Back to School

August 27, 2007
     Bad financial paper, like rust, never sleeps.
    We may be in the traditional torpor zone of late summer when the whole nation takes off on vacation, but worms are still turning in the compost heaps of securitized alphabet debt (MBSs, CDOs, CLOs, et cetera) behind the glass banking towers in places like Wall Street, London, Frankfurt, and Shanghai, and the odor from all this garbage blowing 'round the world grows stronger by the day.

     Transfusions of loss-cover-loans from the Federal Reserve have enabled the The Big Fund Boyz to spend a last weekend or two rubbing elbows in the Hamptons with transcendent beings like Diddy and Kelly Ripa. The Boyz gather along the dunes at twilight, bongs in hand, to gaze at Hedge Fund Island, looming off-shore in the gray Atlantic mist, and they notice something alarming: the island, which the BFB's built themselves over the past ten years, seems to be either floating out to sea or perhaps just sinking!

     The scores of billions of dollars and euros that central banks have poured into the maw of losses lately will only paper over the essential problem for another few weeks, at most. The damage to global structured finance has been done, and it can be stated rather precisely: a widespread recognition that it's not possible to get something for nothing, after all. And that when you hold a lot of paper that was gotten for nothing, and put it up for sale, nothing will be offered for it. What a surprise.

     The task of people holding power now in the finance sector (which itself may be a conceit at this point) is to manage the rapid dissolution of hallucinated wealth in such a way that as few people as possible notice that x-trillions in dollar denominated pixels have vanished from the hard drives. Sooner or later, though, millions of shlubs dependent on pension checks, or annuities, or monthly payouts of one kind or another will notice that something has stopped landing in the mail box. Re-po men with bad haircuts and tattoos will be driving other peoples' cars to the auction barn. Young people accustomed to thrilling paydays will discover that their services are no longer required in the mortgage origination business, and will instead have to memorize dozens of excruciating formulas for different sorts of beverages more or less based on coffee. Millions of realtors will enter second childhoods as they move back in with Mommy and Daddy, who themselves must now change their plans, since it is no longer possible to flip the 1956-vintage raised-ranch in Hempstead to buy that half-million condo in Maui.

     Reality is biting hard. As with the little marmot caught in the Gray Wolf's jaws of death, the body simply surrenders and God's grace of physical shock softens the translation from free-willed joyful creature to dead meat. That is where we are at here in the final days of August, 2007. Digestion follows. The Big Fund Boyz and all their minions will end up as mere worm castings in the aforementioned global compost heaps.

     Terrible shocks are going to rip through the socioeconomic fabric of the USA as we turn the corner past these late summer doldrums. The fiasco of bad debt won't be contained. The choices for those who find themselves financially underwater in the fall of 07 will be 1.) liquidation, 2.) bankruptcy, or 3.) destroy whatever remains of confidence in the US dollar in order to erase debt by hyperinflation. People holding power don't like the first two, which translate into Depression (let's make it capital "D.") When a nation turns into a fire sale from sea to shining sea, and bankrupt citizens don't even have enough cash-on-hand to buy things desperately cheap -- well, that's a Depression. Everybody from Fed officials to news editors have favored the softer term "recession" the past half century because it implies a mere pause in the inexorable march of progress toward economic nirvana. That's not what we're heading into.

     There will be so many assets up for sale across the USA in the months and years ahead that the very sun in the heavens will take on a K-Mart blue-light-special glow. Houses with miles of granite countertops, Maybach automobiles, cabin cruisers that burn thirty gallons of diesel an hour, and much much more. There will be so much slightly used (or barely "pre-owned") stuff for sale that manufacturing another unit of anything (or importing it) will seem like a sick joke. Alas, there may be very few buyers, at least here among the current natives of North America. And so you get "new pricing," and a deadly downward spiral.

      Of course, all that creates a problem for the masses of human beings who theoretically support themselves by working to produce new things of value to be bought and sold . But let them watch Nascar! Let's take whatever little remains of our tax revenues (or bonding ability) and build a dozen more speedway ovals around the country, and tweak the stock car engines so those suckers can run on ethanol, and shower the fans with Little Debbie snack cakes as they count the laps. Bring on Britney Spears or Paris Hilton at half-time (do they have half-time in Nascar?) and let Justin Timberlake cut their hearts out on the hood of a Dodge Avenger. Believe me, the public will be so deliriously entranced by the spectacle, they won't notice anything else going on in the background of our nation.

     This is how America enters the Long Emergency -- in a Nascar rapture, with Jesus directing the pit crews and the Holy Ghost working the barbeque concession.

    I apologize for what has been a rather excessive spewage of mixed metaphors this week, but the extreme abnormality of events has just got me going. The bottom line, though, is simple and straightforward: things may appear normal for the moment, but we are heading into a shit-storm as sure as Sam Walton's descendents contracted to buy all the three-ringed loose-leaf binders made west of the international date line. America, you're about to go back to school the hard way.

Comments

[steve duncan]

I've known sick people written off by the doctors. Genuinely ill, they seemed not long for the world. Yet somehow live on they did, for years and years. Having a multitude of failing body parts mattered little, they awoke every day and got about their business. I think maybe Jim's predictions might be akin to those of the learned doctors feeling Old Aunt Emma's faint pulse. Jim (and the docs) can't help but predict certain demise yet the patient just won't cooperate.

[DaveL]

I like the gray wolf and marmot metaphor.

DaveL

[Bob Morris]

From the old reggae song ("Babylon" being the Rasta name for the dominant Anglo culture)

"Babylon burning
and they got no water
fire, fire
and they got no water."

I agree with Steve Duncan though, the human race does have a way of muddling through.

[Saint Bif]

The violins of autum wound my heart with monotonous languor

I repeat

The violins of autum wound my heart with monotonous languor

[wombatmissile]

Mr.Lahey: You feel that Randy?

Randy: What Mr.Lahey?

Mr.Lahey: The way the shit clings to the air...

Randy: What Mr.Lahey?

Mr.Lahey: Randy my boy it's already started...

Randy: What's started Mr.Lahey?

Mr.Lahey: The Shit Blizzard.

[Postman]

I don't want to stick a pin in your pessimism, but I seriously doubt if the wealthy and powerful are going to allow the U.S. and world economy to swirl down the bowl in one big flush. It's their game and they make the rules. It is we, the wage slaves, that keep the wheels spinning so that they can skim their millions off the top. Do you really think their going to allow all that to be lost? Our financial wreckage would be theirs as well. It ain't gonna happen. It's simply not in their best interest. Things may wobble a bit; they always ARE wobbling somewhere. But it ain't gonna fall. Relax a little and turn the TV and computer off for a while. It's good to walk away and take a break from it sometimes. Gives one a little better perspective.

[artiefacts]

So, does this mean that the infamous Dow 4,000 predicition will come true at long last?

[Perfectscotty]

If that wasn't an odd blog entry then I don't know what is ! It's just money Jim and most of us don't have it to lose anyway.

[oneEyeOpen]

Jimmy,

Since you are so drop dead certain of our financial demise I have a bit of advice: short the market. Put you money where your cake-hole is, honey. Or shut the fuck up.

[Gordeax]

Actually, oneEyeOpen, it would appear there are people with big money doing exactly that...

http://mparent7777-2.blogspot.com/2007/08/45b-bet-on-another-911-within-4-weeks.html

$4.5 billion options bet on catastrophe within four weeks
Anybody have a clue as to what these 'investors' are expecting?

The two sales are being referred to by market traders as "bin Laden trades" because only an event on the scale of 9-11 could make these short-sell options valuable.

There are 65,000 contracts @ $750.00 for the SPX 700 calls for open interest. That controls 6.5 million shares at $750 = $4.5 Billion. Not a single trade. But quite a bit of $$ on a contract that is 700 points away from current value. No one would buy that deep "in the money" calls. No reason to. So if they were sold looks like someone betting on massive dislocation. Lots of very strange option activity that I haven't seen before.

The entity or individual offering these sales can only make money if the market drops 30%-50% within the next four weeks. If the market does not drop, the entity or individual involved stands to lose over $1 billion just for engaging in these contracts!

Clearly, someone knows something big is going to happen BEFORE the options expire on Sept. 21.

THEORIES:

The following theories are being discussed widely within the stock and options markets today regarding the enormous and very unusual activity reported above and two stories below. Those theories are:

1) A massive terrorist attack is going to take place before Sept. 21 to tank the markets, OR;

2) China, reeling over losing $10 Billion in bad loans to the sub-prime mortgage collapse presently taking place, is going to dump US currency and tank all of Capitalism with a Communist financial revolution. Either scenario is bad and the clock is ticking. The drop-dead date of these contracts is September 21. Whatever is going to happen MUST take place between now and then or the folks involved in these contracts will lose over $1 billion for having engaged in this activity.

"$1.78 Billion Bet that Stock Markets will crash by third week in September Anonymous Stock Trader Sells 10K Contracts on EVERY S&P/Y "Strike" Shorts Stocks "in the money" effectively selling all his SPY holdings for cash up front without pressuring the market downward.

[sirbikes]

I keep telling ya, it's business as usual here. More development in the name of economic progress. All car-based. Nobody has a clue.

If people start losing their homes and going bankrupt it will create a recession and kill consumer spending. So I predict a decline in the stock market. Shorting some stocks would be a good idea, however, because that's very risky, I recommend put options to limit potential losses, or at least buying energy sector funds as we will certainly be desperately searching for more oil and gas in a last ditch effort to keep the status quo.

The market is not revealing the fundamental problem right now, because it's been injected with liquidity and priced in a Fed rate cut already. Also, the Hedge Funds have been dumping their oil futures which dropped the price of oil recently. Auto companies are forecasting lower sales, so that signals a slowdown in the economy.

The Fed will take care of the wealthy - it has already shown this recently - at the expense of poor americans. The foolishly arrogant Countrywide Financial will be saved, while foolish Americans will get kicked out of their homes.

[David Mathews]

> "Young people accustomed to thrilling paydays will discover that their services are no longer required in the mortgage origination business, and will instead have to memorize dozens of excruciating formulas for different sorts of beverages more or less based on coffee."

Love it, Jim Kunstler! That's good for a laugh all day!

[Abrey]

Dear Jim: Interesting post this week, Jim. Your apology for excessive metaphors are not needed. I seem to recall a poster from a year or so ago noting that you must sometimes feel like a prophet without honor in your own land. You, and others, who care about this country and its citizens, must certainly feel the same sense of frustration as I do, about what is happening to us as a country, and wonder why we continue to be blissfully unaware about it. That your predictions will eventually come true is not in doubt. The question is not when. The question is, when it does, what are we going to do about it? As you have said in your books and many lectures, we should prepare to be better neighbors. I think that is wise advice and always timely advice too.

[Laura Louzader]

How nice that Mozilo, CEO of Countrywide, warned us of a looming recession AFTER he had disposed of about $100MM worth of his Countrywide stock.

Much big money was being pulled off the table in 2005-2006, at what time you would have had to be blind as a bat not to sense that the housing market was a little exhausted (to say the least), and that it was past peak. So many of the more conservatively managed fixed annuities and pension funds may survived.

People are going to realize that there are worse things than 5% fixed interest.

In the meantime, it would be nice if those of us who did not participate in the rampage of the past 6 years could be spared the consequences, but that won't happen, even if Congress has the wisdom to decline to bail out the mortgage borrowers and holders, and not put the U.S. Treasury insolvent thereby.

None of us will escape unscathed. All my best laid plans to buy cheap are on hold, pending a move to a more secure industry, if there are any. Maybe my little firm, that only runs retail trades and has no propriatary positions at at all, will capture business from the big wirehouses as they start to unwind because of their massive CDO exposure. Little investors will learn that they should play only in little ponds, and to stay away from the big boys.

But I'm not optimistic, so I'm prepared to do whatever.

[DaveL]

http://www.wildlifedirect.org/index.php

I'm kind of facinated by gorillas lately.

I often wish that I was a silverback with a family, living out my life in a mountain rain forest. It would be great.

Of course, my fantasies always lead to tragedy.

As a silverback, i would face down a gang of bush meat hunters and get mowed down by automatic weapon fire. The hunters would then cut off my head and hands for mounting and eventual sale on the black market. The rest of my body would be quartered and immediately packed out for sale in the local market.

A contingent of hunters would remain to track down the rest of my family, now in hiding. They would they would also be slautered and butchered in variuos fashions.

This is all part of market efficiencies and actions of rational decision makers. everything is as it should be. we live in the best of all possible worlds. human beings will prevail. praise alah.

DaveL

[DaveL]

I wish that I could roll around in the grass with a wolf pack. But I think that they'd kind of rip me apart or something, kind of like a marmot.

At what point does the body surrender itself? Mine would go quick and easy. no undo struggling on my part, you can be sure of that.

DaveL

[oneEyeOpen]

"How nice that Mozilo, CEO of Countrywide, warned us of a looming recession AFTER he had disposed of about $100MM worth of his Countrywide stock."

Nah. He should have telegraphed what he believed BEFORE he sold his stock. What a moron.

[DaveL]

http://www.bestcyrano.org/THOMASPAINE/

Nozfuratu sees the sun and dies as a result.

DaveL

[Babystepper]

More Clusterfucking:

Embattled Attorney General Resigns

http://www.nytimes.com/2007/08/27/washington/27cnd-gonzales.html?_r=1&oref=slogin

[Ed]

An important fact to remember about the creative mortgage fiasco is that a massive wave of adjustable rate mortgates, many made to subprime borrowers, are due to make a big upward adjustment this fall and winter. But there are a lot of people in creative mortgages who are not subprime borrowers as well who will take an interest rate hit.

[dale]

I can't tell you if the stock market will crash or if peak oil is already here, but I can tell you a thing or two about the real estate market.

I am in a particular situation where I am able to observe the effects of the last few weeks on a regional market which has not been part of the bubble excess of the last few years to a degree seen in CA,FL,NV,AZ etc.

I did an informal survey of the market in homes over $400K in the best neighborhoods of that market and found an approximate 30 month supply based on August sales levels. Inventory overall up about 50% in the last year.

I hear lots of rumors of low volume high-end single family home builders being on the ropes. I suspect a serious stock market market correction will occur when the August/September numbers come out. RE is dead for now.

[Christian Soldier]

At about this point in dot-com crash, the papers and pundits were telling "suckers" like myself to just hang on. I did and about 40% of my portfolio vaporized in 3 days.

I really had hoped that the "sub-prime" market did represent the outer margins of this coming debacle, but as Jim as pointed, out this impending crash is really about the foundation on which wealth in this nation has been built.

I'm backing out all but my minimums tonight and I'll pray that tomorrows market isn't the big day.

To "perfect Scotty" - I have no doubt that the Chinese are really nervous. Please note U.S. plans to change the $100 bill. It is believed that the Chinese hold billions in $100s.

[jerry mcmanus]

For those of you who may still be under the illusion that the Fed didn't intend to hyperinflate it's way out of this mess from day one, here is an illuminating tidbit from an unlikely source. The show "History Detectives" on PBS recently did a segment on a continental currency note printed during the American Revolutionary War. The full transcript can be found here: http://www.pbs.org/opb/historydetectives/investigations/502_continentalcurrency.html, but it was this brief exchange near the end that made my jaw drop:

[begin transcript]
History Detective Gwen Wright: (voiceover) [Robert Hogue an expert on North American currency and the Revolutionary economy] explains the Spanish dollars were made in a milling machine. They were widely accepted as universal currency in the 18th century because Spain controlled the world's supply of silver. Our bill says whoever has it is entitled to six dollars of Spanish silver.

Gwen: So, there were six dollars to back this note?

Robert: That's right.

Gwen: Who gave the government these Spanish milled dollars?

Robert: No one. Think of it as an official IOU, a promise to pay in the future in good money.

Gwen: Well, were people paid back in good money?

Robert: No. Unfortunately, they were not. They never really made good on this.

Gwen: (voiceover) The shocking truth about our bill, there was no Spanish silver backing the rebel money.

Gwen: Well, how did currency have value then?

Robert: It really had value only as a matter of faith. But then, all money is really a matter of faith, in a way.

Gwen: (voiceover) All Ben Franklin and the Congress had was a dollar and a dream. In truth, an awful lot of paper dollars and a very big dream. His presses kept printing these beautiful bills, with nothing to back them.

Robert: Here we can see all of the issues of currency put out by the Continental Congress.

Gwen: I see. So starting with 3 million, our 4 million, 5 million. Suddenly 25, 75...95 million dollars. How much money did Congress issue altogether?

Robert: Altogether, approximately 241 million.

Gwen: (voiceover) And, of course, the more currency the rebels printed, the less it was worth.

Gwen: 241 million and still nothing to back it?

Robert: Right.

Gwen: No wonder this money devalued. So how much would our six dollars have bought?

Robert: If we take a look at contemporary prices... at the beginning of the war that amount would have been a month's pay for a private soldier in the Continental Army. But by the end of the war, it would not have been enough to buy even a pound of butter.

Gwen: Oh!

Gwen: (voiceover) The falling value of the dollar was sparking potential civil unrest. Then Robert shows me a surprising quote from Ben Franklin. He secretly believed the falling value of the dollar helped the Revolution. In theory, the less it was worth, the less Congress would owe.

Robert: (Quoting Ben Franklin) "This currency, as we manage it, is a wonderful machine. It performs its office when we issue it. And when we are obliged to issue an excessive quantity, it pays itself off by depreciation."

Gwen: (voiceover) I've stumbled on a much bigger story than I'd thought. Franklin and the Congress continued to print dollars, knowing they will become virtually worthless to the citizens who use them. The more I think about this six dollar bill, the more amazed I am at the sheer moxie of the ideas behind it. Here is a fledgling American government so convinced of its own virtue, so sure of its success that it's willing to deceive its citizens by issuing money that has no value...
[end transcript]

Gosh, isn't that interesting, the wealthy elite of this great, god-fearing country have been sucker-punching the little people right from the very start. Warms my shriveled little heart to imagine the enraptured looks of patriotic joy when the obese millions wake up one day to discover that their carefully hoarded 401k's won't even buy a pound of butter.

Cheers,
Jerry

[jerry mcmanus]

Watch for the trailing comma on the link in the comment above. Correct link here:
http://www.pbs.org/opb/historydetectives/investigations/502_continentalcurrency.html

Cheers,
Jerry

[Dave]

Dear JHK

It well may be that all hell is soon to break loose but at least you gave me good laugh this morning ! Thanks !