George Ure for the thought-provoking piece in this week's Peoplenomics issue. And on another note, I grew up in Sikeston, Missouri, a town where Kenny Rogers used his money and name back in his heyday to establish the Kenny Rogers Cerebral Palsy Center. It is now called the Kenny Rogers Children's Center. Mr. Rogers has helped a lot of kids who were dealt a bad had by fate over the years. It is something you might consider as well.
Friday, March 16, 2007
Will it be more war in South Asia, a conflict with Iran that has unintended consequences such as a choking off of oil supplies or heavy casualties among U.S. soldiers, marines or sailors?
Will it be a financial storm, fed by the growing defaults on subprime mortgages that will cause the fractional reserve system of banking to slip into deflation - a firestorm of defaults fed by massive leverage and complex derivatives?
Will it be a social and political storm fed by a polarized political environment and the coming wave of defaults on promises made by the Welfare State that cannot be kept because to pay out all of these benefits would bankrupt the entire country?
Worse, might it be a combination of all of the above?
Much to think about this weekend. Keep you eyes open and read between the lines when you hear news stories about current events. Something big is happening, something hidden by the fog of infotainment news, Angelina Jolie's latest adoption and a rash of scandals in the federal government.
And if so - what does that really mean? Will it be so bad that the lights go off and stay off? Or will it be a long twilight, where the old world dies while a new world is being born - a time where we hang on to the bare minimum of what works while around us a storm blows - a fight between supporters of the old Industrial State versus "What Comes Next"?
We shall see...
Thursday, March 15, 2007
Like the good friend of humanity that he is, Andy is providing a guide to dining as they traverse the globe. He and Melissa will be rating restaurants in ports across the globe.
Check it out as a guide to help you when considering travels throughout the Caribbean, Europe or Asia.
Wednesday, March 14, 2007
The following YouTube video is very pro-tyrant, but gives a decent overview. The tyrant gets whacked at about 4:25. Then we get to hear how great tyrants are.
Amazing how the clip talks about how "brutal" the manner in which Caeser was killed, but neglects to mention the bloodthirsty rampage Herr Julius led across Gaul.
I'll never understand the mindset of those who long to be led around by the nose.
Tuesday, March 13, 2007
Oh yeah - you were praising it as wealth creation and a new era of riches for homeowners.
"Most people are just headless and panicking and don't know what they want to do," said Axel Merk, portfolio manager, at Merk Hard Currency Fund in Palo Alto, California.
Batten down the hatches. Here it comes.
But that is not to say the pressure has not continued to build. Iran has received some bad news from Russia regarding the plant at Bushehr. Basically the Russians seem to be dragging their feet here. If a recent Stratfor analysis is to be believed, the Russians have nothing to lose from continuing to string the Iranians along and little to gain by finally completing the facility. The sniping back and forth tends to make on think that tensions are rising there.
Plus, the U.S. still has two carrier groups on station off Iran.
And, recently, a former Iranian deputy defense minister and brigadier general who once ran the Iranian contacts with Hezbollah in Lebanon has apparently defected to the West. It seems the Israelis are involved as well as unnamed "Western Intelligence agencies". Hmmmm.
Unless the Iranians are running some seriously complex double-cross here, that's got to sting. And it can't help but ratchet up tensions. As George Ure over at UrbanSurvival put it this morning, looks like the West will continue "Tweaking Iran". The part of me that remembers watching the hostage crisis back when I was a kid gets a kick out that. The part of me that can read a map, that followed the reasonable success that Hezbollah had against Israel last summer and that worries that The Chief Decider could be drastically underestimating Iranian effectiveness in a war, doesn't get much of a kick out of it at all.
That said, I still think the socionomic theory on war holds here and do not expect major hostilities unless you see a strong market break and a continued bloodbath in housing. And, since I expect both of those things in the very near future, the WarWatch will continue.
I'm finally getting into the swing of this blog thing and hooking up with Technorati.
I promise an original post that deals with topics a little more weighty than movies or freaky Israeli diplomats later today...
Monday, March 12, 2007
-Dr. C. S. Hyatt
From Reuters, we get this touching story of a man and his gag ball...
Ambassador Recalled for Conduct Unbecoming
JERUSALEM (Reuters) - Israel has recalled its ambassador in El Salvador after he was found drunk and naked with sex toys lying nearby in the yard of his official residence, Israeli media reports said on Monday.
A foreign ministry spokeswoman confirmed that the ambassador, Tsuriel Raphael, was recalled but offered no details. "The ministry sees his behavior as unbecoming of a diplomat," the spokeswoman said.
Israeli media reported that local police found Raphael in the yard of the official residence in San Salvador. The reports said he was drunk, naked, and bound and gagged with a rubber ball in his mouth and sex toys lying near him.
Messr. Raphael is either the victim of one serious episode of character assassination or else this guy knows how to party.
Saturday, March 10, 2007
Then, every now and then, you run across that wonder of wonders - a Baby Boomer who participated in the "Movement" of the 1960's and who is still a rational, practical individual with big ideas and low doses of preachy, narcissistic bullshit so prevalent among that generation. It's worth your time.
Also, posting may be spotty for a few weeks. I have to get ready for a trip to Romania for a conference and hopefully a trip to Indonesia to watch some Rad-chem processing for nuclear medicine. Plus, I will be doing more research on this whole mortgage-lending blow-up and the problems it will have for liquidity. I'm glad I own some puts on the NASDAQ-100 right now.
I am fascinated by the human brain and the vast potential that is never tapped by most of us - eidetic memory, learning languages rapidly, deep understanding of mathematics, picking up chicks in bars near Harvard, etc. I've tried various meditation and mental-exercise regimes in an attempt to tap into altered states - with some interesting experiences but no sustained success.
While I've never hit LSD, I know there was a lot of work done with it in the arena of human potential (and the darker side of brainwashing).
Here's a YouTube clip by Timothy Leary, describing his version of "How to Operate Your Brain"
Imagine what might happen if we ever get to a point where we can study these kinds of chemicals in a rational, scientific manner.
Friday, March 9, 2007
Homeowners Stuck As Lenders Cinch Standards
By Noelle Knox in USA Today
Edward Booker is one of nearly 3 million homeowners with adjustable-rate mortgages who've had trouble paying their bills. And, like Booker, many of them won't be able to refinance their loans once the interest rates start rising. At that point, they'll have to tighten their belts, sell their homes or lose them through foreclosure.
This month, the mortgage payment on Booker's Chicago home rose $200, to about $1,300. It'll go up again in September. He wants to refinance, but he fell behind on payments after his wife died of cancer in 2005, so no lender wants to take the risk.
"I'm just trying to hold onto my house until I can figure out something else to do," says Booker, 58, a former rail-car inspector who's on disability.
This guy, who should have done his homework, was lured into a product totally unsuited to his financial needs. This kind of crap goes on at the end of a credit cycle. Problem for Mr. Booker is that this latest credit cycle was the largest in Western History.
This will not end well.
Thursday, March 8, 2007
Wednesday, March 7, 2007
One link I want to draw your attention to - Matt Savinar sends out an occasional email highlighting news stories and original columns on his site. I love the title of this one: Has there even been a financial collapse with louder or more obvious warning signs?
The short answer? No.
Saturday, March 3, 2007
Let's just hit some headlines and I'll let you stew on things. We'll have a lot of time to analyze the Coming Chaos as it unfolds.
New Century says it faces criminal probe
Subprime-mortgage lender warns it will likely breach lending covenant
New Century is the #3 subprime lender in the U.S. Their predatory junk loans, pardon me, financial products for the credit impaired, lace the financial system like a poison.
Pursestrings Tight, Say Credit Managers
New credit applications have decreased sharply, according to a new survey; ''the data suggest that businesses are curtailing their spending in anticipation of an economic slowdown.''
The "Pursestrings" article is a gem from CFO.com. Read it and weep.
Goldman, Merrill Almost `Junk,' Their Own Traders Say
March 2 (Bloomberg) -- Goldman Sachs Group Inc., Merrill Lynch & Co. and Morgan Stanley, which earned a record $24.5 billion in 2006, suddenly have become so speculative that their own traders are valuing the three biggest securities firms as barely more creditworthy than junk bonds.
Quite possibly my favorite article of the bunch. Those finance giants have earned untold billions screwing the investing public, pardon me, have created massive wealth through creative finance, over the past few decades. I bet there are a lot of very upset stomachs on Broad Street.
Okay, so we did a little news stringing and I picked out some doom and gloom articles. So what? So what is that the Housing time bomb is not just going to hurt builders and a few people who got convinced to buy bad mortgage products. These toxic loans have been packed up into securities and sold as AAA paper to investors all over the world. As those obligations - which themselves have been used for collateral on loans in some cases - begin to suffer problems of paying out, we are going to see the first real test of how the derivatives market, especially the credit default segment, will perform under stress.
My money is betting that it won't perform well at all.
There, now you can stop panicking and go out and enjoy the day.
The Daily Reckoning PRESENTS: Bennifer. Brangelina. TomKat. If the global asset boom were a celebrity marriage, what would we call it? Chimerican? Americhinan? Or how about...Japanica! Dan Denning looks at the events of the past week and aims to answer the question: Is the whole current global asset boom model in jeopardy? Read on...
by Dan Denning
What’s with all the over-reaction? So a $130 billion was lost in China’s market the other day. It’s not like it was real money. The sympathetic corrections in other global markets were mostly occasions for profit taking by investors and traders nervous about eight months of good times. All those flashing lights and bells and whistles...those just mean we’re in a casino.
There are other explanations. But we’re not buying the theory that China’s crash indicates real concern about the sustainability of its boom. The China boom is happening in the real world. The China stock market boom is largely fictitious.
So is the whole current global asset boom model in jeopardy? No. There are three pillars to the global asset boom, Japan’s easy money, America’s free-spending ways, and China’s appetite for raw materials in order to make things. If this were a celebrity marriage (with a bride and two grooms, or two brides and a groom, or three brides, or three grooms) what would we call it...Chimerican? Americhinan? Or how about...Japanica!
Japanica it is, the new name for the wobbly, triumvirate/mascot for the global super asset bubble. And for the record, since we’re sure history is paying attention to every word we write, our bet is that this asset bubble has miles and miles to go before it sleeps. The unification of global stock exchanges looms in the not-too-distant future. This will facilitate even more rapid global capital flows...and bring even more investment products on-line for surplus savers, be they in Australia, China, or Amer...er...Japan.
Seriously, you can see where all this is headed, a super asset boom. And there’s a simple reason for it. The Boomer’s (or Japanese and Chinese savers) are not ready to leave the gambling table just yet. You, see, they can’t. They don’t have enough money to cash out their blue chips and call it a day. They are still making up for the tech wreck, and still wary of the durability of home price appreciation (and the liquidity in the housing market, which, at least in America, is dropping like a stone.)
Was this week a wake up call for investors that markets are still risky? Of course. But investors already they knew that. They love risk. More importantly, they can’t afford not to take it. Day by day, we are inching closer to the time when the Boomers will have to liquidate. But it’s not that time yet. So the money pours into the market, and the market itself, facilitated by the merger of exchanges, grows larger and ever more integrated.
You know what that means don’t you? The real liquidity crisis, when it comes (18-26 months down the road, we reckon) will be much larger, much more destructive, and impossible to contain. It will represent the end of the post-war, post-Bretton Woods experiment with asset inflation as a means to personal wealth-building. It will be nice to own some gold then, preferably a lot.
The incredible irony of what we’ve seen in the past few days is that most investors almost always do exactly the wrong thing, from a rational perspective, when confronted with “decisions under risk.” This shouldn’t be that surprising, though.
Human beings, under the duress of fast-moving global financial markets with dozens of virtually untrackable variables, are programmed by nature to do two things. First, they freeze, the way our ancestor used to do on African savannah’s thousands of years ago when they saw a big cat on the horizon. You can thank the amygdale, which takes control of the brain at these crucial times, pulling rank on the thoughtful frontal lobes that otherwise makes us distinct as primates.
This temporary coup-de-brain is nature’s way of by-passing the frontal lobes to arrest our action before we do something stupid like running for our lives and attracting a lot of attention from other predators. Panic does not promote survival. It’s this freeze in our musculature that gives us enough time to tense up our muscles and either fight, or flee.
The second thing human beings do when confronted with risk is seek the action which has the largest possible negative effect on them. Yes, you read that correctly. And here we apologize for getting a bit statistically geeky on you. But as this is The Daily Reckoning, we are pretty sure you won’t read this explanation for market behaviour anywhere else. From a novelty perspective at least, it should be worth your time.
The explanation takes us back to that crucially important year in financial history 1979. That was the year Daniel Khaneman and Amos Tversky published the second most cited economics article in academic history, “Prospect Theory: An Analysis of Decision Under Risk.”
The paper was a landmark in the understanding of human behavior because it pointed out the tawdry little lie at the heart of classical economic models about human behaviour, namely that people weigh risks with perfect information and then make rational decisions. Wrong! Homo economicus is a complete fiction.
What Khaneman and Tversky showed is that people make two kinds of decisions with respect to risk and reward, and that neither decision is rational. One the reward side, investors tend to overweight certain outcomes, choosing lower returns with higher probabilities over higher returns with lower probabilities. Or, in layman’s terms, most investors prefer the appearance of certain, predictable, single-digit returns from blue chip stocks or bonds than the higher but lower probability returns from say, small cap stocks or emerging market bonds.
That investors would over-weight outcomes that are considered certain isn’t that surprising. It suggests that capital preservation is psychologically (and financially) more important to investors, than capital growth. The difference today may be that investors—at least the retiring Boomers in the West who make up the bulk of the market—need big capital gains in the next few years to increase their retirement income. This may cause them to take more risk (to make up for past losses) than would ideally be appropriate at this stage in their investment career. But you go to war with the Army you’ve got, don’t you?
What’s really shocking from Kahneman and Tversky’s paper is how investors approach losses. And the conclusion is inescapable: investors seek it. Or, as the paper puts it, “This analysis suggests that a person who has not made peace with his losses is likely to accept gambles that would be unacceptable to him otherwise. The well known observation that the tendency to bet on long shots increases in the course of the betting day provides some support for the hypothesis that a failure to adapt to losses or to attain an expected gain induces risk seeking.”
And here we thought investors were seeking alpha, and that global risk premiums were converging toward zero. But no! What you’re really seeing is more bets on long-shots. This is, in the paper’s own terms, a failure to adapt to the very risky world we invest in. But then again, investors are only people. And this means that in the coming years, we can expect investors not to avoid wealth-destroying beahviours and investment decisions, but to greedily seek them out.
Incidentally, Bill Bonner has a theory about this, which he hasn’t given an official name to. His theory is geopolitical, that it is the nature of large institutions (like empires) to find a way to destroy themselves, that they must do so. Surpluses of any sort (financial, political, caloric) are un-natural. Human beings, as every good student of Greek and financial tragedies knows, find spectacular ways to squander their good fortune.
Tversky and Khaneman show that faced with a choice between a low-probability but high-magnitude loss on the one hand, and higher-probability but lower magnitude loss on the other hand, human beings tend to choose the higher magnitude loss with the lower probability. Or, in layman’s terms, that means if you were faced with the choice of a certain loss of $20 or the 30 percent probability of losing $60, you, if you were like most of the other featherless bipeds on the planet, would choose the 30 percent probability of losing $60.
It does make sense with a weird kind of emotional logic. Faced with the certain loss of $20 or the possible loss (one chance in three) of losing three times as much, investors take the lower probability, higher magnitude event.
But when you apply this statistical, empirical, and psychological finding to the markets—and here we mean equity markets writ large on a global scale, reacting to one another in real-time—the result is stunning. It means you can expect to see people engage in riskier and riskier behaviour, nearly always choosing bigger losses over smaller losses.
“But wait!,” you shout. “You’re forgetting about probabilities. Why choose a certain loss over a probably loss?
Good question. But perhaps our notion of probable losses is wrong as well. Investors are operating under the assumption that larger losses in today’s markets are lower probability events. There is also a wide-spread believe that the larger the markets get and more integrated they become, the lower probability of really gut-wrenching losses. The problem with this academic theory is that it is exactly, emphatically, categorically, wrong.
The theory we refer to is that market crashes are statistically rare and can be modeled on a bell curve, with a standard distribution of price movements. Most movements, in a classic bell curve, would be within one or two standard deviations of the mean. Or, in stock market terms, there would be only a few instances when the market produced dramatically above average or below average returns. Most returns would be rather mundane, and rather predictable. There would be few crashes and fewer still triple digit gains. But the evidence suggests otherwise.
“From 1916 to 2003,” Benoit Madelbrot writes in The Misbehaviour of Markets, “the daily index movements of the Dow Jones Industrial Average do not spread out on graph paper like a simple bell curve. The far edges flare too high: too many big changes. Theory suggests over that time, there should be fifty-eight days when the Dow moved more than 3.4 percent; in fact, there were 1,001. Theory predicts six days of index swings beyond 4.5 percent; in fact there were 366. And index swings of more than 7 percent should come once every 300,000 years; in fat, the twentieth century saw forty-eight such days. Truly, a calamitous era that insists on flaunting all predictions. Or, perhaps, our assumptions are wrong.”
And what about this new era, dear reader? When you combine Mandelbrot’s observation with Kahneman and Tversky, you get a picture of increased volatility and risk-seeking behavior. People, faced with more to lose, risk ever more.
The only question now is how large the stakes will get. And our observation on that is that the global equity and asset pot has room to grow. Volatility has been ominously quiet the last few years. It may have returned this week through the backdoor in Shanghai. But don’t expect it to make investors more conservative and trigger a rally in fixed income and bonds.
Rather, we may be seeing a whole new level of global speculation, an order of magnitude larger than anything that came before it. This game, the world series of speculation, is the end-game of the experiment with fiat money, money not backed by a real asset. But it would be a mistake, we think, to imagine that the end-game is now.
The tragedy/comedy has at least one more act and a few years to go. And in that time, we recommend you pull up a chair, pop some corn (if you can afford it at today’s prices), and enjoy the spectacle.
for The Daily Reckoning
P.S. We do, however, advise against over-weighting expected certain outcomes...that stock prices always go up, that sovereign governments don’t default on their debt...and that investing for the long-term is your best bet.
Just what is your best bet? Cash in while you can, perhaps. Peace of mind makes being a spectator more pleasurable. But, if you’re in the markets, or must be in, our focus will continue to be on the higher-magnitude returns that are priced as if they have lower probabilities.
Or, of course...you could always buy gold:
Zero-Downside Gold – Available for a Limited Time
Editor’s Note: Dan Denning is the editor of The Daily Reckoning Australia. He’s also the author of 2005’s best-selling The Bull Hunter (John Wiley & Sons), and spent five years as editor of Strategic Investment, one of the most respected “big-picture” investment newsletters on the market. A former specialist in small-cap stocks, Dan draws on his network of global contacts from his new base in Melbourne, Australia.
To purchase your copy of The Bull Hunter, see here:
The Bull Hunter
Friday, March 2, 2007
Danish Police Expect More Clashes
from the BBC
Police in Denmark are braced for more violence after the eviction of squatters from a youth centre in the capital Copenhagen.
At least 217 people were arrested on Thursday after clashes around the Youth House (Ungdomshuset) building in the Noerrebro district.
Danish Prime Minister Anders Fogh Rasmussen has condemned the rioters.
With foreclosure rates skyrocketing here in the United States, and with all those empty and soon-to-be-empty houses littering the landscape, expect "squatting" to be a major flashpoint near-term. It will remain a flash-point until people emotionally realize that this downturn is NOT like anything seen in at least 80 years.
Once the numbers get huge and the emotions run hot, expect changes to the law allowing some sort of use-in-exchange-for-occupancy-and-upkeep, or maybe a new form of sharecropping, with major banks or credit card companies as the landlords.It'll be a brave new world.
Thursday, March 1, 2007
California needs billions in bonds: Schwarzenegger
By Adam Tanner and Howard Goller for Reuters
"I was at a meeting this morning where someone said, 'Look, we need $150 billion just for infrastructure and transportation.' It's true," Schwarzenegger told Reuters in an interview in a state office in San Francisco.
"We need $500 billion to rebuild California the way it ought to be," he added. "But this is of course too big for people to digest, so you don't talk about that."
I'd say that will probably be an attention-getter in San Francisco.
That said, their site also contains a surprisingly even-handed review of major nuclear topics.
Glad to see that my initial reaction - rolling my eyes at the thought of another PR stunt by uninformed neo-luddites - was totally uncalled for. Heck, I might even order myself a case of the Nuclear Waste Antidote and drink one here in the break room at the reactor...