Friday, November 30, 2007

A Case For Pessimism

While I gave a Case for Optimism earlier today, the good folks at Elliott Wave International are allowing me to post a case for pessimism, in full. Below, Susan Walker makes a comparison between Hurricane Katrina and the ongoing submprime mortgage meltdown.

Enjoy.

Subprime Delivers One-Two Punch Just Like Hurricane Katrina Did


By Susan C. Walker, Elliott Wave International

November 29, 2007

The world is awash in bad news about the subprime mortgage meltdown, just the same way that New Orleans was awash in floodwaters from Hurricane Katrina two summers ago. A few examples:

  • The median price for new home drops 13% since last year, the most in 37 years, according to a Census Bureau report on November 29. This due in large part to buyers not being able to get financing now that lenders have tightened their lending standards in response to the subprime debacle.
  • Major Wall Street banks write off billions of dollars in subprime-backed securities.
  • Dire forecasts estimate that the credit crunch caused by the mortgage problems will cause between $250 billion to $500 billion of losses at banks and brokerages before it's done.

If you want to see how this kind of news looks on a price chart, consider the chart that we published in the latest Elliott Wave Financial Forecast. It shows how confidence in the mortgage market has simply fallen off a cliff. "The ABX Mortgage Indexes are akin to the eerie music that starts to play right before the goriest scenes in a horror movie," write our analysts Steve Hochberg and Pete Kendall. Even prime-rated mortgages (the top line on the chart) seem to have been tainted by the cliff-diving exploits of the subprime and Alt-A mortgage indexes.




Editor's note: Elliott Wave International invites you to read more about this Mortgage Mutiny chart in a special three-page excerpt from the November 2007 Elliott Wave Financial Forecast, called "Transition to a Fear of Risk."

The continuing repercussions of the subprime meltdown since two Bear Stearns' hedge funds imploded in August remind me how closely this situation imitates the delayed punch of Hurricane Katrina in the summer of 2005. In fact, I wrote a column for Fox News on that very topic a few months ago, some of which is worth repeating.

[Excerpted from "Subprime Storm Mimics Katrina," originally published July 30, 2007]

...Wall Street may have reason to worry about a financial hurricane poised to do the same kind of damage Hurricane Katrina did — in terms of money and assets lost — in New Orleans in 2005. Given the latest storm warnings about subprime mortgages and the Dow’s dive last week, it looks like "Subprime Katrina" might become the financial storm of the decade.

Wall Street investment bankers who remember the devastation in New Orleans might want to start battening down the hatches. In fact, some of them seem to understand their pending doom as they try to cajole the rest of the world into thinking that the subprime (otherwise known as low-quality) mortgage contagion is contained. 'Sure, sure, Bear Stearns got hit when its subprime hedge funds lost their value, but everyone else is O.K.,' they say. 'Let's all heave one collective sigh of relief that we dodged that bullet.'

Does that attitude sound familiar? It's exactly how the people of New Orleans felt for the 8-10 hours after Hurricane Katrina whipped up the Gulf Coast and dumped its rain. It was over; they had dodged the bullet. Their beautiful city that is built below sea level and surrounded by sea walls and levees was safe.

That's where Wall Street is right now – hoping the levees will hold as investment bankers try to sandbag the rest of us with lots of placating talk. Well, it turns out that New Orleans was about as safe as the subprime bonds that are now below their own "C" level.

Although Wall Street bankers have been doing one heckuva job, I think it's too soon to breathe easy, just as it was too soon for those in the Big Easy to breathe easy. Here's why: Wall Street was warned about the coming hurricane-force fall-out from subprime mortgages, and it ignored the warnings, buying up all the securities backed by subprime mortgages that it could. Now, Wall Street is having trouble selling more debt. It sounds like it may be too late for many Wall Street denizens to get out of town – and their positions – before the floodwaters start rising.

Remember, too, the finger-pointing and blaming that started as soon as the rest of the nation realized that the U.S. government was not doing enough to help New Orleans? The editors of The Elliott Wave Financial Forecast recognize a similar change in attitudes toward Wall Street:

"The unwinding process will be sped along by a flood of revelations about illicit hedge fund and investment banking activities. Just as Enron, Tyco and a host of other primary beneficiaries of the late 1990s bull market run became the focus of scandals, hedge funds and the banks that enabled them are starting to become a focal point for scrutiny." (The Elliott Wave Financial Forecast, July 2007)

Then will come the final installment. Just as the U.S. government was slow to come to grips with the disaster in New Orleans so that people were left to fend for themselves, so too will investment bankers and investors have to fend for themselves. They may find themselves clutching their worthless paper and wishing
someone would bail them out from the rooftops of their now-worthless homes...

Now, here we are at the end of November, and the situation for investors and investment banks has played out almost exactly as I outlined. Hardly anyone is coming out smelling like a rose. If anything it's the opposite, as the stench from quarterly financial filings rises as banks reveal how many billions in dollars they must write off for their mortgage investments gone bad. Sadly, the conclusion to my Subprime Katrina column still holds true: "Heckuva Job Brownie – now known as Helicopter Ben Bernanke and his Federal Reserve team – won't have any more luck picking up the pieces on Wall Street than FEMA did in New Orleans."

Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. Her columns also appear regularly on FoxNews.com.

A Case for Optimism?

Let's end the week with an attempt to view events through a lens of optimism, instead of the expectation of a Great Collapse.

As usual, I want to use socionomic theory to try and shed light on what is to me an odd reaction in the markets and world events to what I have been assuming is a steadily worsening "mass mood" which should be driving world events towards chaos and anger and which should be propelling financial markets lower and lower (see "Unconscious Herding Behavior as the Psychological Basis of Financial Market Trends and Patterns" for an academic treatment of this thesis).

First off, I do believe that we are in the waning days of a huge wave of optimism and progress that has been ongoing for several centuries. Now, does waning days mean it will severely reverse in the coming months? Or do we have a few years? I've been working on the assumption that the coming Great Bear Market will be making itself known within the next few months, especially as the asset-backed derivatives debacle has continued to unwind.

But what markers do we have that perhaps this era of optimism still has a little more life in it?
  1. Large economic and infrastructure projects are moving from just talk to action. For instance, the NRC has docketed an application for a Combined Operating License for the construction and operation of a two-unit nuclear plant in Texas. Two other companies have filed COL's as well. This is big as nuclear energy is a very polarizing, emotional topic. It requires and large workforce and confidence that the demand will be there for the electricity in the coming decades. Another example - when Dominion Resources (a major electrical utility in Virginia) recently filed an COL, the stock market reacted positively - completely shattering the consensus that any company to build new nuclear would get punished in the markets. This is fantastic news - if we can secure funding and get new plants built, these resources will prove vital during any downturn in the future. If nothing else, it does show the optimism (or expectation of high energy prices) for the future.
  2. North Korea is in the process of dismantling its nuclear weapons program and attempting to reintegrate into the international system. This is a big step away from negativity and towards positive expectations for the future.
  3. Iraq is becoming less unstable. Now, personally it is my opinion that this is because the ethnic cleansing is pretty much complete at this point, combined with the tribals deciding that Al Qaeda in Iraq is now a liability, not an asset, but still, in that region of the world, I'll take any positives I can get.
  4. The stock market has held on in the face of ugly economic news. This is called "climing a wall of worry" and normally is a sign of a bull market. I don't have to agree with it. I don't have to like it, but the numbers are what they are.
  5. Socionomics is predicated on human herding instincts and basic brain behavior. What it might not be accounting for are brain-altering chemicals. In all seriousness - in the old days the big-money players were generally alcohol-and-coffee-users. Sure, you might have a few cokeheads on the trading floor or some folks on Valium, but in general, say up through the 1970's, you could expect limited chemical effects. For the last few decades (coinciding with the great Bull Market of our lifetimes - there was a great chart that was in a Barron's article back in 1997 or 1998 that I can't find at the moment, but it paralelled the market rise with anti-anxiety medicine consumption) we have seen anti-anxiety meds, SSRIs, etc. flood the population. If a significant enough percentage of your decision-makers have their brain chemistry altered to ignore downside risks, could that help explain this rise in markets in the face of fundamentals that argue for a DJIA below 10,000 (in my opinion)? Could it have affected the decision-making of the Beltway geniuses who planned the invasion of Iraq and the post-invasion occupation? I don't have statistical evidence at the moment (finding drug use figures that are accurate has proven difficult - any help would be appreciated). If the typical herding instinct has been skewed, then socionomic theory based on the actions of a non-medicated (or primarily alcohol-medicated) society might not be as accurate as we'd hope.

Again, I personally would suggest a very conservative personal finance strategy and combine it with trying to build up a network of people you trust in your community, planning for a big downturn. If this positive mood does hold up, that is nothing but good at this point. Maybe we'll get a little more infrastructure built-up or repaired before the crash comes. At this point, the downturn is going to be so severe that a few more months or even years of delusion won't make too much of a difference.

Thursday, November 29, 2007

Shortages?

Tom Whipple, who has been covering Peak Oil for the Falls Church News-Press for a number of years has a new story up that you should read:


The Peak Oil Crisis: Revolt Of The Teapots
Written by Tom Whipple, Falls Church News-Press
Thursday, 29 November 2007
In China, small privately or locally owned oil refineries are called “teapots.” Unlike the giant ones that refine hundreds of thousands of barrels each day, these little fellows typically process about 10,000, but taken together, they produce some 10-15 percent of China’s refined products. Reduce the teapots’ production and you have a problem....

...In recent months China’s impressive economic growth has been accompanied by some impressive inflation which reached an 11-year high of 6.5 percent in August and again in October. Beijing, which apparently has not yet discovered “core inflation,” allowing it to remove food and fuel from the index, is becoming worried. Not worried enough to clamp down on growth, which most in China seem to agree is the overriding national priority, but worried enough to put a ceiling on gasoline prices. That is where the current trouble started. As the world price of crude oil rose and rose, independent Chinese refiners, the teapots, lost more and more money.

For the teapots, the solution was to switch their production mix away from price-capped gasoline and diesel to non-regulated products such as petroleum coke or simply to suspend refining until the situation changed. They didn’t have to wait long to bring the mighty Chinese economy to its knees...

Personally, I think that the recession we are entering will thoroughly crush demand, making this shortage story a moot point, but I am not sure of that, so we need to continue to watch the amazing growth in petroleum demand by China. I assume we'll see one final downtick in petroleum prices. This would come at the worst possible moment, scuttling a number of capital-intensive projects and preventing investment that would pay off in the future. I don't think the true reality of Peak Oil will settle in until a few years from when the world attempts to grow its way out of the coming severe recession. That's going to be ugly.

My socionomic take on it is that we'll a severe downturn in '08, a recovery of optimism following a spasm of renewed war (this time with Iran) and economic chaos as the derivatives debacle unwinds. This recovery of optimism will be short-lived and as anger, protetctionism and fragmentation take hold with a vengeance, the realization that the Peak Oil ceiling has been reached will be used as an excuse for a lot of very angry reactions that could make the ensuing bout of negativity make the Great Depression look like a Spring Break party.

And if we don't see the recession I anticipate, then we need to remember that the Chinese have the money to bid up oil prices and keep the petroleum flowing their way. We in the U.S. have a lot of debt. I wonder how that will end?

Wednesday, November 28, 2007

We Have Been Warned

Carve out a few minutes today and read the latest from Fabius Maximus - actually you might want to bookmark it. The links provided show that there have been many Paul Reveres out there, screaming at my fellow countrymen to awaken from their television-induced consumerist trance.

We have been warned. Death of the post-WWII geopolitical regime, Chapter II

Our descendants will wonder how America fell from a pinnacle of prosperity and power such as the world has never seen. Our policies for the past thirty years have been both astonishingly foolish and broadly supported by America’s elites (Left and Right). This note focuses on the core of our irrational economic policy, the “twin deficits” — the growing liabilities of the Federal Government (actual debt is only a fraction of this), and the current account deficit (US consumption in excess of our income, financed by foreign debts). Like any drunken binge, this felt good. Now a new day dawns, and the hangover.

We have been warned. Here are a selection of warnings from 2003 and 2004, given by a wide range of experts and institutions. This list could easily be extended both backwards and forwards in time; a few such are included to illustrate this...

Tuesday, November 27, 2007

A Visual Society?

The Glittering Eye has a new post that is worth pondering. He picks up a theme introduced by Alfred Korzybski (to whom I owe a huge intellectual debt - reading and coming to grips with his Science and Sanity was a key milestone in what passes for my intellectual education) and runs with it.

Please take a few minutes and read the entire post and be sure to check out the comments section as well - Zenpundit's remarks on a potential split between the visual-oriented masses and a literate elite is worth pondering:

The Visual Imagery Society
...The transition from an oral society to a literate one had implications that extended far beyond just the means of communication or the costs of transportation for an unexpected reason: literacy reorders consciousness. I’ve written on this subject before. Communicators in an oral society tend to be additive, agonistic, redundant and repetitive, empathetic, and situational. Communicators in a literate society tend to be subordinative, analytic, objective, and abstract...

(Hat tip to Zenpundit at his new web home for the link!)

Monday, November 26, 2007

Loyalty

A number of themes that we reviewed in Catastrophic Abundance and that play a large role in 4GW theory and the work of John Robb go back to a common source - the ability of a society to obtain the loyalty of men and women to a distant central government and the ramifications of that success or failure.

In a world where socionomic trends are positive, theory tells us that trust, mobility, free markets and open societies can operate well. If the theory holds, then we are going to see a reversal of a trend where trust is so ingrained in the economic and social fabric that a company like Amazon can do billions of dollars in business with customers that will never come face-to-face with an Amazon employee or bricks-and-mortar store.

When that kind of trust is rewarded (or is it just another byproduct of a socionomic trend?), your society can move away from traditional reliance on the tribe or village and into a larger, more exciting and risky world. Loyalty can then be extended further and further afield - to the state or province and to a central government who's capitol is thousands of miles away governed by elites to whom you have no blood ties to (again, remarkable when viewed in the long span of history).

But what happens when trends turn to the negative? What happens when your neighbor gets sick and has a deep network of family members to aid and assist him, but when you get sick, all you receive is a call from a sibling five hundred miles away who tells you to trust Medicare - a system that is already technically insolvent? When trust in strangers and loyalty to a central government becomes the mark of a naive chump, then you have begun to shatter the foundations upon which the superstructure of your political system is erected.

When it pays to be more loyal to the family and village, when the central government defaults on the many promises it has made to a generation of citizens, then the psychological ramifications will be deep and lasting. And the nation-state form of government will continue to suffer setback after setback as its legitimacy erodes via inflated currencies, bureaucratic inertia and inept responses to crises that it has promised to protect its citizens from.

The prolific Gary North touched on the loyalty aspect of this problem in an essay last week that bears reviewing. In The Decline of Loyalty North has a few observations worth reviewing:


...I have been re-reading the works of my teacher, Robert Nisbet. The continuing theme of his entire career was the loss of legitimacy of the intermediary social institutions that once united people in communities. The nation-state overwhelmed these organizations, absorbed them, rendered them legally marginal, and replaced their functions. This has left the individual with few allies to resist the State's encroachment in every area of his life. He once saw the State as liberation. Now, the individual sees it as a safety net that extracts permanent streams of money from him, and maintains permanent supervision over him. In private circles, this is called a protection racket.

I do not see any great reversal until the checks stop comingor the money they convey ceases to buy much. The State can maintain its image of healer only for as long as it can extractwealth from productive people. This requires widespread fear, not loyalty...

This is a point I want to touch on. There will be two options open to the elites who run the nation-states of the world as their legitimacy is challenged - they can "Lose Control to Gain It" by loosening their grip on their citizens (the U.S. has an excellent template in place for this very action - the 10th Amendment to the Constitution - there is a huge barrier to implementation here, though - it would require the Washington D.C. government to go back to governing according to that document) or, if the nation-state can't or won't let some of that control go, it can become authoritarian and rule by fear and oppression.

There was a reason that millions of men went off to war when the South seceded from the Union in 1860. At that point, loyalty had transferred up from the family (in most cases) and to the state, but loyalty to the "United States" was not yet dominant. The victory of the Northern States validated the rising tide of the benefits to being loyal to a central government. Now, it is my thesis that this tide, which reached its high-water mark in the 1970's, is rapidly beginning to recede.

It's when that tide recedes that we'll see the detritus left over from the long period where the family and community atrophied at the expense of the central government. The family and community will regain its importance, in my opinion, but it is that transition period - those long decades between now and "what comes next" that will prove to be tumultuous in the extreme.

Another Sign of the Apocalypse?


Here at Futurejacked we are doing our best to look through the fog of daily events to find the big trends coming at us all. Well, I think I may have one of the single best indicators that the Apocalypse is upon us. The University of Missouri football team is now ranked #1 in the BCS and in the AP Poll.

Tuesday, November 20, 2007

A Thanksgiving Laugh



Denial

Well, here's a news story worth pondering over the Thanksgiving holiday for my readers in the U.S. I have a few posts that are still in draft form, but they won't make the blog until next week. I'll be doing the Thanksgiving thing and then be at Arrowhead Stadium for the biggest football game in Missouri history. If I am still alive and functioning on Monday, posts will resume.

Have a safe week. Remember - be ready for ugly financial markets after Thanksgiving. Something is going to give in the credit markets and when it starts to collapse, heaven help us all. The mob psychology is still positive, for the most part, but problems are starting to hit close to home for big money players as well as for millions of honest men and women around the country.

And speaking of collapse, about the only thing between us and Dow 6,000 is denial. Pure, unadulterated, anxiety-med fueled denial:

Denial Makes the World Go Round
by Benedict Carey, New York Times
...In this emerging view, social scientists see denial on a broader spectrum — from benign inattention to passive acknowledgment to full-blown, willful blindness — on the part of couples, social groups and organizations, as well as individuals. Seeing denial in this way, some scientists argue, helps clarify when it is wise to manage a difficult person or personal situation, and when it threatens to become a kind of infectious silent trance that can make hypocrites of otherwise forthright people...

Monday, November 19, 2007

John Robb on a Potential US Strategy in a 4GW World

Check out John Robb's latest:


THE US EMBRACES OPEN SOURCE WARFARE?
The US military is on the slow path to the realization that nation-building -- from reconstruction to other forms of traditional COIN dogma that serve to return legitimacy to the government -- doesn't work. Politics and populations in our new global environment fragment faster than they can be assembled into cohesive entities. What does work to slow the spread of temporary autonomous zones and open source insurgencies are open source militias. While messy (and many times as bad as what they replace), these militias do work...

A big step in the right direction by the U.S. if we do continue to implement this type of work under a rationalized strategy.

Mish on Housing, Again

A new post should be up in a day or so - been very, very busy here.

In the meantime, check out this post from Mish on the housing debacle:

All of a sudden, it just fell off a cliff

There was an interesting article in the San Francisco Chronicle on Sunday called Fairfield balances on the edge as housing prices plunge.The article mentions Fairfield California specifically, but it is really about hundreds of similar towns across the nation facing the same problems. Let's tune in.

If you want to see how the housing bust is affecting business in the Bay Area, there's no better place to look than Fairfield.

Housing in this bustling Solano County city is in an outright depression. Home prices are plummeting, buyers are running for cover and, in September and October, not a single home building permit was issued, the first time that's happened in the memory of city officials.

"People still seem to be employed. There's still a lot going on," said Stu Reid, owner of the home remodeling business Kitchen Tune-Up. "While people may be talking more cautiously, they're still going out to dinner, still playing golf. You still see long lines at Starbucks."

That's right now. The question on everybody's mind is how long can the city's economy stay healthy with housing in tatters. Fairfield, it seems, is a city on the knife's edge.

My Comment: Fairfield is over the edge. They just do not realize it yet. This is a Wiley Coyote moment...

Thursday, November 15, 2007

The Elite All-Electric Roadster


Tesla Motors is now opening the reservation list for an all-electric 2009 Tesla Roadster. For those of you with significant disposable income, check 'em out.

In a Peak Oil world, all-electric will be key to personal transportation. These kinds of vehicles will be luxury items, but the more buyers you get, the deeper the market gets. In the economic transition period we are facing, probably you'll see the rich in all-electric vehicles and a large number using all-electric devices for the coming wave of relocalized agriculture. I doubt we'll ever see mass-motoring as we know it today, but that is for future generations to worry about.

Now we just need a significant build-out of nuclear power and we'll be able to charge 'em up and go.

This Is Very Good News

China is pushing ahead with Pebble-Bed reactor technology, according to Interfax:

China to Devlope High-Temperature Gas-Cooled Reactor
INTERFAX-CHINA - China will launch a new program to develop high temperature gas-cooled reactor (HTGR) technology, which marks the country's latest development of its nuclear energy sector, a government official said at an industrial forum yesterday in Beijing.

(Hat tip to Idaho Samizdat for the story)

China already has already built a prototype and has an agreement place with South Africa regarding this next-generation reactor design.

This is key to helping the world transition from fossil fuels to "what comes next." I think the ride will be rough, but having a nuclear power plant that can't melt down, that is gas-cooled and that can be plugged into grids that can't handle the huge loads provided by plants like the EPR or the AP-1000 is key to spreading this technology.

Keep your eyes on China - this type of reactor technology could spread like wildfire in the coming decades.

This is Very Bad News

While things are looking positive on the geopolitical front (FSR Georgia is ending the State of Emergency, deaths are down in Iraq now that the bulk of the ethnic cleansing is complete, Iran is giving up more info to the IAEA, North Korea looks serious about giving up the Bomb), things are deteriorating rapidly in the world of finance.

A money market fund from a "Big Name" player has allowed the pricing to break a buck.

[UPDATE: I used an incorrect term there. It should be "cash management fund" NOT "money market fund" - a money market fund is generally a bit more regulated and while a number of companies have had to inject cash to keep their money markets at $1, they have done it. A cash management type of fund is usually aimed at institutional investors. This is still bad news, but not as bad as I first thought.]

Mortgage Woes Damage a GE Bond Fund
By ANDREW BARY, Barron's

A SHORT-TERM INSTITUTIONAL BOND RUN MANAGED by General Electric Asset Management apparently has suffered losses in mortgage and asset-backed securities and is offering investors the option to redeem their holdings at 96 cents on the dollar.

I wonder how many companies have computer software that has $1 hard-coded into their financial accounting routines for money markets? Hopefully none - you'd think they would learn after the Y2K efforts.

More realistically, if this turns into a common occurrence, this will play hell with most "low risk" cash management strategies.

Markets follow mood. If this truly is a big turn towards anger and negativity, we'll soon see all the hard-won gains on the geopolitical front evaporate. Here's hoping these finance problems are isolated...

Tuesday, November 13, 2007

Muni Bond Bombs?

For those of us who read Conquer the Crash a few years ago, this is old news (and we are prepared). Muni bond defaults could become very mainstream starting even next year. Before you fire off an email at me telling me that I'm smoking crack, take a few hours and look over the publicly availble information on the debt obligations of your city and your county. Then do the math on the required growth rate in tax receipts required to service said obligations...


Changing Tides II: Could Municipal Bonds Become Risky?
Charles Hugh Smith
November 13, 2007
It has long been gospel in the investment world that municipal (tax-free) bonds were extremely safe investments. How about in the future?...

...It doesn't take much imagination to imagine the ruckus facing the poor judge in bankruptcy court (yes, cities and counties can go bankrupt, too): over here are the current city employees, demanding not to be fired to cut expenses; over there are the pensioners, demanding "whatever it takes" to preserve their pension and medical benefits, and over yonder, the muni bond holders, screaming about their right to "first dibs on any revenues." Somewhere in the back, lost in the chaos, is the poor taxpayer, ignored except as subservient cash-cow, and the poor citizen, deprived of libraries and other municipal services as the greed-fest-frenzy swirls around the judge...

It is a prime thesis of Futurejacked that when the house of cards that is the U.S. financial systems comes apart, the violence will follow close on its heels. And in a Peak Oil world, in a country with no memory of its agricultural roots and no factories to employ her citizens, the results for life, liberty, property (and all those property taxes gobbled up by cities and towns all across the U.S.) will be dire.

How to Recognize a Financial Mania

I've obtained permission from Elliott Wave International to post the following article in its entirety.

At a time when financial markets are still buoyant in the face of ugly "fundamentals" - it is worth a few minutes to step back and look at the bigger picture:

How To Recognize a Financial Mania When You're Smack Dab in the Middle of One
By Susan C. Walker, Elliott Wave International
November 12, 2007

When you're caught in the middle of a bad storm, you don't really care whether it's a tropical depression or a full-strength hurricane. You just know you're hanging on for dear life. The same idea applies to financial markets. When a market is trending up strongly, it's hard to tell whether it's just a bull market or a more dangerous financial mania.

The recent tremendous ride up for global and U.S. financial markets, including the Dow, looks and feels more like a mania than a mere bull, says Elliott Wave International analyst Peter Kendall. This distinction is important to recognize in the rising stage, because manias always result in a crash that takes them back beneath their starting point.

Kendall recently published his research into current financial manias throughout the world in SFO (Stocks, Futures and Options) magazine. The article, titled "Financial Manias and the Trade of a Lifetime," suggests an even more stunning finish for the current manias: "The speed and global scope of the unfolding credit crisis suggest that most of the fast-rising markets of the last decade will crash in unison," he writes.


Editor's note: Elliott Wave International invites you to read the full five-page article with charts from the October 2007 SFO magazine by Elliott Wave International's Pete Kendall called "Financial Manias and the Trade of a Lifetime."

As co-editor of The Elliott Wave Financial Forecast, Kendall searches for trends that help traders to move in and out of markets. By comparing other historic manias with the impressive rise of the DJIA since the late 1970s, he focuses on the skyscraper pattern that they all have in common. The four historical manias are the Dutch Tulip mania of the 1630s, the South Sea bubble of 1720, the U.S. stock crash of 1921-1932 and the dot.com bust of the 1990s and early 2000s. Once you can see the similarities, you will be better prepared to face the music when the crash comes. As Kendall writes, "once the belief that the markets will always rise becomes widespread, it actually signals the start of a price swing that tends to be a career-breaker for any trader who tries to oppose it."

He also discusses current manias, such as the Nikkei, which has yet to return to its start after a manic rise to its all-time high in December 1989, and the Dow, which reversed from its rise in 2000 but made a U-turn in 2002. The starting point for the Dow's mania as shown in the chart included in the article is at the 1000 level.

Kendall, who is also writing a book about financial manias, titled The Mania Chronicles, describes five telltale signs that help an investor to tell the difference between a regular bull market and a mania. It's a mania if:


  1. There is no upside resistance, and rising prices seem to be perpetual.
  2. Everyone in the market looks like an expert.
  3. There is a flight from quality investments to riskier investments.
  4. As financial bubbles pop in one area, they bubble up in others.
  5. The crash after the peak takes back all the gains the mania made.

No. 5 can be viewed only with hindsight. But the first four signs provide essential clues to what's shaping up in the markets.

"By studying past mania experiences, traders can gain valuable insight into the collective emotions that drive their markets," writes Kendall. "It's possible to make significant money in the advancing stages of a mania with no knowledge of its existence. But there is nothing like recognizing a mania for what it is in real time to help a trader keep those gains and deal with the relentless crash after it peaks."

In the last part of the SFO article, he asks the key question, Are we at the peak yet? Find out his answer by reading the whole article for yourself.


Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. Her columns also appear regularly on FoxNews.com.

Chechens in Georgia

We've been follwoing the situation in Former Soviet Republic Georgia (not to be confused with Former Confederate State Georgia in North America) for some time now (click here to review previous blog postings). Things continue to get interesting there.

Stratfor reports:

Geopolitical Diary: Russia's Secret Chechen Weapon
MORNING INTELLIGENCE BRIEF 11.13.2007
Georgian State Minister for Conflict Resolution David Bakradze on Monday accused Russia of bringing "large" amounts of illegal military equipment and personnel into its secessionist region of Abkhazia. Among the list of items Bakradze laid out was the disturbing charge that 200 new "peacekeepers" had been moved into Ochamchire -- most of them Chechen. The Chechens have a long and bloody history in Georgia and Abkhazia, and using them as official peacekeepersis like throwing matches -- or even road flares --- at a powder keg...

...The Chechens have a long history in Abkhazia and Georgia, though their presence in the region is less like Chinese water torture and more like evisceration. Following a 1990-1992 stint fighting for the Armenians in the Azerbaijani secessionist region of Nagorno-Karabakh, the Chechens joined the Abkhazians during their "War of Independence" from Georgia. The Chechens provedto be invaluable in that two-year war, which was one of the bloodiestpost-Soviet conflicts. The war also showed that Georgia was far from able tofend off the Chechen militants' wood-chipper tactics...

There's more for subscribers, but the gist of it is that the pro-Moscow Chechen militias that were used to crush the Chechen revolt are now proving very valuable to Russia as she tries to reimpose her will in the "near abroad".

Sunday, November 11, 2007

Following George

If you haven't checked in with George Ure over at UrbanSurvival recently, please add him to your list of sites to check once a day.

He has a great way of tying together lot's of disparate bits of news and making a coherent picture from them. He's expecting a wild ride through the end of the year.


I hate to tell you this, but if you thought this past week was bad, you better get ready for a whole lot more downside action...and when I say a lot - I mean a whole friggin' huge gob more, and starting rather soon, although I wouldn't panic just yet, as I explained to subscribers at mid week that I'm waiting for one last bounce up to the 13,500-13,700, next week. I'll be selling into that one, with a few commodity precious metals calls that should be delightfully green.

The specific reason that the headline "Stocks End Volatile Week with Huge Drop" is likely only the foretaste of a horror to come (that may whack more than half the Dow average off) is that Elaine and I had a long conversation with a genuine Wall St. insider friend last night, a fellow that knows exactly (or more precisely, within mathematical bounds of mark to index models) where things are headed. "It's going to be a whole lot worse than LTCM, for example, much worse" he told us.

In addition, he is expecting problems with transportation and problems with the supply chain in the U.S.



Because of that, George has been doing a (rather raw) analysis of "shortage" data on Google for several months now. Keeping an eye on that chart alone is worth the time to read his stuff (in my opinion).

Friday, November 9, 2007

William Gibson Interview

Check out this interview of William Gibson in Rolling Stone. I've been a huge fan ever since Neuromancer blew me away twenty years ago.

William Gibson: The Rolling Stone 40th Anniversary Interview
by Andrew Leonard
You made your name as a science-fiction writer, but in your last two novels you've moved squarely into the present. Have you lost interest in the future?

It has to do with the nature of the present. If one had gone to talk to a publisher in 1977 with a scenario for a science-fiction novel that was in effect the scenario for the year 2007, nobody would buy anything like it. It's too complex, with too many huge sci-fi tropes...

Thursday, November 8, 2007

Jeff Vail on Oil Prices and Demand

Check out Jeff Vail's new post over at Energy Intelligence:

It’s the Demand Inelasticity, Stupid

Oil prices again. Tapis (Malaysian Crude) just broke $100 a barrel and West Texas Intermediate breached $98 briefly in after hours trading. I can already hear tomorrow’s cries from the pundits and purveyors of financial “news” that the fundamentals don’t support these prices.

Huh?

Let me back up and explain what’s happening here. We have a generation of financiers who were trained in a very specific methodology to analyze stocks. They are now applying that reality tunnel of how stocks behave to deliverable commodities, and in the process are making a huge error...

I think Mr. Vail may be a little off when he states that "...the price of oil, as a deliverable commodity, isn’t subject to a speculative bubble like stocks are..." (as the folks at Elliott Wave International have shown in years of calling commodities markets) but I think he is hitting on a key emotional and intellectual point. The current crop of geniuses in the trading pits and on Wall Street have a firmly entrenched view of the world calcified in their brains - much like the U.S. has calcified its transportation system by locking itself into a suburban model that relies on cars fueled by petroleum. These mainstream traders keep expecting markets to behave according to their models, instead of altering their models to fit the reality of Peak Oil.

The shattering of that calcified mindset could unleash demons of speculation and volatility in energy markets unseen in modern trading history. Welcome to another preview of the Great Collpase.

Wednesday, November 7, 2007

Added Fabius Maximus to the Blogroll

I've added Fabius Maximus' site to the blogroll under "Random and Useful".

If you have not taken the opportunity to read his work, much of which is posted over at DNI, I strongly suggest you take the time (especially his series on the Long War). He has an extensive breadth and depth of knowledge in foreign policy, history and the chaotic world of war and politics - his is a voice worth heeding.

As I've said many times - it is my strong opionion that a storm is coming, and that right soon - a financial, social, political and violent reckoning of the many imbalances and absurdities which have overtaken the Grand Old Republic in the past several decades. An attentive ear to our history and to the voices of deep experience such as that of Fabius will be invaluable lights in the dark days to come.

Pakistan and the Coming Chaos

Yesterday, we touched on a number of fracture points that exist in Pakistan. Today I suggest you read George Friedman's take on the underlying tensions that have existed in Pakistan since the partition:


Pakistan and its Army
November 6, 2007
By George Friedman

...Pakistan, however, was not a historic name for the region. Rather, reflective of the deeply divided Muslims themselves, the name is an acronym that derives, in part, from the five ethnic groups that made up western, Muslim India: Punjabis, Afghans, Kashmiris, Sindhis and Balochis.


The Punjabis are the major ethnic group, making up just under half of the population, though none of these groups is entirely in Pakistan. Balochis also are in Iran, Pashtuns also in Afghanistan and Punjabis also in India. In fact, as a result of the war in Afghanistan more than a quarter century ago, massive numbers of Pashtuns have crossed into Pakistan from Afghanistan -- though many consider themselves to be moving within Pashtun territory rather than crossing a foreign border...

Definitely worth the read. I think the very last part, where he discusses the potential for dissent by lower-ranking officers is key. If the majors and colonels decide that they have more to gain from going Islamist, the Corps Commanders may not be able to hold it all together.

Chaos Helping Encourage More Chaos?

Now, let's take it a few steps further. If Pakistan collapses into chaos the ethnic split above comes into serious play.

If you are the U.S., looking to find some sort of leverage in this mess, a collapsing Pakistan might give you a reason to attack Iran and a means to make such an attack more successful. This might seem counterintuitive - if the U.S. suddenly loses a main ally in the fight against Islamic extremists, it would seem then to be the worst time to amplify the disaster by attacking Iran and engaging Shia extremists in addition to the Sunnis salafists you are already hunting down.

But here is where the heavy gravity of primary loyalties kicks in. All of a sudden, in a post-nation-state "Pakistan" you can overtly leverage various tribes. The Baluchis are a case in point. There is an existing movement (depending on your perspective - terrorist or freedom fighter) to create a "Free Baluchistan" that covers territory inside Iran, "Pakistan" and Afghanistan. There is access to the region by sea - which is owned by the U.S. Navy. If the Baluchis were to promise significant trouble for the Iranian regime in return for recognition and arms from the U.S., a bombing campaign against the IRGC now looks more tenable.


Ethnic Groups in Pakistan

The Pashtuns will be busy consolidating power and maybe, just maybe, you could find a way to leverage them into a fight with Iran as well.

Personally, I regard that fallout from the collapse of "Pakistan" (nuclear-armed "Pakistan" I might remind you) and an attack on Iran as bad for long-term U.S. interests, but I don't call the shots. The geniuses in the Beltway may be looking at a "Pakistan" on the verge of collapse as an opportunity, not a problem. Who knows, they might even be considering giving it a nudge over the edge of the abyss.

Tuesday, November 6, 2007

More Iran War Speculation

Check out this article by the very unconventional thinker who goes by the pseudonym Spengler:


When you can't deal with the devil
By Spengler

A year later than I expected, the drumroll has begun towards a Western attack on Iran's nuclear capability. Despite the best efforts of Western diplomacy, the "moderate" option in Iranian politics expired last week with President Mahmud Ahmadinejad's triumphal consolidation of power.

A combination of economic distress and external threats, Western capitals hoped, would strengthen the position of the loser in Iran's 2006 presidential elections, Hashemi Rafsanjani, and external pressure would undo the decision of the Iranian electorate. At best that would have been a deal with the devil; unfortunately, the devil was not returning phone calls last week.

It never was to be. Iran has only two options: a sickening slide into economic decay and internal weakness as its oil-exporting capacity attenuates, or a regional adventure against the Sunni oligarchs of the Gulf oil-producing states. For the Iranian street, Ahmadinejad's constituency in the slums of Tehran and the Persian hinterland, this is the Shi'ite moment, the once-in-a-millennium opportunity to undo centuries of perceived oppression...

I don't know if I agree with every bit of it, but I think he might be spot on when he says "[t]he West will attack Iran, but only when such an attack will do the least good and the most harm."

Peeking at the Man Behind the Curtain

If you want a fantastic and humorous exposition on markets and the mortgage mess, take ten minutes and laugh at this absurd and all too accurate clip:



Hat tip to the formidable Gary North for this one...

Pakistan Simmering

Before turning to the tensions in Pakistan, I want to say thanks to those of you who contributed to Ron Paul's campaign yesterday. He raised $4 million dollars in ONE DAY. I am personally very pessimistic about the short-to-medium term future of the U.S., but if we can influence the debate and get a candidate like Ron Paul to help set the tone in the coming election cycle, maybe we can alter the trajectory of this country from its high-speed collision with tyranny to and end result more in tune with the Constitution, an end result that will give us enough freedom to rebuild a better society, post-economic and social collapse.

Packing It In Over In Pakistan?

Speaking of staving off collapse, President Musharaff is working furiously to consolidate his position in the face of a judicial revolt and ongoing war with tribals and salafists. Stratfor (from their Intelligence Briefs subscription service) has this to say about the challenges faced by the U.S. in this relationship with Pakistan:


...[The suspension of democratic practices] puts the United States in a bind in a number of ways. The United States needs Pakistan if it is to have any hope of continuing to contain the remnants of al Qaeda and keeping it from re-forming. Not cooperating with Musharraf is the same as abandoning the battle in northern Pakistan or continuing the battle in direct opposition to Musharraf and much of his army. It is collaborate or oppose, with very little wiggle room. Releasing the militants helped Musharraf secure his political flanks inside Pakistan, and also signaled the United States not to take his cooperation for granted...

Huh. Maybe Bush 43 will learn to curtail his "us or them" and "Axis of Evil" type statements and understand that when you cynically use the "spreading of democracy" as a speaking point to cover you foreign policy blunders, it can come back to hurt the Republic.

John Robb also weighed in briefly on the situation in his personal blog:


Military Melt-down in Pakistan
Emergency rule in Pakistan will not halt the slide of the military as an institution. In fact, it will likely accelerate it if they are placed in opposition to protesters. They certainly will find it difficult to face resolute foes in the field.


If you see the military fracture into factional infighting, it is all over for Pakistan. I won't even begin to list the reasons why that would be a horrible setback for U.S. foreign policy - I'd be typing until tomorrow.

UPDATE: Zenpundit strikes right to the heart of the current crisis -

...Pakistan's central problem is a crisis of legitimacy. Nationalism is a waning force these days and even anti-Indian feeling is sustained by a marriage of nationalism with Islamist radicalism. Once, a Pakistani leader could declare that Pakistani's " would eat grass" to make their country the nuclear equal of Hindu India. No more. Musharraf's fear of "national suicide" did not rouse his countrymen to his side and there are some, even in the army, who would hold up jihad above the nation. Well above...

Monday, November 5, 2007

Mood Matters

Yes, I'm beating the socionomics drum again. Hard.

Mood matters.

First, look at the many descriptors being used in articles and on television about the various mortgage and derivatives "crises" that are boiling up.

Second, just ask Meredith Whitney of CIBC. She dared speak truth to power and look what it has earned her:

CITIGROUP: COMMENTS DRAW DEATH THREATS
by Tara Perkins

Canadian Imperial Bank of Commerce analyst Meredith Whitney says she's received multiple death threats because of a research note she wrote that sparked a selloff in shares of banking behemoth Citigroup Inc.

The 37-year-old analyst, who is based in New York, is standing by her research, and lashing out against what she characterizes as analysts' fear of negativity.

CIBC spokesman Rob McLeod said the bank is also standing by Ms. Whitney's decision to downgrade Citigroup.

"People are scared to be negative, especially when a company has such a wide holding," Ms. Whitney told The Times of London. "Clients are not pleased with my call, and I have had several death threats."

People won't be "scared to be negative" for long - that's one trend you can bank on.

Sunday, November 4, 2007

Remember the 5th of November

Help us drop a "money bomb" this November 5th. Give to Ron Paul's campaign. Give $10. Give $50. Give what you can. Help drive the debate in the United States back to the real issues (debt, war, the collapse of the Welfare State) and away from the media puppets in the Rudy McRomney campaigns.



Saturday, November 3, 2007

Be Afraid

This should truly scare anyone following the financial markets:

Ambac, MBIA Fall; Goldman, Morgan Stanley Cut Rating
By Christine Richard

Nov. 2 (Bloomberg) -- Ambac Financial Group Inc. and MBIA Inc. shares fell, along with other bond insurers, as Morgan Stanley said the industry may face a downward spiral'' and Goldman Sachs removed its "buy'' rating on the two companies.

Morgan Stanley lowered the financial guarantee industry to "in-line" from "attractive," after Goldman Sachs Group Inc. earlier today cut its rating on the two companies to "neutral" from "buy."

The bond insurance industry has guaranteed more than $1 trillion of bonds issued by U.S. cities and states as well as bonds backed by mortgages, credit cards and other assets, and the guarantee allows borrowers to use the insurers' AAA rating. A loss of confidence by investors in the insurers' credit quality threatens the survival of the industry and the price of the thousands of bonds it guarantees.

Please take this opportunity to read now, for free, an excerpt from Bob Prechter's Conquer the Crash that deals with the Fed's ability to mitigate a cascading credit crisis, a topic that will be very relevant, very soon.

This is not trading advice, because the powers that be in the markets probably have at least one more massive short squeeze in their playbook, but a crisis is coming for the Dow and chaos will follow in its wake.

Friday, November 2, 2007

Added Of Two Minds to the Blogroll

I'm in a cynical frame of mind heading into the weekend. Reading the fine print of the recent jobs report will do that to a person. Check out where the jobs come from - Leisure & Hospitality, Business Services and Government. Losses were light in manufacturing and construction (especially considering how bad things are getting out there for residential builders). Not bad you say? Check out the birth/death assumptions behind this stuff - and yes, it is true that the BLS will NOT allow anyone to know what their supersecret econometric formula is for determining business births/deaths.

In that spirit, I am adding Charles Hugh Smith's blog Of Two Minds to the blogroll under Random and Useful. Check it out.

Globalguerrilla Theory Continues to Evolve

John Robb has just posted another excellent analysis of globalguerrilla evolution:


ON OPEN SOURCE GUERRILLA VANGUARDS

...The advent of global economy/superinfrastructure and the new technologies of individual super-empowerment (in sum, a global "platform") tends to fragment organizational hierarchies and replace them with more robust, resilient, and efficient decentralized alternatives. This logic reflects what we see in going on in public and private life, it should apply to warfare as well. Therefore, the new assumption for moral conflict should be:

The historical trend, since the Millennium, is towards increasing levels of decentralization and the dissolution of complex states.

This completely changes, willingly or not, the role of the guerrilla vanguard in any insurgency. These changes include:

  • an easier path towards the creation of a moral crisis that causes the state/government to lose legitimacy but
  • an inability to generate a military and political hierarchy that will serve as an alternative to the failed government.

As a result, the onset of the moral crisis will create a hollow states, that is a government in name only (i.e. the Mayor of Kabul or the Green Zone), and perpetual insurgency composed of many small groups, each of insufficient hierarchical weight to replace the government but in combination able to keep the government in perpetual failure...

Be thinking of non-military ways to leverage the globalguerrilla paradigm in your community. If we see a "Black Swan" event, such as a disruption in petroleum supplies or a significant market event that plunges communities into economic chaos, we are going to need creative thinkers ready to build platforms that help sustain communities and create positive (or at least, less negative) outlets for the anger and aggression that will follow in the wake of collapsed living standards.

And, if this tinfoil-hat sort of story from Matt Savinar at LATOC turns out to be accurate, helping your community become a node of stability could wind up paying huge dividends down the road...

Thursday, November 1, 2007

A State Response to the Coming 4GW Storm

Nothing unexpected in the government response to this incident - repression is the standard default position. What I found interesting was the quote from the juror:

Gang Member Is Convicted Under Terror Law
by Timothy Williams

...yesterday, in State Supreme Court in the Bronx, jurors for the first time found a defendant guilty under New York’s [post-9/11 anti-terrorism] statute, and he did not fit the stereotype of a terrorist.

The defendant, Edgar Morales, is a 25-year-old recreational soccer player and gang member who fatally shot a 10-year-old girl and wounded a second man outside a christening party in 2002...

"...When you fire a gun into a crowd, whether you hit your intended victim or not, you scare people, you make them fearful for their lives, and that’s why, in my opinion, the terrorism charges applied,” said a juror who identified herself only by her first name, Linnea. Like the other jurors, she did not want to be identified because the case involved gang members and a killing...

The fact that reckless driving or even speeding can also "scare people" and "make them fearful for their lives" seems lost on them.

When Bill Lind's Boomerang Effect begins to play out in NYC, one can easily imagine the police, and later national guard and U.S. Army, response - and Riker's Island ain't big enough to handle it. I wonder how soon we'll see the cops and prosecutors implement collective punishment, under the guise of pursuing those who "aid terrorists" with the authorities jailing and otherwise hassling family members of gang bangers? And how soon before the same "aiding and abetting" charges will be filed against drug buyers who purchase their drugs from gang members?

The unraveling of civil society and its replacement by a police state is coming to an urban center near you. And soon.