No Mercy!

Market Knoweth No Bounds To Its Fury :

1929-1932 chart is of the Dow Jones Industrial Average, as it collapsed 90%. That level of crash, if it were to occur now, will bring the DJIA down to about 1400. In otherwords, another 80% down from today's levels. That is an implausible scenario, if not impossible.

Rest of the charts are that of S&P500, which goes back only till 1957. It is a much broader index, more representative of the entire market. DJIA contains only 30 of some of the largest companies in the U.S., where as S&P 500 contains 500 of some of the largest companies in the U.S.

The tech crash at the earlier part of this decade happened over a period of 2.5 years.

On a positive note:
1. Dollar index staged a spectacular rally.
2. Option ARMs reset will be moderated by the collapse in interest rates, at least for now.

Big Three Update:

Executives at the Big Three flew into Washington in their corporate jets, carrying a tin cup
All three CEOs - Rick Wagoner of GM, Alan Mulally of Ford, and Robert Nardelli of Chrysler - exercised their perks Tuesday by flying in corporate jets to DC. Wagoner flew in GM's $36 million luxury aircraft to tell members of Congress that the company is burning through cash, asking for $10-12 billion for GM alone.

Writes IOUSA team:

“We have to face reality,” admitted Senate Majority Leader Harry Reid. Not the reality that an automaker bailout is a bad idea… but the reality that no one outside of Washington supports it.

Congress will recess until the week of Dec. 8, so members can go home, collect bribes, patronize their constituents, sleep with young aides and so on. When they return, the “Big Three” will present their case -- make one last stand -- and maybe, just maybe, this thing will be over.

Kashkari in the Hot Seat:



During last week's congressional testimony about the 700 billion TARP program, one of the congressmen asked Kashkari if he is a chump. With millions watching them on TeeVee, congressmen were just swinging for the bleachers. Despite what Kashkari wants you to believe, neither he nor Hank Paulson could care less about the home owners.

Status Quo Update:

President Elect Obama is likely to pick President of the New York Fed, Timothy Geithner, for the post of the Treasury Secretary. Boyish looking Timmy has been part and parcel of the NY banking establishment for the last 20 years, wheeling and deeling for the bankers, even as an epic credit bubble was ballooning in his backyard. If there is a shining beacon of unchange anywhere, Timmy is where you are likely to find it.

In another act of unchange, Democrats have decided to keep Neocon Joe Lieberman at helm of Senate Committee on Homeland Security and Governmental Affairs.

Monday Mishmash

Underwater Mountain:

Mountain House, CA on the verge of collapse. A bankruptcy could mean an end to police, fire, sewage, water, garbage services. I am not sure if all of those services are provided by that City.

Here is International Herald Tribune:

This town, 59 feet above sea level, is the most underwater community in America.

Because of plunging home values, almost 90 percent of homeowners here
owe more on their mortgages than their houses are worth, according to figures
released Monday. That is the highest percentage in the country. The average
homeowner in Mountain House is "underwater," as it is known, by $122,000.

A visit to the area over the last couple of days shows how the
nationwide housing crisis is contributing to a broad slowdown of the American
economy, as families who feel burdened by high mortgages are pulling back on
their spending.

Fed's Balance Sheet:

In the mean time Federal reserve expanded it's balance sheet to 2 trillion. A year ago, the balance sheet was just over 800 billion, of mostly AAA rated U.S government securities, and an year later $2.2 trillion claims on dead donkeys.

Financial markets experienced a giant margin call over the last couple of months, it was deleveraging at warp speed, triggered by the collapse of Lehman Brothers. Most, including those who were predicting this crisis, didn't see it getting unglued as fast as it did.

Detroit's "Big" three :

Bankruptcy of GM or for that matter Ford or Chrysler, is not the end of the world. There will still be GM branded cars sold world wide, GM will still be number 2 auto maker for the foreseeable future, post-bankruptcy GM will be under new management, the current shareholders will be wiped out, and most of the short/long term obligations of the company will be wiped clean as the creditors take over the company. Bankruptcy will help GM with an opportunity to emerge as a stronger and more vibrant company. Pensions are unfortunately guaranteed by Pension Benefit Guarantee Corporation a.k.a Tax Payers. Some employees will lose jobs, others in UAW will have to accept a payscale commensurate with rest of the manufacturing industry.

Tax payers, most of whom are suffering from the current downturn, who make a lot less than UAWer, in terms of salary and long term benefits, should not be paying for UAW's extravagance. It is the other workers depicted in this chart, who will be paying for the extravagance of the big three.

The bigger the unproductive firm, more important that it fails sooner. Unproductive firms put gargantuan amounts of productive resources to unproductive use; they are a wealth sink. In other words, keeping these unproductive corporations alive will only help dissipate wealth at a fast rate.

GM couldn't make money in 2005 or 2006, when the Japanese automakers were making record profits, and auto industry as a whole was at it's peak. Why should they keep making more cars than the consumers are willing to buy?

However, that is a lot of wishful thinking. The man of the moment, who is going to the oval office to kill the influence of the lobbyist in washington, is totally in the hands of UAW lobby. What he probably meant by his rhetoric, was to replace lobbyists from Goldman Sachs, Haliburton, Exxon, Bible thumpers, Neocons etc. with those from Morgan Stanley, AARP, AFL-CIO, UAW, GE ( green energy aka general electric ), Climate Change Armageddonists, Neocons etc. Collective looting will continue, however, it will be mostly by a different set of collecives. How is that for change? Yeah baby! Change your dog can roll in.

Cash Carry In the Hot Seat

Is he a chump? asks one congressman.

Random Rambling

Michael Crichton, RIP

Michael Crichton passed away on November 4th, 2008. Mr. Crichton, “the father of the techno-thriller,” is the author of 21 books including The Andromeda Strain, Congo, Jurassic Park, Timeline, The Lost World, Prey, and State of Fear, selling more than 150 million copies and translated into 36 languages, with twelve made into films. The recipient of an Emmy, a Peabody, and a Writer’s Guild of America award for the TV series, ER, he is a graduate of Harvard Medical School, and has been Visiting Lecturer in Anthropology at Cambridge University; Henry Russell Shaw Traveling Fellow; post-doctoral fellow at the Salk Institute for Biological Sciences; and Visiting Writer, Massachusetts Institute of Technology.

Michael Crichton’s latest best-seller, State of Fear, an indictment of Climate Change Fear Mongering, may in time be viewed as a landmark, both cautionary and prophetic. Is environmental debate today, including global warming, bio-technology, and other issues, based on science or politics? Are popular accounts of such issues rooted in science or phantom risks? Are government policies focusing on the trivial while ignoring the real, and in the process wasting limited resources, crippling human innovation to address true dangers, and inviting tyranny?

Statistical Illusions:

There is nothing scientific about Climate Models. Climate Models in many ways resemble econometrics and statistical modeling used by Keynesian and Monetarist economists. Models are statistical illusions. Economists who make prognostications about the future based on econometric models are often proven wrong, and when they are right, it is purely out of luck. That doesn't stop economists from continuously making new statistical predictions about the future.

There is no denying that certain trends in economy can be prescienlty predicted, but that always comes from understanding of the laws of economics and an understanding of human behavior. These factors are subjective and impossible to quantify.

Then there is the Heisenberg's uncertainity principle: Observation affects the observed - Heisenberg was speaking about subatomic particles. Mises spoke about the same certainity regarding human behavior. Once people get the wind of certain trends, crowding into that trend will make the trend null and void. Or if human beings get to know that they are being observed for certain purposes, they consciously or subconciously adjust their behavior.

Statistics is one of the most misused branch of mathematics. You can look at data from the financial markets correlate it to planetory positions and may be able to find that they follow some obscure patterns, but that doesn't make it a scientific truth. There are infact financial advisors who help you make investments based on astrology ;-)

Statisticians look at patterns in the past and they project it into the future, but often to their dismay, the future fail to resemble the past. According to these geniuses, if market has been going up, their models will predict that they will continue to go up. If globe has been warming, it will continue to heat up. Then much to their chagrin, future fails to resemble the past.

Black Swan is a term popularized by statistician finance professor Nassim Nicholas Taleb, who wrote a book by the same title - "Black Swan: Impact of the Highly Improbable." The term Black Swan would have been an oxymoron in the good old days a few centuries ago, because swans by definition were always white. Then the Europeans started colonizing australia in 1788, and they found black swans for the first time.

Once of the recent black swan event was the historical election of Mr. Barack Obama to the presidency of the United States of America. It was a statistical impossibility. If you sample the data, none of the previous 43 U.S Presidents were of African American ethnicity, which should make some statisticians conclude that probability of a black person getting elected as the Commander in Chief is 0. Yes, Mr. Obama overcame great odds, but it is impossible to overcome zero odds, and one would be crazy to even attempt. We know there are more factors affecting the electability of a person than just his/her race.

Another example that Mr. Taleb sites in his book is the life of a Turkey. Turkey grows up on a farm. It's life is rather easy - the farmer takes care of it, every morning it wakes up and there is enough food to eat, provided by the farmer of course. One day is hardly different from the other. Then, one fine morning in november, Turkey gets jolted from it's sleep and gets its head chopped off - Happy Thanks Giving.

Global Warming theory is nothing like Theory of Relativity or Boyle's law. There are very little if any, absolute, proven, and quantifiable relations between the various factors that affect the climate. Scientists may not even know entire list of factors that affect global climate and how precisely these factors interact with each other.

Is it really random rambling? or is there a statistical pattern to it?

Is Bullishness Unwarranted?

Mish at the Global Economic Analysis suggests that there is unwarranted bullishness.

Here is what I think:

There is a technical reason, may be two for the bullishness.

First, "Change" is coming to White house, most likely. Do you think political hacks like Paul Krugman will be bearish once messiah "O" is declared the next president of the U.S?

Second, The sell off in the financial markets were spectacular and they are way oversold. The rally, even if it is very unlikely to take the markets to a new high this year, is likely to be just as spectacular. That's what volatile markets do.

Bulls are right; at least for a while they will be. Messiah "O" will instill confidence until he takes office, he will propose mesmerizing grandiose schemes to "save" the economy. It will all work until he gets into office. A rally is coming, and how long it will last or how far it will go is anyone's guess. Some time in the next 2-4 months, there will be another opportunity to go short, at is my speculation.

(Nothing personally against "O", I am not a big fan of his rival either. I supported Ron Paul during the primaries.)

The 2002 lows in S&P and Dow is likely to be taken out, possibly in 2009 or 2010. Ultimately the entire Dow could be bought for 1-2 ounce of Gold. Do you think that is a fantasy? In the last century it happened twice - once in the early 30s and again in the early 80s.

As for inflation, it is likely catch the deflationistas with their pants down.
Shorting long term U.S government bonds looking like a nice trade to go into. It is not a short term trade, instead a long term one. Tremendous supply of new treasuries coming to market, as the treasury tries to raise funds to fill the humongous budget gap. Also, watch out, Chinese, Indian, Russian and Saudi governments are likely to use some of their reserves to stimulate their economies.

Houston Chronicle: BP chief says another oil spike is possible

Oil executives and political leaders told a major petroleum conference Monday that the era of cheap energy is over and warned of another price spike if investment in oil production is curtailed.

“Prices are falling, but they’re falling for the wrong reasons: because of reduced demand and a consequence of reduced economic activity, not because we have increased supply or increased energy efficiency,” BP Chief Executive Tony Hayward said at the Abu Dhabi International Petroleum Exhibition and Conference.

( Click the subject line for the story )

Bloomberg: Rate Cut Down Under

Australia's central bank cut its benchmark interest rate by a larger-than-expected three quarters of a percentage point, the third reduction in as many months, amid evidence global financial turmoil is buffeting the economy.

Governor Glenn Stevens lowered the overnight cash rate target to a 3 1/2-year low 5.25 percent in Sydney today, adding to last month's 1 percentage point reduction. Fifteen of 16 economists surveyed by Bloomberg News forecast a half-point cut and one tipped a quarter-point drop.

( Click the subject line to read the article )

Mandelbrot & Taleb Interview on PBS

Mandelbrot & Nassim Taleb on the credit crunch. Watch it here

Taleb is the author of "Black Swan: The Impact of the Highly Improbable"