(17 Nov 2008) The financial news of today was rather boring, therefore I post only two items today (a military and one financial).

Item 1) Scientific panel finds widespread Gulf War I illnesses.
Item 2) Eliot Spitzer is not a girlie man upon the credit crisis. 

Item 1) Scientific panel finds widespread Gulf War I illnesses. 

This is news of a breath taking beauty: At least one in four Gulf War I veterans have a lot of horrible diseases related to the exposure of toxic chemicals. That are about 175 thousand war veterans!

The best thing is: Lots of the sickness are brain related! And compared to your brain, only a sickness related to your penis is worse...;)

All day long, since I read that news, I feel like I am walking on air. The only negative is: since they are war veterans via the Veteran Affairs they have access to healthcare; it would be even better that, since most of them cannot work, they would not have health care. That's the way to deal with that slimy military shit (mostly these are trailer trash people who enlist the US military for the bonuses). 

Let me quote a bit from this wonderful news (source): 

WASHINGTON - At least one in four U.S. veterans of the 1991 Gulf War suffers from a multi-symptom illness caused by exposure to toxic chemicals during the conflict, a congressionally mandated report being released Monday found. 

For much of the past 17 years, government officials have maintained that these veterans -- more than 175,000 out of about 697,000 deployed -- are merely suffering the effects of wartime stress, even as more have come forward recently with severe ailments. 

“The extensive body of scientific research now available consistently indicates that ’Gulf War illness’ is real, that it is the result of neurotoxic exposures during Gulf War deployment, and that few veterans have recovered or substantially improved with time,” said the report, being released Monday by a panel of scientists and veterans. A copy was obtained by Cox Newspapers. 

Gulf War illness is typically characterized by a combination of memory and concentration problems, persistent headaches, unexplained fatigue and widespread pain. It may also include chronic digestive problems, respiratory symptoms and skin rashes. 

Comment: Needless to say why I feel so good today! Quoting on, the best part is still to come: 

It said that Acting Special Assistant to the Secretary of Defense for Gulf War illnesses Lt. Gen. Dale Vesser remarked that year that although Saddam Hussein didn’t use nuclear, biological, or chemical agents against coalition forces during the war -- an assertion still debated -- “It never dawned on us ././. that we may have done it to ourselves.”

Comment: This is so good; it never dawned upon us... bla bla bla ...it to ourselves. It is now 17 to 18 years later than the first Gulf War!
And when will it dawn on the Americans that there could be a little little fault in the official version of the 911 attacks from 2001?
I guess; about 387 years (give or take a few decades)!
But what kind of stuff did they do to themselves? Quoting on:

Several soldiers interviewed said they were ordered to dunk their uniforms in the pesticide DEET and to spray pesticide routinely on exposed skin and in their boots to ward off scorpions. Others wore pet flea collars around their ankles. 

Comment: In order to avoid scorpions, they had to dunk their uniforms in DEET and spray pesticide over exposed skin and it takes 17 to 18 years to get stuff like that to the surface?
After AIG we know that the largest insurance company in the world did not understand the basics of insurance, from the actions of the Federal Reserve we know now that they do not understand what it takes to maintain a fiat money system and we knew it already of course but we have one more clue the Pentagon does not have what it takes to fight wars properly.
The Americans are nothing more then a bunch of fatbag obese people waggling through life without understanding much of it.

Lets close this item with a serious thing (although I feel more like telling jokes):

I think for a long time that the USA going nuclear at the end of World War II is a very important kernel of what the American society is today. Today the USA is nothing more than obese folks waggling around telling nonsense all day long, but what explains this completely sung loose from reality?
I think going nuclear was one of those things, together with the fact they were a super power (super powers never get corrected in their ways of thinking so super powers are unstable by definition) you have explained a whole lot of why they are today what they are... 

Item 2) Eliot Spitzer is not a girlie man upon the credit crisis.  

Remember Eliot Spitzer? He was the 54th governor of New York and before that he was the main prosecutor trying to keep Wall Street in line with legal reality. Beside being addicted to attention (most of our political leaders and almost all of the so called celebrities have an attention deficit disorder), he was hooked on hookers.

An investigation into his financial transactions lead to the discovery of a whore ring named 'Emperors Club VIP' (see the Wikipedia thing for more details). 

So he is just like a real human being although in almost all societies being a political leader and fucking whores is often an unhandy combination...;) 

Lets get serious, Eliot wrote an article for the Washington Post (source) and lets look at a little quote from that one:

And when the attorneys general of all 50 states sought to investigate subprime lending, believing that some lending practices might be toxic, we were blocked by a coalition of the major banks and the Bush administration, which invoked a rarely used statute to preempt the states' ability to probe. The administration claimed that it had the situation under control and that our inquiry was unnecessary. 

Comment: It is a pity not a date & year are given, but the fact that the Dubya regime claimed it 'had the situation under control' is highly interesting because a lot of other sources confirm that the Dubya regime has a lot to do with subprime mortgages. 

When empires start to fall there is always a common factor: The leadership of that empire starts standing outside reality, from the USA we know already for a long time that their President Dubya has a strange world  view. In Item 1) from above you see the Pentagon is on the same way for a very long time now. The debt hugging principles of the (Noble prize winning) US economists are rather outlandish too & so on & so on.

So there is an enormous power vacuum out there; the Europeans are not fit to fill it, the British have their problems too, the Chinese are still too primitive, the Russians get more clever by the year but their society is far from ready...

What will fill this giant power vacuum? Next US prez Obama?

We'll see how stuff pans out, till updates! 

(16 Nov 2008) This day I don't want to talk about hobby's like trying to destroy stock markets or attacking the funding base of the US military.

No today I don't feel like talking about hobby's, I feel like talking on the more serious matters in life. How can you have hobby's when the basics in your life are a disaster?

Therefore I would like to post a few video's as found on the YouTube website, they range from how to fold a tshirt in two seconds, more efficient making a tie in your shoelaces to brewing beer.

My dear reader might think 'brewing beer'??? And what about that Muslim and mujahedin stuff? Well I am rather serious on that: I think it is better Muslims brew their own beers. Not those heavy ones that make you drunk, loose your self control and you get aggressive to your family for example.
No, once you understand the rather subtle details of brewing you can easily brew so called 'table beers' that are so light you cannot get drunk from them but still are very tasty.

In the picture below you have six video's, number 1 and 2 are about the folding of tshirts, number 3 and 4 about efficient shoelace tying, number 5 is about the important subject of how to fold your socks and in video number 6 some basics about beer brewing are explained. (In case you want to make beer, start with a soup pan and malt extract and most of all: buy a good book first or get it from the local library.) 

So these are the important things in life; when the important things are on order you can indulge in hobby's like destroying the US financial system. Nothing of importance is found over there, so only a hobby can bring it down. 

Till updates! 

(14 Nov 2008) Only three items:

Item 1) Very funny YouTube video about a guy named Peter Schiff.
Item 2) Everybody is talking about a successful test of the 8000 DOW low...
Item 3) US Treasury Secretary Paulson is debiting deep insights.

Item 1) Very funny YouTube video about a guy named Peter Schiff.

A guy named Peter Schiff (he is an American) did see a lot of the present troubles coming and in the YouTube video you can see how a lot of other Americans try to put him in the category of 'rotten fish'.

The oldest date in the video was something out 2006, so Peter is good but I remember that in the spring of 2004 I was very worried for a few days. Wow wow wow, I am not scared easily but the sheer size of the clearly impending crash did even send shivers down my spine...

All in all it goes very good, food and oil prices are coming down so that horror scenario is prevented for the time being...   

Have fun looking at the video, it is about 10 minutes long: 

http://www.youtube.com/watch?v=2I0QN-FYkpw 

Item 2) Everybody is talking about a successful test of the 8000 DOW low... 

Yesterday the DOW Jones breached the 8000 level, after that it jumped up over 10% (the largest dead cat bounce in this second activation of the NightmareOnWallStreet). Some observers remark this can only be the work of the Plunge Protection Team because normally speaking after breaching 8000 a lot of automatic selling would be there.

But most Americans talk about a successful test of a new low (thus implicating there is no problem).

You can choose what they have in their head:  

1) Horse shit,
2) Cow diarrhea,
3) Rabbit shit,
4) Alzheimer's disease, or
5) A healthy and properly working brain...  

Let me select only one small detail why it cannot be number 5).

Begin small detail: 

Right now the house price deceleration is still picking up speed; the year on year declines are still growing every month.
That means we are still not halfway.
The first half of the house price decline will bring less pain than the second half.
Right now about 18% of US houses are 'under water', that means they have more mortgage than the value of their house.

So when house prices are on their long term affordability again, it could very well be that 50% of all houses have a mortgage higher than the actual value of the house.  

End small detail. 

Funny to observe all those Americans talking about a successful test of the DOW Jones 8000 level, I think their future mental span is about 24 hours...

Item 3) US Treasury Secretary Paulson is debiting deep insights. 

On Yahoo finance (who have it from the fools at CNBC) a very remarkable quote was found from the Paulson clown, (source) quote:

Government purchases of capital in healthy banks are likely to restore lending, he said. 

Comment: We clearly see that the clown Paulson is trying to get the old ways of picking up more debt once more to the surface. But as I calculated for my honorable audience, the US financial sector picked up debt in the period 1974 - 2008 with a speed of 13% year on year.
At 01 July 2008 the debt of the US financial sector stood at 16507.5 billions of US$.
That is above the entire US gross domestic product and although in the last seven years it is only about 9% year on year growth, lately the entire sector is picking up historical levels of more debt.

The US main stream financial media make a big fuss if government debt is standing at 9 or 10 trillion, they 'forget' to mention the 16.5 trillion beast that is still growing in double digit numbers. 

In case you missed it: go to the 11 Nov update in the Nightmare files. 

Till updates.

(13 Nov 2008) This update is boring because any idiot can see the next G20 meeting will fail, so shy should I hit the button 'publish website' anyway?

Item 1) Why the 15 Nov G20 nations meeting will fail.
Item 2) Jesse found a 2x2 cross table on inflation & deflation.
Item 3) Super perfect US Oct Federal deficit: $237.2B
Item 4) A nine page read: The end of the Wall Street boom.
Item 5) As usual the empty item.

Item 1) Why the 15 Nov G20 nations meeting will fail.

Really I do not understand what is in the mind of the other 19 nations of the G20 but we, the public, are supposed to believe that our political leaders will 'work together' and 'make progress' on the financial crisis that is a severe thread to the global economy.

I really do not understand this, may be the Central Banks of the other 19 nations still have too much US Treasuries on their balances and they get spooked by the idea that that stuff is in fact total crap.

Let me keep this simple and easy to understand:

The G20 nation meeting will fail because it is done under the leadership of US prez Dubya. Just like there is zero point zero progress in the promised Palestine state (two nations living in peace together) this all will bring only photo shots of dumb political leaders. Nothing will happen...
In fact the US Paulson clown has already pointed at some of the problems they cannot be blamed for: There are nations that save too much and do not consume enough, countries like China or those oil producing countries just do not consume enough and you cannot hold the USA responsible for that... (No source files given, but that is the beginning reasoning of the USA.) 

Item 2) Jesse found a 2x2 cross table on inflation & deflation.

My compliments go to Jesse because he started me thinking on money supply inflation/deflation versus the behavior of asset price inflation/deflation.

I never looked at it in this way because the Central Bankers will always find some lousy excuse to inflate because they think that is 'best for the economy'. For example the European Central Bank has almost never met her official target of consumer inflation below 2%, they always have lousy arguments year in year out why the rates should be that low... 

Here is his link from Jesse's Café Américain:

Nailing our Thesis on Inflation and Deflation to the Door 

Item 3) Super perfect US Oct Federal deficit: $237.2B

And when year in year out you  have the value of your fiat money too low via idiot low interest rates, you inevitably get one of those pinched in your dumb face: 

October budget deficit hits record of $237.2B 

More of that will follow, there is so much fun to be found in the USA shadow banking system but rather likely the G19 idiots have never heard of a shadow banking system... 

Item 4) A nine page read: The end of the Wall Street boom.

A long read from Portfolio dot com, nine pages to be precise. I stopped reading after three pages because there was nothing new in it.

But for financial amateurs like G20 political leaders it is a good read:  

The end of the Wall Street boom 

 Item 5) As usual the empty item. 

It is a good thing I always shave my head so I am bold already. When I think of these idiots that go down to the G20 meeting under the leadership of Dubya and his clown US Treasury deputy Paulson I would tear all my hear out. 

These G20 idiots; What is in their brains? 

Emptiness, only emptiness will be found there... 

Till updates.  

(12 Nov 2008) This is a multi trillion update, without any derivative positions mentioned this is the biggest multi trillion US$ & € ever posted.
Topics ran widely from large to small countries and there are not five but seven items.

Item 1) Prudent Bear: Guest commentary on the US 2009 bond market.
Item 2) US M2 money growth: The FED does not understand basic math.
Item 3) The one year anniversary of the NightmareOnWallStreet, a chart.
Item 4) A nice graph from David Merkel.
Item 5) Why Bailouts Attract Handout Seekers (from Barry's hangout).
Item 6) Naked Capitalism on Iceland.
Item 7) The empty item.  

Item 1) Prudent Bear: Guest commentary on the US 2009 bond market.

This is already the third link I post to one of those guest commentaries; often they are very good in depth, width and originality. The writer of the commentary, Martin Hutchinson, is just like me expecting real bad weather for the bond markets in 2009. Now the credit crisis is more and more unfolding in her majestic beauty, only new US government bonds reach staggering numbers.

But you can find a lot of those numbers in the commentary, lets do the quoting thing (source & Prudent Bear home page):  

With M2 money supply (the one the Fed will divulge) up at an annual rate of 18.3% since the beginning of September it seems likely that inflation will accelerate – as it did in the recessions of 1973-74 and 1979-80. 

Comment: This speed is new to me and we can only estimate what happens to the broadest measure M3 because the US Federal Reserve does not report that any longer (the costs are too high compared to the economical insights gained... FED source).
Don't forget: The broader the money measure the faster it grows and these now countless trillions of M3 money can damage the M1 only you have in your wallets... 

 Item 2) US M2 money growth: The FED does not understand basic math. 

Suppose you have a savings account with a fixed starting amount and in the first year you get 5% interest, in the second 10% and in the last year 15% interest.

I have two questions for you:  

Question 1) Is your average interest 10% (since that is the average of the numbers 5, 10 and 15)? 

Question 2) Does the order make any difference? So does the 5, 10, 15% sequence give the same results as the 15, 10, 5% sequence? 

Stuff like that belongs to the very basic math of financial calculation, on question 1 you must take the geometric mean of the numbers 1.05, 1.10 and 1.15 resulting in 1.0992... Hence the average grow factor is 1.0992 and thus the average percentage is 9.92%.

As a rule of thumb you can neglect the difference because it is so small, but if a student on an exam would say it is 10% I would draw my red pencil and the student would have zero points for that answer.

These days we have 8 € hand calculators like the Casio fx-82 so there is no need for the rule of thumb any longer. (In the past you needed logarithm tables and too much time to arrive at the correct answer, hence the rule of thumb made sense.)

Now we turn to the Federal Reserve H6 Statistical Release (about money supply). The current release is from 06 Nov (source), cut and paste quote on M2 money supply:

June 2008: 7638.7
Sept 2008: 7769.0 (both billions of US$). 

Comment: In a period of 3 months this grew 7769/7638.7 = 1.01705.... or 1.705...%
If you make a full year of that (that means annualizing it) you get 6.9997...% or 7.0% for simplicity. What does the FED make of it? Quote:

3 Months from June 2008 TO Sep. 2008:  6.8%     

Comment: You freakin don't believe this; at the FED they cannot even compound a steady interest rate! Even with the modern technology they fail on details, just like their car factories that complain since the mid nineties about foreign cars but did absolutely nothing, just nothing, about that.
Why do so many economists still tell crap like 'The US economy is very adaptive'? Why, in Gods name why?
These are only obese fatbags doing their daily routine... 

Item 3) The one year anniversary of the NightmareOnWallStreet, a chart. 

One year ago when I did the second activation of the NightmareOnWallStreet, the DOW stood at 12,987.5498 after flirting a bit with the 14 thousand level just a few weeks before.

Only a chart of the last 14 months, click on the picture for a wider version (I have included today's DOW chart):  

Today the DOW ended at 8282.66 points, not bad & for the rest no comment. 

Item 4) A nice graph from David Merkel. 

On Seeking Alpha David has a nice chart about total US debt versus gross domestic product. Until now this was mostly done for small countries, the main stream media truly has no problem with publishing stuff like this for small neglectable quantities...

According to David the US economy has now about 356.5% in direct debt outstanding, this is without jokes like the US Treasuries in the Social security funds. That makes stuff only worse.

David's main point of reasoning is that the actions of the US Federal Reserve are only helping those parts of the US economy that still are capable of absorbing more debt.

That is a relatively good take of the present developments.
The last thing we can say about the Americans is that they behaved as responsible house fathers with regard to the world reserve status of the US$. They really thought this was all for free...

Seeking Alpha source.

Graph source. 

Item 5) Why Bailouts Attract Handout Seekers (from Barry's hangout).   

Only a quote around the sudden arise of all kinds of new banks in the USA (hey who said they do not have a vibrant economy?). New banks everywhere because there is taxpayer money to hand out... Quote (source): 

A truisim of all bailouts: Enormous amounts of taxpayer cash attracts all manner of unsavory, undeserving characters. What was supposed to be a narrow and limited attempt to reduce the systemic risk of a financial collapse has become a taxpayer funded free-for-all.

Like hyenas trying to steal the kill from a lion, the mere scent of this enormous pile of loot starts attracts the scavengers. They cannot help themselves, for it is their essence, and who they are. 

Comment: Barry observes that at the present rate grow of handing out money the price tag could be 8 to 10 trillion US$ or even an entire GDP.
For me that is not relevant, all I know is that the US military costs about 700 billion US$ a year and that is the only funding to destroy as far as I am interested... 

Item 6) Naked Capitalism on Iceland. 

Only a funny quote from a long article on the Iceland stuff (source): 

Iceland’s banking system is ruined. GDP is down 65% in euro terms. Many companies face bankruptcy; others think of moving abroad. A third of the population is considering emigration. The British and Dutch governments demand compensation, amounting to over 100% of Icelandic GDP, for their citizens who held high-interest deposits in local branches of Icelandic banks. Europe’s leaders urgently need to take step to prevent similar things from happening to small nations with big banking sectors. 

Comment: Well I know of a few of those countries, for example Luxembourg is almost entirely dependent on banks and what to think of my own country the Netherlands? The ING bank has so called 'assets' on her balances that are as wide as 300% of our gross domestic product...
Until now I still consider ING a large liability to the Dutch society and not a large asset. But facts are facts and today it was reported ING sucked in 7 billion € in new savings from the population... (The only problem: The population does not know how banks work, they go for the slogans and the advertisements.) 

Item 7) The empty item.   

Empty empty & more emptiness... Think for yourself please!  

Till updates. 

(11 Nov 2008) It is now day 365 of the second activation of the NightmareOnWallStreet. It was activated for a second time just after the 14 thousand top of the DOW Jones stock index.

I sincerely hope the US economists have gained wisdom in the last 12 months, I only have hope because in fact these fake scientists also have their own 'emotional resistance levels'.

Lets make a long story short and explain to US economists why their entirely economy is doomed and they can ponder the question why they are not free academics but only ass licking cleaners of the debt huggers.

American economists being a help for humanity?
These perfumed princes are not worth their salary...

Simply look at the last update in the nightmare files & conclude they are not worth their salary:

11 Nov 2008  US financial sector: Debt growth through the decades 

Till updates.

(10 Nov 2008) The five items for today:

Item 1) Trashed US economist of today: Nobel prize winner Paul Krugman.
Item 2) Dubya, I already start missing him...
Item 3) How to make a profit of just 5455% in just a few months.
Item 4) AIG: The gift that keeps on giving.
Item 5) The empty item. 

Item 1) Trashed US economist of today: Nobel prize winner Paul Krugman.

I keep on wondering why this guy got the Nobel prize, ok ok it is long known that the economy Nobel prize is more or less an incestual happening but even then it might be expected the winner has some kind of real brains. 

So not saint Paul; instead of analyzing why all those fake Federal Funds filled with Treasuries only maximize a Federal default, or instead of pointing to the debt the combined US financial sector has upon itself, our Donald Duck of economics writes (source):

Well, there’s no question that fighting the crisis will cost a lot of money. Rescuing the financial system will probably require large outlays beyond the funds already disbursed. And on top of that, we badly need a program of increased government spending to support output and employment. Could next year’s federal budget deficit reach $1 trillion? Yes.

But standard textbook economics says that it’s O.K., in fact appropriate, to run temporary deficits in the face of a depressed economy. Meanwhile, one or two years of red ink, while it would add modestly to future federal interest expenses, shouldn’t stand in the way of a health care plan that, even if quickly enacted into law, probably wouldn’t take effect until 2011.  

Comment: When after the ravages of war a country can always pick up debt because it is clear it will pay itself back with a factor far above the number one. Given the debt levels throughout the entire US economy, from the Federal to the household level you can safely conclude more debt will not work.
The standard textbook simply does not take into account that interest on outstanding debt is already above total profits of the entire economy. Our Donald Ducking Paul Krugman forgets to mention this little detail...
Therefore Paul Krugman is classified as a 'debt hugger'.  

Item 2) Dubya, I already start missing him...

I already start missing him, Dubya is one of the items you only miss after he is gone. Gone are the theories that less tax now means more tax revenues in the future. Gone are theories that a low minimum wage is best for the economy (while outsourcing the industry). Gone are the statements that freedom is on the march in Iraq...

It is all gone, there will be a vacuum so big, it dwarfs the universe...

Luckily on biertijd dot com there are some photo's left. 
Click on the picture to view them & understand the deep deep loss we have! 

Item 3) How to make a profit of just 5455% in just a few months.

Profits like the above look huge but a return of 54.55 times your investment is simply needed to fund al lot of these kinds of investments.
It is very simple: all you need to know that the pricing of options mechanism fits most of the time but not all of the time. There is a deep and fundamental flaw in the pricing of options, I know that over a decade and I am still poor and unemployed. When I apply for a job at a bank or a pension fund, my capabilities are always not needed.

So for the time being I am destroying entire banks and entire pension funds, why not? It is very funny to do and nobody dies from it.

On Seeking Alpha they have an article about Nassim Taleb, Nassim and me have remarkable similar insights when it comes to rare events. To be honest: Nassim is even better because he advises a multi million US$ thing...

All I want is military power, the more the better and these days you cannot buy real military power with money. 

Lets quote a bit of the fun (source):

Universa keeps 90% of its assets in cash or cash equivalents and simply tries to break even as it places small bets on rare events.

Five weeks ago when the S&P 500 was trading around 1200, Universa bought S&P 500 Index put options with a strike price of 850, due to expire late October. They were betting an “unlikely” drop would occur.

They paid around 90 cents for those options. By Oct. 10, the S&P had dropped 300 points in a month. The options Universa purchased for 90 cents were now trading for $60 each. Universa cashed out of its position around $50, good for a gain of 5455%.

Universa also paid $1.29 for a put option on the insurance company AIG. They’d be in the money if AIG dipped fell below $25 a share by September. AIG (AIG) imploded in a tangle of bad debt and Universa sold the AIG put options for $21 apiece.    

Comment: Not bad, these days you can do the same thing on the currency markets & the more volatility there is the better it gets. The idea is so simple: Pick up far far out of the money stuff when the sellers of that stuff think it is ruled by their computer program and cash in every few times in a decade or so.

Item 4) AIG: The gift that keeps on giving. 

It is so lovely: By the week more and more expensive it gets for the US tax payer and we must not forget that most Americans hang on to the next insight:

Taxing people = Stealing jobs. 

Government jobs are often low paid because of the job security that comes with it, but Americans think that taxes steal jobs. Taxes bring also law enforcement but they never say:

Law enforcement = Stealing jobs.

They are so dumb, you just cannot imagine how dumb they are.

But every now and then there is one of those Americans that is not entirely dumb and gets mad about what is happening with tax payer money in the case of AIG.

AIG, for me the gift that keeps on giving. Here is the link where someone named Yves Smith rants against Wall Street advertisement outlet the Wall Street Journal:   

AIG: The Looting Continues (Banana Republic Watch) 

Comment: AIG, the gift that keeps on giving for a long time to come! 

Item 5) The empty item.  

Empty empty empty.

Not empty enough? Check it out where the Federal Reserve declines to shed light on her two trillion in taken in garbage collateral:

Fed Defies Transparency Aim in Refusal to Disclose  

Till updates.  

(09 Nov 2008) Only one item today:

Item 1) Two Little-Noted Features Of The Markets And The Economy.

Item 1) Two Little-Noted Features Of The Markets And The Economy. 

My dear reader, I hope that by now it is well known I only use the financial crisis and the economical troubles flowing from that as an 'investment vehicle' to destroy the US military might.

Let there be no doubt about my intentions: I want to destroy the US military might.

For this to happen, tactical stuff like impossible funding of the US military future dreams are important. Until now everything goes perfect; for example the largest insurance company in the world named AIG is perfectly hooked to the wallets of the US taxpayer. A lot more is already hooked to the US taxpayer mouth and in the future a lot more will be hooked in order 'to preserve the system'.

In my little fishbowl of reality everything worked just fine; all stuff simply worked together to bring down the US military might.

The US of A is also the best 'weapon smith' around, regardless of the financial troubles they will always take pride in their weapon systems crafted...

I will not attack this pride but only the stuff it leads to: Dumb political leaders having too much military powers is what we need to kill.

Now back to the title of this item:

The writer of the article that shook my foundations in bringing down the US military is a guy named Peter Bernstein. He is 89 years of age and so he is about double my age. Peter has wisdom to share, it made me do a rethink of destroying the US military might...

His graphics are from the stone age, may be this explains why they are so good.

Click on the picture for the entire article:  

Peter has a good point in asking why bond yields are above stock yields because stocks carry much more risk compared to bonds...

After my humble opinion the impending crash on US government bonds could lead to restoring the power of the bonds. I am fully aware of the fact that a lot of players still think US government bonds are the safest place to be; let them think what they think...

Till updates. 

(07 Nov 2008) The five items of today:

Item 1) US non-farm payrolls & is there a party starting?
Item 2) US states unemployment funds running empty?
Item 3) Handy for in your bookmarks.
Item 4) Military stuff: Russian missiles in Kaliningrad.
Item 5) The empty item. 

Item 1) US non-farm payrolls & is there a party starting?  

Very good news from the non-farm payroll front: In Oct the US economy shed 240 thousand jobs and if that was not good enough, the month of Sept was revised from 159 to a loss of 284 thousand!

So we have at least 240 + 284 = 524 thousand shed jobs in the last two months but likely it is even better! Almost always the 'revision' in the NFP shows lesser jobs, never more. That has nothing to do with a 'conspiracy theory' but with the fact a lot of unemployment simply is not processed when the figures come out.

The revision for Sept was 284 - 159 = 125 thousand.
Therefore Oct could be as high as 240 + 125 = 365 thousand lost jobs...

Needless to say this is good news for me and believe it or not, it is good news for the US stock markets too (at the moment of writing the DOW is up 2.39%).
Here is a picture, click on it for the source file:   

 Item 2) US states unemployment funds running empty? 

In the USA the states run the unemployment trust funds, from the Federal funds we already know there is no real money in it but only US government bonds (that keeps the official deficit low). So all real money that was supposed to be in the Federal funds is already gone and spend on pet projects like war or roads to nowhere.

Today I came across an article that says the unemployment funds from the states are running empty, it just looks like these are funds with real money from employers in it.

Let me (Yahoo/CNNmoney source) quote:

"Some states didn't have adequate reserves built up," said Andrew Stettner, deputy director of the National Employment Law Project. "They are having significant problems paying out the increased number of benefits."   

Comment: This looks like a fund with real money in it, but has it? Quoting on: 

The Michigan fund is being squeezed, in part, because of changes lawmakers made over the past 12 years, Geskey said. When times were good -- the fund had a $3 billion balance in 2001 -- officials lowered the tax rate. This resulted in a loss of $1.1 billion in contributions, he said. 

Comment: Here in Holland there is always real money in such funds and during good times the unemployment tax is always kept high for a long time. So next year, now the economy is turning bad, we don't have to pay for a full year in unemployment tax.
Again: A fiat money system can only be stable and long lasting when there are enough reserves on all kind of levels of the society, the American economists are too plain stupid to understand that trivial detail.

Here is a link to the US Treasury Unemployment Trust Fund Report Selection.  

http://www.treasurydirect.gov/govt/reports/tfmp/tfmp_utf.htm  

When you click on one of the state reports you see there are 'shares/par' in it, that does not proof there is no real money in it but indeed it is a strong clue that all unemployment taxes are long gone by now. (And replaced by 'shares/par' that can be sold to the US Treasury.)

Item 3) Handy for in your bookmarks.  

The next link is a search link on Bloomberg dot com, it is a function crafted by Bloomberg and it is named WDCI. I do not have a clue what it means exactly but likely it stands for 'Write Downs & Capital Injected' or similar stuff.

The function measures total write downs and capital raised by the 100 largest banks in the world. The link I have is not updated very often; the latest update from 29 Sept says 590.8 billion US$ in write downs and 434.2 in new capital raised (from rather dumb investors I just guess).

Here is the search link:

http://search.bloomberg.com/search?q=WDCI&site=wnews&client=wnews&proxy
stylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=
wnnis&sort=date%3AD%3AS%3Ad1&submit.x=14&submit.y=5   

And here the latest (29 Sept) result:

Banks' Subprime-Related Losses Surge to $591 Billion: Table  

Remark that after my estimations the US banks have used the 'mark to market' rule to write down on their own debt obligations to the tune of over 200 billion US$. So in theory this number should have been above 800 billion US$ but the main stream media prefers, just like the case is with hidden Federal debt, to hang on to their version of Alice in wonderland.
That's fine by me: Just another profession that does not understand the basics of her own profession.
It's as simple as it is; Those who tell crap only render themselves into insignificance... 

Item 4) Military stuff: Russian missiles in Kaliningrad. 

For a few days I waited before commenting on this military detail, I waited to see if there was any Western 'political observer' or 'commentator' finally stating it makes not much sense to build an anti missile shield in Poland.
The Americans give help to Israel with a radar post to detect early missiles from Iran but the anti missile shield is located in Poland...
It makes me wonder; why does nobody wonder?

A long quote from the International Herald Tribune (source):

The French presidency of the European Union expressed "strong concern" Friday over a Russian plan to station new missiles near Poland's border.

Russian President Dmitry Medvedev announced Wednesday that Moscow would deploy missiles in its western outpost of Kaliningrad in response to U.S. plans to station an anti-missile defence shield in Poland and the Czech Republic.

"The presidency of the European Union council expresses its strong concern after the announcement by President Medvedev ... of the deployment of a complex of Iskander missiles in Kaliningrad," the presidency said in a statement.

"This announcement does not contribute to the establishment of a climate of trust and to the improvement of security in Europe, at a time when we wish for a dialogue with Russia on questions of security in the whole of the continent," it said.

The Bush administration says its missile shield aims to protect its European allies against possible attack by "rogue states," particularly Iran, and by terrorist groups. Moscow views the system as a direct threat to its national security.  

Comment: It is about high time the European political leaders get their heads out of their perfumed asses. If this anti missile shield truly was for protection against 'rogue states' and terrorist groups (since when have terrorist groups long range missiles by the way?) why locate it in Poland? Would the brave nation of Israel not make much more sense to place such a anti missile shield?
The European political leaders have not addressed the above questions and by telling crap they create a so called 'power vacuum'. That's not very smart after my humble opinion, remember in the Georgian equation it was the same and the outcome of that was also a consequence of having your head too deep inside your perfumed asses.
To Russia: Placement of missiles is allowed but there are some rules in this:
Leave all nuclear stuff out, so preferably missiles that cannot transport nukes anyway (I have little to no insight in your missiles so I do not know how realistic this is). For the rest, number of deployed missiles: 300 to 400 is no problem from my side of the equation.
You might argue 3 to 4 hundred is a big number but the Patriot systems still get better by the year. From the military point of view: dealing with the Patriot systems is the same as dealing with the large scale anti missile shield: a lot of cheap decoys together with some real missiles will to the trick.
I think the Russian military engineers have some work to do in order to make an efficient answer to this anti missile shield. Good luck with it.

From the long term history point of view I would like to add: I understand the feelings of the Polish people, the borders of your nation have been messed up rather rough in the previous century. I have nothing against a Polish membership of NATO...     

The picture below shows a short range Iskander missile, you see 300 or 400 allowed is no big deal (to be precise up to 400 much bigger missiles are allowed). I never heard of them before but they clearly do not have nuke capability... 

Item 5) The empty item.

Emptiness, only emptiness found here!

In case it is not empty enough, you can read the most dumb 'financial expert' they have at Yahoo finance:

How to Ruin Your Morning   

Till updates! 

(06 Nov 2008) There is a need to unload some links because they start polluting the tabs on my browser, so here we go:

Link 1) From an Australian academic who, just like me, saw it coming. The author mentions Hyman Minsky and I was glad to get to the ideas of Hyman; it saved me at least three full months of thinking to understand what was going on.

Why Did I See it Coming and “They” Didn’t? 

Link 2) From the black swan, without comment, we have:

http://www.fooledbyrandomness.com/imbeciles.htm   

Link 3) This is a link from today, but when the Lehman credit default shit was to be materialized we only got the DTCC stating that only 6 to 8 billion US$ changed hands. DTCC stands for Depository Trust and Clearing Corp. 

Of course this statement was a bag of shit because Lehman only had far over 100 billion US$ sold in bonds only. Other sources explained that LIBOR rates stayed so high for so long after Lehman because of the 'unwinding' of Lehman, I cannot confirm if that is true but if true the implication is clear:
The unwinding is done via more borrowing.

Here is the link:

Credit Swap Disclosure Obscures True Financial Risk  

And here is the old link that states the Lehman unwinding is draining other borrowing capacities:

How Credit Default Swap Settlements Are Draining Liquidity From Interbank Market  

Link 4) In case you missed it: Shame on you.

Quote of the fun:

Goldman Sachs is on course to pay its top City bankers multimillion-pound bonuses - despite asking the U.S. government for an emergency bail-out.

The struggling Wall Street bank has set aside £7billion for salaries and 2008 year-end bonuses, it emerged yesterday.

Each of the firm's 443 partners is on course to pocket an average Christmas bonus of more than £3million. 

Comment: Please my dear folks, keep on worshipping the rich & please work a bit harder to make them more rich. That is why you are on earth: To make the bogus Goldman Sachs rich... 

Source:

"Goldman Sachs ready to hand out £7bn salary and bonus package... after its £6bn bail-out" 

Link 5) On US election I really did not like it observe all that idiotery around over there. Long waiting lines like it was just another developing country...

So I picked up an old old math subject again, I did not work on it for 16 years but it is strange, so utterly strange how fast things fall back into good math.

Goal is (this time) to get more nice fractals and I try to keep the level of the work at at most 2 years of university so no fancy stuff like Cauchy integral representations of linear operators (although that is tempting because it would make me look as a smart guy while in fact I am a complete idiot...).

Here is the pdf thing, remark the last part is pure bogus math! 

Till updates.   

(05 Nov 2008) Flip flip flip, my endorsement US prez candidate John McCain did not make it. That is a pity so my condolences go to John McCain.

I will not make the mistake of offering congratulations to Barack Obama, in my mind is a long history of US military adventures since World War II and the USA still has 50% of the world defense budget. Sixteen months we were promised by Barack, sixteen months to withdraw from Iraq... Lets wait and see.

From a many century point of view it is not bad to have a nigger in the White House, so I cannot give congratulations but I can say 'not bad'.

To the future US government I can say: Do your thing and as a small detail we have leaving Iraq within 16 months after the 20th of 2009. When you think you have 'enough freedom' to do things I oppose you will find me on your way. And as some nations might have found out: You will not like that.

To the Iraqis I can say: I expect you to behave calm like a house father when the fucking US military is leaving. For the time being I expect you to settle your inner differences like you always did. Don't forget you have a big wallet under your feet, the wallet has a name, it is oil.
Do your thing, I trust you to behave... 

 Title: Sixteen months promised = sixteen months delivered...

Just to give you an example how society works: My son had a friend over and that 14 year old boy asked me if I was in favor of Obama or McCain.

I told him I hoped for McCain because that would better bring down US government bonds in the short run.

The boy did not understand it: "But our entire school is in favor of Obama!"

After so much teenage wisdom I just skipped stuff like "Murder rates are historically five fold compared to normal democracies, their society is dependent on having 50% of world defense budget, one in six Americans have no access to healthcare and beside this the healthcare is just too expensive."

I only asked the boy: If a coffin is two meters long, how long is a row of one million coffins?

It took the boy some time but he coughed up: 2000 km (that is about 1400 miles).

And I informed the boy: Did Obama or your school tell you that the Americans are responsible for this in Iraq??? Of course the answer was a 'no'.

After that they were allowed to play video games again, and I know it only takes one or two Hollywood movies to repair the insights of the local teenagers: After a few Hollywood movies all of the 2000 km of filled coffins are nicely under the carpet...

__________________________ 

After all this preaching lets look at some financial news:

Macro Man has some strange graphics upon boring stuff like money growth in this:

How Will an Obama Administration Affect the Dollar?   

And via that link we have from Bespoke Investments:

VIX Declines a Little  

Comment: The VIX is also a 'panic indicator' so shall I pump it up with better bombshells? No this is not wise; The investment community has to understand that my goal of 7000 on the DOW Jones index mostly will go via the 'price to earnings' ratio.

Only the P/E ratio on a longer term will bring wisdom to those still seeking profits from the 50% of world military budget.

As Jesus once said: Those who live by the sword will get killed by the sword.

But Jesus, if only he knew about financial attacks to kill the sword... 

Till updates. 

(04 Nov 2008, second update) I am watching the US elections on CNN with utter amazement: The rows of people before they can make their vote are just so long... Can anybody explain to me the difference between a third world country and the USA?

I am now 45 years of age and voted in almost all elections since I was 18, the longest waiting line I can remember was six to seven people and I was annoyed at myself because I was so stupid to vote during lunch time... And I was annoyed because I had to wait a few minutes...

Compare this to the US of A: Many hours of waiting, voting is obliged otherwise you get a fine & most of all you can only choose between idiot number one and idiot number two.

Can anybody explain to me what this has to do with democracy?

Here in Holland voting is voluntary (the obligation was skipped somewhere after World War II or just before that). I can vote among a wide range of political parties, on the contrary the Americans are obliged to vote and can only choose between idiot number one and idiot number two...

Can anybody explain to me what this has to do with democracy?
Can anybody explain to me the difference between a third world country and the USA?

Till updates. 

(04 Nov 2008) Today the most expensive version of American idols is on the television all day long; costs only 1.5 billion US and that is about 500 million US$ more expensive as the elections in 2004.

I really did not feel like looking a two guys making idle promises all day long; the Republican candidate McCain thinks he doesn't need to raise taxes (well how to pay for the 850 billion US$ non working bailout program?) and the Democratic candidate thinks investing in stuff like infrastructure will do the trick.
Ok ok, any candidate that would simply tell the truth would never get elected; the American citizens have a strong tendency to want to live in some fairy tale version of economical realities...

So after waiting 16 years I picked up an old math subject about generalized multiplication in n-dimensional real spaces. Given the fact I picked this up after 16 years, it was amazing how easy it was to reconstruct the theory. I think it has never left my mind for real because large problems from 16 years ago melted away like the savings of the Americans.

I have a good introduction and already have a funny end with the best scientific bogus I have ever written. Not that the theory is bogus, no I consider it my best work. It is my best work because it borrows from almost all major fields in math, but the zero one project learns us that you must be able be have some 'relativity attitude' in order to get to your goals in a good health. As a comparison, the pi-radius work is only ranked at number three or below that.

If you click on the picture you get the best of my scientific bogus & before I forget it; I want to thank the Americans for making the LaTex package a free package for the international math society.

No, I am not sarcastic, the LaTex package often gives a lot of headaches but it's for free and may be the Americans should do that with some more stuff from the 'intellectual resources'. Here is the bogus:

Till updates, have a nice bogus life (read: be a banker) or try to get one... 

(03 Nov 2008) This day only a bit of math, on Barry's hangout there were five vids about fractals. Here is barry's source file. But when you try to play the video it says: You are not inside the US of A and so you cannot view the video.

This is a strange pattern observed; as far as memory serves it was the White House that did stuff like that for the first time (that is according to my memory) in the 2004 elections. Another example from this election is the IQ test that advocates John McCain has an IQ of 138, but when you click the advertisement it is again 'You are not inside the US of A so you cannot view this file'.

On the one hand you can argue this is only a manifestation of isolism that naturally comes with crises like this, on the other hand you can ask 'What the fuck is happening over there?'

Luckily the third comment of Barry's file says the next, quote:

If you are outside the US you can still view the fractals using VLC media player. Using the link below:
mms://pbs.wmod.llnwd.net/a1863/e1/general/windows/wgbh/nova/
fractals-3514-c01-350.wmv?v1st=8A9DD94AB38FD74&vsdomain=pbs

Change the part “c01″ to “c02″ and so on to view the next series  

Comment: On my computer system here in Europe you do not need the VLC media player, I used the Microsoft standard media player.

Here is some fractal picture and click on the number to get the video number:

I hope it works and you do not need weird players (although it is thoroughly advised never ever to use the Microsoft player as your default player!).

But this update was supposed to be about math and not upon isolism or your default player:

When I was a student I generalized the so called 'complex multiplication' as far as possible into all dimensions. It was a (relatively) great work; lots of isolated math studies like 'calculus' or 'system theory' were combined into a wonderful theory.
Anyway, I thought it was wonderful but the professors did not agree for a large part.

They were, just like me in the first three months of my study, only inside the fishbowl of the complex plane... 

Lets leave it with that. 

Have a nice US election day tomorrow or try to get one.  

(02 Nov 2008) Only one item and one link today.

Item 1) Prudent Bear guest commentary; the good stuff.
Link 1) More on chained dollars.

Item 1) Prudent Bear guest commentary; the good stuff.

I only did a little or financial news reading this weekend (because most things run the expected course) but on the Prudent Bear website the most significant news was found.

It was around the US 10 year CDS spread, for normal folks this means:
How expensive is it to insure the value of your US government bonds?
It is now 40 pips or 0.40% a year, the contracts are usually five years long so it costs now 2% of your investment in US government bonds to insure this against USA default for a period of five years...

Still bargain prices if you would ask me. 

Click on the next picture to get the graph a bit sharper: 

Lets do the math: 40 pips is 0.4% and as a number this is 0.004. Therefore the sellers of this insurance think that the USA only defaults every 250 years (this given the present turmoil). I only repeat: European pension funds should buy this while it is at such bargain prices.

Think for yourself: once in 250 years?????

For the rest, only a quote from the file (source):

This has perplexed, and even amused, some market observers. How, they ask, could a private sector contract against default be expected to pay out in the case of a US government default – which would be the equivalent of a nuclear explosion in the financial markets? So what’s the point of buying such a contract? 

Comment: For inside the USA it does not make much sense to buy stuff like this, for long term European pension funds it makes a lot of sense. Lets leave it with that.  

Link 1) More on chained dollars. 

In the chained dollars department there was a good link found (USA statistics of course):

Real Per Capita Disposable Income Biggest Drop Since 1949  

The link contains good info (another link), scroll down to line 37: 

Scroll down to line 37 

Till updates.  

(01 Nov 2008) As usual five items:

Item 1) New food: Mark 77 Fire Sauce.
Item 2) Hedge fund and pension fund hammering.
Item 3) More on the USA gross domestic product.
Item 4) Jesse still thinks the system can be saved with more debt.
Item 5) The empty item. 

Item 1) New food: Mark 77 Fire Sauce.

My dear Afghanis and most of all my dear Iraqis, I know I have been lax on my duties towards you. I am sorry for this, but the breaking down of funding for the US military goes so good that I mostly concentrate on that...

Here is only a third food thing named Mark 77 Fire Sauce, the fish soup and the other food items still have to be published & lets not rush and declare victory when in fact the US military is still alive...  

Most of all, the final calculations around the zero one project still have to be published. And since I hope that by now my fellow scientists know that I can craft good statistical tests, the zero one project will be taken a little bit more seriously... 

Item 2) Hedge fund and pension fund hammering.

From Pension Pulse we have two good links, one about hedge fund hammering and one about pension hammering: 

http://pensionpulse.blogspot.com/2008/10/closing-gates-of-hedge-hell.html  

http://pensionpulse.blogspot.com/2008/10/kaboom-pension-bombs-exploding.html  

No comment, have fun reading it. 

Item 3) More on the USA gross domestic product.

Two days ago I did some exotic attack on the US real domestic product and shaved about one trillion off that number. In case such stuff is too exotic for you, there is also more down to earth stuff.

Econ Browser analyzed the diverse components of the latest USA gross domestic product report & it looks that without US government spending things would be far more worse... Welcome to the United Socialists of America:

http://www.econbrowser.com/archives/2008/10/some_additional_1.html  

And from some Time web log we have:

The GDP report: Moderately bad, perhaps more than moderately misleading. 

Again no comment, use your own brain!  

Item 4) Jesse still thinks the system can be saved with more debt.

A lot of otherwise smart people think that when you borrow yourself into trouble, you can also borrow your way out of these troubles.

Yet the law of gravity forbids anti gravity, that is an elementary fact of live.

Beside Jesse also Barry still thinks the present system can survive & so I ponder if there is a flaw in my own thinking. I cannot find the flaw, I think that when you borrow yourself into troubles you can not borrow your way out but you have to work your way out...

After so many years of overspending, there will be years of underspending. If there still is some borrowing capacity left this only means the years of overspending are not entirely over. It' s all pretty simple...   

Here is what Jesse thinks: 

Avoiding a Great Depression: Rescue, Rebalance, Reform. 

Again, no comment.  

Item 5) The empty item.  

Today on CNN I viewed a report from a graveyard in Iraq. The CNN reporter told stuff like 'until now we could not visit a site like this because the security situation did not allow for this'.

This was a strange remark because so many years so many reports were there from 'embedded reporters'  from 'dangerous places'.

The report of this day only validates we could easily look at a so called 'excess death toll' inside Iraq of over one million. The US military has full responsibility for that because we all know the present US government is just a bunch of idiots.

The US military started to use Iraqis to kill Iraqis and the wisdom of that can be measured on the graveyards of Iraq.

The US military cannot hide behind her political leaders, the US military were the boots on the ground that did this. And they did nothing, just absolutely nothing to report to the White House what the consequences of followed policies were...

Lets hope this item is empty enough...

Till updates. 

(31 Oct 2008) With all this emotion in the air with all these declining stock market stuff, every body starts cherry picking data to proof his or her fabulous insight.

Let me do the same, it is just two hours after US market closure and here is my source file and here is my cherry picking:

-- The Dow fell for eight straight sessions -- the longest losing streak since the eight days of declines following the Sept. 11, 2001, terror attacks, when the blue chips lost 1,038.12, or 10.8 percent. It lost a staggering 2,400 points, or 22.1 percent.

-- The market's volatility was so intense that there were just three days during the month that the Dow didn't rise or fall in triple digits. The Dow set new records for one-day point gains, 936.42 and 889.35, and for one-day point losses, 777.68 and 733.08. 

Comment: Not bad, for the rest no comment. 

Till updates.  

(30 Oct 2008, item 3 is updated and corrected on 31 Oct) Today's five items: 

Item 1) New wallpaper made (1024 by 768 pixels).
Item 2) The Macro Man has absolute fantastic graphics.
Item 3) USA chained dollars gross domestic product: 11,720.0 million.
Item 4) The USA GDP deflator and conspiracy huggers.
Item 5) The empty item.

Item 1) New wallpaper made (1024 by 768 pixels).  

For many years I use wall papers from the Hubble space telescope, today I modified one of them. Here is the original: 

And this is the modification:

At http://hubblesite.org/gallery/wallpaper/ there are a lot more.
From the moral point of view you can use them because using them has no positive contribution to the nominal or real US gross domestic product...;) 

Item 2) The Macro Man has absolute fantastic graphics.  

On Seeking Alpha the Marco Man has absolutely fantastic graphics, in the picture below you see all daily returns from the DOW Jones (SA source). 

I hope you understand a 'return' of 0.1 refers to a 10% increase... You observe: Since 1995 the negative spikes are often larger than the positive spikes, if this goes for now the biggest declines still have to come!

Item 3) USA chained dollars gross domestic product: 11,720.0 million.

Today I wanted to start an investigation if indeed the USA deflator figures are understated yes or no. That is because a few days ago I wrote that the US gross domestic product could be overstated by as much as 10% & beside idle I have a habit of backing up my words.

Although I could find some data needed in this table oversight from the US Department of Commerce, Bureau of Economical Analysis, at first glimpse I could not find all the information I need.

But I found another 'cut the corner' table that gives a clue that indeed this structural overstatement of the US gross domestic product is there.

When you look at so called chained dollars you can craft the next table of the US gross domestic product in chained dollars:  

To be honest, I never heard of chained dollars, here is a definition that explains the word 'chain' but technical details lack.

11720 / 9695.6 = 1.2088 hence 20.88% GDP growth in 8.5 years.

Thus a yearly 'chained' GDP growth of 1.2088^(1/8.5) = 2.26%.

That is not very much, but the US Department of Commerce introduced it herself to let 'changes in the purchasing power of the dollar' out.

Good stuff isn't it? Because 2.26% is beyond the long term GDP growth since we left the golden standard and started hugging fiat money...

Begin: Update & correction from 31 Oct 2008.

Yesterday I made a gigantic mistake, I was thinking that 'US dollar purchase power' contributed to stuff like the US dollar index and this was utterly wrong.

It seems that this dollar chain thing is only an inflation thing, it has nothing to do with global purchasing power of the US$ but only a local (inside the USA) thing. The 'chaining technique' is not relevant, just like their are many ways to construct a price index there are many ways to calculate the present GDP in 'year 2000 dollars'.

So the present USA GDP of over 14 trillion US$ is only 11.72 trillion in 'chained dollars' And when using this real USA GDP growth over the last 8.5 years was only 2.26% a year...

The problem remains the same: Can I shoot a 5 to 10% hole in the 11.72 trillion?

Of course I can, as a matter of fact it is a cakewalk.

<Begin: Cakewalk.

As the Americans are experiencing; the costs of living in your house can be a large part of your budget. And if these costs climb wouldn't it be nice if that would be reflected in the consumer price indices?

As a matter of fact the costs of living in your house is nicely kept out of the inflation numbers; all those years house prices went through the roof so called 'consumer inflation' was artificially low. This was handy for the US government so they could keep the rates on debt too low for too long.

The US government uses so called 'rental equivalence' to measure the cost of living in a house, they do this because using rental equivalence differentiates between the 'true costs' and your 'investment component' on paying the mortgage.

There is only a little problem: On average you folks only live about seven years in a new home and given the present decades of mortgage payments your 'investment component' is rather neglectable. (Only in the last seven years of your mortgage payments you make significant 'investment components').

To make a long story short: You were fooled all those years when house prices climbed too fast and credit was too cheap. Housing is a large part of consumer payments and all those years the deflator was too low.

Hence from the reported so called 'real US gross domestic product' we can easily withdraw another trillion to arrive at something like 10+ trillion in so called 'year 2000 dollars'. 

End: Cakewalk> 

End: Update & correction from 31 Oct 2008.  

Item 4) The USA GDP deflator and conspiracy huggers.

One of the strange characteristics of the US society is that when you doubt some generally accepted things, you are suddenly a 'conspiracy seeker'. Instead of going into a debate and look at arguments pro and contra, you are suddenly a 'conspiracy seeker'.

There are some roots to this, remember the Iran contra scandal under Ronald Reagan? Folks who tried to expose reality were of course only 'conspiracy seekers'.

But let not loose ourselves in old history; Barry was complaining that rising oil prices (from imported oil) brought down the deflator and thus the GDP was propped up by this.
Barry had a good point in this because the Americans do not hug the real GDP but it's (price) inflated version.

Here is some of the conspiracy feeders critique (source)     

Over at the Big Picture, Barry Ritholtz has been constantly complaining that the GDP deflator is underestimating inflation. Well I’m not particularly surprised since the GDP deflator does not measure inflation persee.

His specific concern is that the rising oil prices have decreased the GDP deflator - he thinks this is ridiculous, however, if we are willing to stop being conspiracy theorists for a little while we will see that it is fine.


GDP=Consumption + Investment + Government Spending + Exports - Imports

As a result, if the volume of everything was unchanged (such that real GDP was unchanged) but import prices rose, nominal GDP would fall. As a result, rising import prices lower the GDP deflator (as this is what is used to adjust the nominal figure to a real figure). Since oil is imported, and since the imported price went up a lot over the June quarter, this drove the GDP deflator down.

Real GDP is a measurement of the volume of production in the economy, which is why this makes sense. 

Comment: It also makes sense that when prices go up, sold volumes go down. Imported or locally produced does not make much of a difference I guess. So the example given (leaving all other changes out beside oil prices) is rather dumb: it works only with small changes if and only if these small changes can be borrowed...
One way or the other the extra money needed for oil cannot be spend on other items. 
Matter of fact is there is a whole range of problems with the official US statistics and they have nothing to do with conspiracy but with people not understanding their core business.
Just like insurance company AIG did not understand her own core business (insuring risk)... 

Item 5) The empty item. 

Empty empty empty & more of that vacuum cleaner stuff; think for yourself!  

Till updates. 

(29 Oct 2008) Just a lazy update today, a few links and a short reflection on the Federal Reserve rate decision from today.

Four days ago I posted an update around a guy named Nassim (Nassim and me have strong correlation in the way to view financial risks) and my colleague in math Benoit Mandelbrot. There seems to be a video of the conversation I quoted from, I hope this link works:

http://www.pbs.org/newshour/video/module.html?mod=0&pkg=21102008&seg=5  

And if that does not work you can try:

http://bigpicture.typepad.com/comments/2008/10/pbs-video-taleb.html   

Most other financial weblogs of importance already linked to it, but for reasons of being complete let me quote some fun (Bloomberg source): 

``This year's financing needs will be unprecedented,'' said Anthony Ryan, the Treasury's acting undersecretary for domestic finance, at a Securities Industry and Financial Markets Association conference in New York, where he was a last-minute substitute for Treasury Secretary Henry Paulson. 

Comment: Indeed from a macro economical point of view this is very interesting because even without 700 billion bailout programs it was already doubted that the USA could pay back her debt, let it be local or foreign debt. 

 __________________________

Now a short reflection about the US Federal Reserve rate decision (50 basis points down to 1% & this is viewed as 'aggressive).

Begin intellectual reflection.

A few months ago the worlds Central Bankers gathered in Basel and one of the more important statements was that 'from now on even in economical prosperous times interest rates should be higher to avoid another round of this present chaos'.

There he was sitting: The idiot Bernanke, no sweat always mister cool. He 'agreed' to that insight too.

And so the first thing the FED does is lowering and lowering, this is a first solid clue the USA will not oblige her future payments on US government bonds.
That is only lesson number one we can draw from this rate cut.   

Lesson number two is a future lesson:

When given the choice between funding the US military and paying her international debt off, the USA will always choose for funding the US military.

If you don't believe me, why don't you start a study of murder rates in the USA? Historically they are five fold compared to normal democracies, if you do a bit of deep thinking and connect the dots there will be only one conclusion left:

Country first & military first...

And dumb Central Banks like those in China or Japan will take heavy losses and say 'This was not foreseen by all experts'.

End intellectual reflection. 

 Title: The Americans are so easy to understand:
Dumb, fat & obese, hautain & arrogant.

At last don't forget there are a whole lot of dumb Central Banks around that give away their reserves in exchange for US dollars, here is a Yahoo link:

Fed announces new credit lines with foreign banks  

Till updates. 

(28 Oct 2008, second update) Now in effect former Federal chairman Alan Greenspan is trashed, it is time to move on and trash the battalions of debt hugging USA economists. Let me first give you some workable definition of a trashable debt hugging economist:

This is a person who sees no problem when debt levels blow up exponentially at a higher rate than the gross domestic product.

In general these are folks who borrow a lot of their thinking from economic theories from the old days of the golden standard where the total global gold reserves served as a natural ceiling for too high debt levels.

The USA economist I have to trash today is James Galbraith (found via Barry's hangout; source). I could write a complete book about why this guy is wrong in almost every detail so I only highlight one:

Somewhere in the video James Galbraith states that in the USA they have social security and that for about 40% of the elderly this is their only source of income.

Debt hugger James Galbraith forgets to mention that these social security funds only contain Treasuries, the money collected in the past is long long gone on weird stuff like wars or outbailing banks. Debt hugger James Galbraith thinks that the rest of the world is a piggy bank for the USA, but James why should we borrow you folks more money when you have already the most 'vibrant economy' around?

Seldom you see so many economical nonsense as in the next video:

http://www.pbs.org/moyers/journal/10242008/watch2.html  

Till updates.       

(28 Oct 2008) Items here, item there, items that are everywhere:

Item 1) Case Shiller fun fun fun!
Item 2) Porsche & VW do some good hedge fund ramming.
Item 3) The Upas tree kills everything in a 15 mile radius.
Item 4) For the first time in history: S&P down in a 10 year period.
Item 5) The empty item.

Item 1) Case Shiller fun fun fun!

This day we had the latest Case Shiller housing index out, compared to the official Federal statistics this index is always some good cool aid. Here is the fun:

You see the year on year speed is still growing; when this speed does not grow any longer the fall in house prices is halfway.

Until now US family home house prices have fallen only 19.5% (source), from the top level mid 2006 they will fall another 30% until long term affordability is restored again. So from the present prices another 37 to 38% decline looks logical.

In terms of lost housing value; the 19.5% decline equate to about 4 to 4.5 trillion US$ lost, together with the losses on the stock markets we are looking at about 7 trillion US$ combined in lost value from the unbubbling fun...

Future losses in home equity could reach another 9 trillion US$ more, you see it is 'fun fun fun' over here. 

Item 2) Porsche & VW do some good hedge fund ramming.

In Germany today the stock value of car producer VW almost doubled, hedge funds and the like had borrowed about 12% of total market cap of VW so they could go short on that stock. Hedge funds borrow from example from pension funds, the pension funds get some money for that so these pension fund index investors can always (miracle miracle) show above index performances.

This day it went all a bit different because Porsche decided to use her options on VW and the hedge funds found themselves in the next funny position: They had borrowed VW stock, they went short for the day and suddenly had to buy more to keep the losses under control.

The move was so massive that VW became the largest market cap in the world; that must have beaten some of those hedge funds...;)   

Here is a market watch source. 

Item 3) The Upas tree kills everything in a 15 mile radius.

On the weblog naked capitalism there was a link to the New Scientist with

Seven of the greatest scientific hoaxes   

A very good hoax was 'quantum gravity is a social and linguistic construct' but the most funny scientific hoax was the Upas tree that was supposed to kill all and everything in a 15 mile radius... (Source) quote:

An account was published in the London Magazine in 1783 by a Dutch surgeon named Foersch (his initials were variously given as NP and JN). It claimed the existence of a tree on the island of Java so poisonous that it killed everything within a 15-mile radius. 

Comment: That's a nasty tree! But when you substitute 'bank' for 'tree' it could be true, some banks can create so much unpaid debt that entire economies are killed. That is simply what you get when you use economical insight from the debt huggers from the USA.

Item 4) For the first time in history: S&P down in a 10 year period.

For the last item to be published I waited until the US stock markets were closed.
I waited because it was clear that the obese not understanding economics stock traders from the DOW, Nasdaq and S & P 500 were busy doing a thing called 'staging a rally'.

When you ask one of those dumb obese 'professional' stock traders how the economy is doing you will rather likely get an answer like 'We staged a rally today so the economy is doing fine'.

As a matter of fact a broad stock value measure like the Standard & Poors 500 is down on a decade long scale and this is the first time ever that this happened.

S&P rallied over 9% today, this on only negative news...
It looks like the USA folks have some 'emotional issues' with the declining stock values, oh oh those poor fatbags. 

Of course news like that never makes it to the front pages of the main stream media, main stream always has a bias to concentrate on the positive side of the story (we must not talk ourselves into a recession). In the picture below you see that in fact the NightmareOnWallStreet rules and not these obese not understanding economy Wall Street stock traders. Click on the picture for a bigger version or check the yahoo source file.

Item 5) The empty item. 

As usual the empty item, use your own brain (Wall Street traders are always advised to take enough pain killers before they try to think for themselves). 

Till updates.

(27 Oct 2008) Today only two items: We take another look at US house prices and volumes sold and inside military thinking we take a look at four US helicopters bringing death inside Syria.

Item 1) House prices and volumes sold.

This day there was a lot of news about US homes sales that were 'unexpected' up 2.7% and thus we had all the ingredients for a nice DOW rally.

Here you have one of those Ass Press files:

New home sales post unexpected increase as prices fall to lowest level in 4 years

Even the local journalists from the RTL7 channel brought in wisdom like 'unexpected the sales went up'. It has to be remarked that a lot of those RTL7 journalists have in fact a degree in economical science...

I do not know if they got their degree at a local university or got it for 49.95 € at some website but RTL7 keeps on telling crap where science should prevail.

Therefore I advice the RTL7 team to look at a few links and a graph from those links, if they do not do this and prefer to keep their idiotery a bit longer they will get some severe punishment in the future.

Here we go my dear but stupid RTL7 team:

When studying prices and volumes sold in economical science it could be handy if you have some handle on so called 'seasonal components'. It is clear the RTL7 journalists do not understand the pricing and volumes sold after more then two years into the US housing crisis.  

Let me give the stupid RTL7 journalists only one graph and after that only a few links & please let me hope here in Holland we have some better brains to rule the place... 

The graph showed above was found via Barry and his source link is very much worth reading: 

http://calculatedrisk.blogspot.com/2008/10/september-new-home-sales-lowest.html   

Item 2) Some military thinking. 

The news from Syria is so strange to me: For the last year the US military has extreme low death toll compared to the entire war and compared to the 'zero one project' (that killed US military slime in a nice three digit fashion for three months on a row).

The news is so strange because the US enjoying such low casualties numbers inside Iraq, why fly out to Syria with the object of killing civilians?

Don't forget, one of the 'anonymous sources' from the US military stated 'There is no need to hide amongst innocents, we will find you'. (No source file because I got angry.)

Why fly with attack machines to Syria to fulfill your groupthink of reality?

And kill children under the rather weird axiom of 'You cannot hide among innocents'?

In order to expose the US military fine crafted qualities of targeting the enemy, let me  (Ass Press source) quote:

The raid Sunday targeted the home of Abu Ghadiyah, the nickname for the leader of a key cell of foreign fighters in Iraq, according to the U.S. official, who spoke on condition of anonymity to discuss sensitive intelligence. The U.S. Treasury Department has identified him as one of four major figures in al-Qaida's Iraq wing who were living in Syria. 

Comment: I am not an expert inside international law, but after my humble opinion every house of every military member of the US military is easy cake. When the US military can kill children inside Syria from the decade long stuff counties like Iraq and Afghanistan can do the same thing... 

Only very seldom you observe a military action as stupid as this Syrian joke. 

Till updates. 

(26 Oct 2008) The previous update was also updated: for the first time in this credit crisis there are some details that I do not understand at all, so please read that too!

For the rest: As usual five items as I found them to have some interest:

Item 1) From immobilienblasen: Volvo sales a bit down.
Item 2) Real reserves US commercial banks: minus 362550 million US$.
Item 3) Guest commentary Prudent Bear: Real interest rates.
Item 4) Is there a new bank regulator in town?
Item 5) As usual the empty item. 

Item 1) From immobilienblasen: Volvo sales a bit down.

This weblog has a fascinating name; may be at one point in time in the future I can ask a German female the next: Kannst du mir immobiel blasen?

But all madness on a stick, here is the (source) quote:

Volvo said it received 115 order bookings for heavy trucks in Europe in the quarter, down from 41,970 trucks a year earlier. Customers in Europe are taking a ``wait and see'' attitude amid turmoil in global financial markets, Volvo said. 

Comment: If this figure is correct it is clear the the European economy will get a lot more very hard hits. Please recall that when I declared economical sanctions on the USA back in 2004, everybody thought I was crazy.

But if these economical sanctions were carefully implemented since then, we would not have all these shells shocks from the present days.
So Volvo & Swedish government, let this be a good lesson for you:
Never ignore wise advice...
What are you saying, I cannot hear you...? Oh you did not understand why it was wise??? Sorry, that is your problem and not mine!  

Item 2) Real reserves US commercial banks: minus 362550 million US$.

I have been lax on my duties following the combined 'non borrowed reserves' of the US commercial banks. For years and years the real reserves stood at +40 billion but in this financial universe where elephants still can fly, the real reserves are now minus 363 billion.

That is about ten times lower compared to what it was all those years; this implies the US Federal Reserve has about 400 billion US$ in garbage collateral on her balances only in relation with the money auctions.

Seldom the Almighty was so harsh for a bunch of obese corrupt people, sorry it is not me but it is the Almighty who shows America what she is: 363 billion negative real reserves...    

Here is the link, look in the third column and scroll down to 22 Oct:

http://www.federalreserve.gov/releases/h3/Current/   

Item 3) Guest commentary Prudent Bear: Real interest rates.

To me the info found at the guest commentary was completely new, although I expected the US Treasuries (the government bonds) to turn to worthless pieces of paper in the future, until now this was only a 'gut feeling' of me.

Therefore to my surprise this was a common trait among all large economic declines, it is nice to observe that my 'estimated guesses' often turn out to be true...  

http://www.prudentbear.com/index.php/commentary/guestcommentary?art_id=10141  

Scroll down to the easy to understand graphs... 

Item 4) Is there a new bank regulator in town?

The political leaders of a lot of nations will gather mid November for a weekend to put forward a common strategy for the present crisis. Of course this will not help one quantum because the USA will insist, as usual, on her 'leadership role'.

Of course when they have that leadership role, as usual, nothing will happen.
It will take some more years for the Americans to loose their arrogance and for the other nations it will take even longer before they arrive at the conclusion humanity is served best by imposing economic and financial sanctions against the USA.

For example: Now the US dollar is artificially high because of the unwinding of the carry trades, for China this is simply the best time to get rid of all those US Treasuries. In the future they will be rather worthless, now will China do this?
Of course they won't because they lack all kinds of insight into how 'financial stuff works'. Mark my words: China will not unload even now there are trillions in unsold US Treasuries...

But I have done my stinking best in finding a new international regulator, I have done lots of prayers and I asked the Almighty what would be best to preserve a system where the rich get richer every year, the poor poorer every year. I asked the Almighty what would be best to preserve a financial system where rich folks can speculate on food markets to make more money and poor folks understand far better what it means to be poor.

The Almighty, wise as the Almighty is, guided my hand to the next international regulator. Isn't she cute? She has it all, if she can tame double headed dragons she can also tame banks with official balances and 'off balance' items.

If this dragon chick cannot pull it off, in that case not only the financial sector is doomed but the entire future existence of humanity is at stake! Really true...;)

Item 5) As usual the empty item.  

This is the empty item so use your own brain: Do we need to kill most of the rich people because they leaded us into this situation? Should we keep on worshipping the rich or is it better to kill a lot of them?

In Zimbabwe the killing was executed rather stupid...

Arguments pro and contra please but my vote goes to some smart killings! 

Till updates.

(25 Oct 2008, updated 26 Oct) Lets suppose that yesterday's graph from Jesse is in fact correct, what can cause such a large spike in failed US Treasury settlement failures?

Don't forget, for the time being this is pure speculation but when a trader from a bank or whatever financial firm makes such a fake sell of lets say 10 million US$ in US treasuries, in that case the 10 million are instantly reported on the daily balances (the trading books). If some time later the sell does not go through, the 10 million is withdrawn again (but of course another trader or the same one has already sold another batch of non existent treasuries).

This all could be a vehicle in artificially pumping up the trading books...
If the above speculation is true, it makes a lot of sense.

There is another reason why Jesse could be in the right, he places the following link rather prominent on his weblog:

http://www.pbs.org/newshour/bb/business/july-dec08/psolman_10-21.html  

There you can find a discussion with Taleb and colleague in math Benoit Mandelbrot. The ideas they unfold are like hand in glove with mine although I crafted the stuff at first inside military thinking.

In military thinking it amounts to that when during war you must never apply all the military recourses you have because otherwise you cannot accelerate when needed. During war it is important that you can decellerate and accelerate.

In April / May / June 2007 the so called 'zero one project' was executed in Iraq, these were the three most bloody months for that US military slime. Lets quote the fun once more:

These were the three most bloody months for the US military, but this could only be achieved because we had so called 'zero days' when killed US slime was supposed to be under the average and 'one days' where this was supposed to be above average.
In practice (to make it workable for the Iraqis) we had stuff like seven consecutive 'zero days' followed by ten 'one days'. Very simple...

The military model is the same in for example the banking industry or government finances, only there you have to have enough reserves in the system to make it stable and healthy for the long run. The savings (the reserves) compare to the 'zero days' and increase in debt amounts to the 'one days'.

It's a very universal model, no wonder a lot of other folks have found it too...

So not the USA government, but this is not a miracle since corruption is deeply rooted in the USA (elementary examples are the earmarks in the law crafting process and the power of the lobbyists). From history we know that corrupt regimes always under perform and always lead their societies into the void.  

Lets give some nice quotes from the article mentioned above:

PAUL SOLMAN: Taleb's book, published in April 2007, was called "The Black Swan" because, in 1697, Dutch explorers discovered Australia and black swans. 

Comment: This is new to me, I did not know my fellow countrymen discovered black swans. Beside this it is rather likely the local Australian aboriginals discovered them thousands of years before... 

NASSIM NICHOLAS TALEB: Let me tell you why it's not like before. Look at what's happening. The world is getting so fragile that a small shortage of oil -- small -- can lead to the price going from $25 to $150. 

Comment: This is true but in oil there were always plenty of reserves, the problem there was that stocks did not perform enough for the fast return seeking hedge funds. Lets kill the hedge funds & lets kill the rich people who leveraged the entire economy up so much. Only after some serious killing the healing can start, why let these criminals get away with it? 

BENOIT MANDELBROT: That is not well-understood. In fact, that is misunderstood for which tools have been developed which assume that changes are always very small. 

Comment: May I thank my colleague Benoit for ramming a full fist in the heads of the risk departments of the banks?

NASSIM NICHOLAS TALEB: Now you understand why I'm worried. I hope I'm wrong. I wake up every morning -- actually, I don't wake up every morning now. I start to wake up at night the last couple of weeks hoping that I'm wrong, begging to be wrong. 

Comment: Sometimes when I go to bed a bit late, I feel obliged to wake up early and check if stock values have 'declined enough'. Don't be afraid for a complete system crash my dear Nassim, there is plenty of intellectual capital around to craft a better banking system.
The present system is doomed anyway so why worry about that?
Better look for a way out, like I did years ago when I informed my readers that a new 'golden standard' is not wise and currencies should be tied to a labor standard. It has all kinds of benefits, like for example in the USA declining obesity rates... 

Once more the Jesse graph: 

Update from 26 Oct:

On Bloomberg I found an article that also goes around this topic of settlement failures, let me (Bloomberg source) quote:

Failures, an indication of scarcity, jumped about 35 percent to $4.79 trillion in the week ended Oct. 1, according to data on the Federal Reserve Bank of New York's Web site. Fails averaged about $185 billion a week since July 1990. 

Comment: These are absolutely staggering numbers given the fact that the 'official Federal deficit is only about 10 trillion US$. This is the first time in the credit crisis I simply do not understand what is happening; Where the hell is the price elasticity on US Treasuries? If these numbers of settlement failures are in fact correct in that case the price of that stuff should go through the roof... 

Till updates. 

(24 Oct 2008) We had good market action today on the stock markets but sometimes it is wise to keep an eye on the bond markets.

The most weird news I found today is also the most important news in case it is true.
Is it true that 2.29 trillion US$ in US government bonds are sold short and the seller cannot deliver?

Yes think about that... Could such a weird proposition be true?

At the moment of writing it was just over 30 minutes ago when I came across a weblog named Jesse's Café Américan and he had that strange statistic upon failed US Treasury deliveries. I don't know how reliable Jesse is but he claims to be tracking stuff like this since he started tracking this on a weekly basis since 2003, so for the time being I give him the benefit of the doubt.

For the time being I only post what I found at Jesse's hangout and you are allowed to do your own thinking on this. Here is the basic graph with US Treasuries failed deliveries:

The graph does not say what the 'unit' is so Jesse does not have an education in math and statistic; please always report what the unit on the Y-axis is...
But it seems to be 'millions of US$' reported in failure on the Y-axis.

Here are a few source links:

A Record Number of Buyers Cannot Take Delivery of the US Treasuries that They 'Own' 

And from 10 Oct:

Stand and Deliver - Significant Fails in the US Treasury Market  

Luckily today I can also unveil the third reason why I support the McCain / Palin ticket to the White House. The picture below says it all, why do difficult things with 'international diplomacy' when you can get a chick like this at the helm of the US military?

Till updates.

(23 Oct 2008) Boring things continue:

Item 1) Why the USA will never ever enter a depression...
Item 2) A bit more on the Value at Risk model.
Item 3) Greenspan, conondrum and a 'once a 100 year' problem.
Item 4) Another good intraday swing.
Item 5) The empty item. 

Item 1) Why the USA will never ever enter a depression...

The USA will never ever enter a depression, not even a small one. You might think this is a proposition that cannot be valid; in the past at least once the USA had a serious depression.

The answer is very simple: The US government has so called 'official statistics' and these official statistics are so good, they will prevent all depressions and even a lot of recessions!

Don't believe me? Let me back it up with a little quote (Bloomberg source):

Home prices dropped 5.9 percent from a year earlier, the biggest decline since 1991, when the Federal Housing Finance Agency data starts. Foreclosure filings increased 71 percent in the third quarter from a year earlier, according to Irvine, California-based RealtyTrac, a seller of foreclosure data. 

Comment: Do the free market data with foreclosures up 71% while we know that foreclosures are a large part of houses bought contradict or validate the 5.9% of the FHFA? Of course the Federal data are to be doubted.
Same goes for the Federal reported US gross domestic product, I cannot proof this because I lack a long list of deflator figures and compare these to reported inflation figures but my gut feeling says that over the last decade the combined reports of US GDP could be overstated as much as 10%...

Item 2) A bit more on the Value at Risk model.

Here is a Working paper from 2002 about the Value at Risk model:

http://129.3.20.41/eps/mhet/papers/0207/0207001.pdf   

On page 24 you can find a 'third problem' with the Value at Risk model from former investment bank JP Morgan, quote:

Consider a situation when volatilities rise and there are some trading losses. VaR’s would be higher and tolerances for risk would likely be lower. For an individual firm, it would appear reasonable to reduce trading positions; however, if everybody were to act similarly, it would put pressure on their common trading positions.

Comment: There are a lot of reasons why the VaR model should be only one of the tools in the toolbox and there are a lot of reasons why this is more or less the only tool in it.
Let me give you some statistics from when I was a student: I started with more or less 50 other students in the first year of math, computer science had about 60 and after one or two years about 50 to 60% of those students were gone because the education path was too rough for them.
The faculty of economics easily got 500 students a year but you never did see only 250 survive after one or two years. In those long lost years it was rather clear to me: the economy folks are not a real science, they do it for the money...
Bankers are recruited from economical or financial faculties, input from real brains is never very much accepted by those commercial economical guys.
To make matters worse, people with a law study often take pride in not understanding math (the never be a nerd syndrome).  

Item 3) Greenspan, conondrum and a 'once a 100 year' problem.

Some years ago the former chairman to the US Federal Reserve has some weird problem; it was the conondrum thing (my spell checker says it is conundrum, so ok ok).

The conundrum was very simple: Long term rates on the free markets were below the short term rates set by monsieur Greenspan.

Nobody sounded the alarm, all other Central Banks kept their mouth shut and this only proofs: We are ruled by idiots.

These days the financial journalists from the television follow daily / monthly / etc so called LIBOR / Euribor / HIBOR rates to see if they are coming down and if they come down a bit this is 'proof' that the measures of our leaders are working...   

After my humble opinion these are all idiots in a fishbowl.

Let me quote a bit of the stuff Alan Greenspan debited today (source) quote:

Despite concerns he had in 2005 that risks were being underestimated by investors, "this crisis, however, has turned out to be much broader than anything I could have imagined," Greenspan said in remarks prepared for delivery to the House of Representatives Committee on Oversight and Government Reform.

"Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity -- myself especially -- are in a state of shocked disbelief," said Greenspan, who stepped down from the Fed in 2006. 

Comment: In the face of so much wisdom I have no comment.

Greenspan thinks this credit crisis is a 'one in a 100 year event' and this is plain stupid of course. But the google news search pops nothing up when I search for 'greenspan 100 year'; the financial journalists still are journalists and not very 'financial' I just guess. 

Item 4) Another good intraday swing.

In the picture below you see some good intraday swing on the DOW Jones index, the swing is above 500 and below 600 and all I want is to observe swings above 10% of this index.

That would be some real testing if the US economy is in fact a vital and vibrant economy or a thing that is classified as a Ponzi scheme where everything is centered around 'can we get more credit'. To put it simple: I would like larger intraday swings...

 Item 5) The empty item.  

Pure emptiness around here: Use the thing behind your eyes and between your ears and try to think for yourself! 

Till updates.

(22 Oct 2008) Sorry, more boring items:

Item 1) More on the Lehman CDS & the Value at Risk model.
Item 2) The Californian economy.
Item 3) Al Qaida backing the McCain / Palin ticket?
Item 4) Non financial news: a fractal drawn by a child.
Item 5) The empty item. 

Item 1) More on the Lehman CDS & the Value at Risk model.

Yesterday some so called 'experts' would like us to believe that almost all of the 300 to 400 billion US$ CDS contracts canceled each other out and there would be only about 6 to 8 billion US$ actually change hands. The rationale was that some companies not only bought that stuff but also sold it.

What I forgot to mention yesterday is that Lehman had about 140 billion US$ in bonds outstanding and that it is hard to believe that only 8 billion of those bond were covered by credit default swap insurance. Conclusion: Very likely it is much much larger than the reported 8 billion US$.  

__________________________ 

In another development I learned of the existence of a company named the Risk Metric Group, it seems they sell software that is used by a lot of risk departments in the banks. I was curious if I could chop up their risk models just like the option price model lately. But since it is a stock listed company there are so many thousands of web pages about that company that I gave up for the time being.

Then I came across a nice Seeking Alpha article with the title:

How Good are RiskMetrics' Tools? 

There was a very funny quote found about insuring sub prime mortgage debt from the USA, quote:

Most educated investors know about the details of the Paramax/UBS lawsuit - where UBS “insured” $1.3 billion in sub-prime loans for a premium of 0.155% per year. That is a premium of $1.55 million a year for a notional value of $1.3 billion. In fact, the numbers are in-line with actuarial numbers for insuring a house against the possibility of destruction from earthquake - but that has a 15% deductible. In the world of CDS’s, there are no deductibles. The insurer pays for all losses - including those from “markdowns”. 

Comment: This is sheer unbelievable, it might have been she 'super senior' tranche of that pile of sub prime garbage... But only 1.55 million a year to insure on 1.3 billion???  

The Paramax / UBS lawsuit is also funny reading from a very strange financial planet. 

__________________________ 

Item 2) The Californian economy.

The Californian economy is of interest because it is an area where the house prices went through the roof and as so serves as an example for what will happen in the rest of the country. (Both climbing and decline happened early there.)

Here is the Seeking Alpha source file:

Is California's Economy Sending a Warning Signal?  

Just some funny quotes:

Last week, I talked to a London-based investment banker who is convinced that many senior bank officials do not understand their own “financial instruments.” Not just why they failed, by how they worked in the first place. 

Comment: As we have for example the Value at Risk model   :)  

And what to think of:

If you live in a $2,000,000 mansion, typically you are cushioned from the worst type of financial devastation. However, the “cushion” is likely the equity in your home and stocks. When these both lose 50% of their value and you’re in debt up to your eyeballs – a few missed payments –suddenly the bank owns your house.  

Comment: A lot of scientists say there have been dozens and dozens of credit crisis / housing bubbles / stock market bubbles and so there is no real problem because a few years later every thing is back on track...
They miss the point that because of the debt hugging culture in the USA and the Federal Reserve policies from the past we have at least 3 bubbles going 'back to normal'. Don't you think there are at least 3 bubbles? You can choose from:

1) Housing prices.
2) Stock prices.
3) Credit prices.
4) US government bond prices.

If my insights in financial / psychology matters are correct, somewhere down the timeline foreigners (but also US citizens) will come to realize the true value of the US government bonds... Will taxes be raised to pay them off? Of course not. 

__________________________ 

Item 3) Al Qaida backing the McCain / Palin ticket?

I am glad that my support for the White House Presidential ticket for McCain / Palin has not fallen on deaf ears. Lets first quote the fun and later discuss if we need a 'Spanish election' yes or no.

Here is the Breitbart source file:  

Al-Qaida-linked Web site backs McCain as president 

The message, posted Monday on the password-protected al-Hesbah Web site, said if al-Qaida wants to exhaust the United States militarily and economically, "impetuous" Republican presidential candidate Sen. John McCain is the better choice because he is more likely to continue the wars in Iraq and Afghanistan. 

"This requires presence of an impetuous American leader such as McCain, who pledged to continue the war till the last American soldier," the message said. "Then, al-Qaida will have to support McCain in the coming elections so that he continues the failing march of his predecessor, Bush." 

SITE Intelligence Group, based in Bethesda, Md., monitors the Web site and translated the message. 

"If al-Qaida carries out a big operation against American interests," the message said, "this act will be support of McCain because it will push the Americans deliberately to vote for McCain so that he takes revenge for them against al-Qaida. Al-Qaida then will succeed in exhausting America till its last year in it." 

Comment: Very likely this is true; a large enough attack will draw the obese and stupid US voter population towards McCain. When you study McCain you understand he thinks America owns the places known as Iraq and Afghanistan.
From the military point of view it makes much sense to push for another Republican Presidency, from Spain we know that about 200 dead civilians give rise to about 10% in voter swing. If an attack is pulled it has to be bigger than the Madrid bombings...
From the economical point of view it does not make much of a difference who will be the US President, both parties lack all kinds of insight and think more debt via 'economy stimulus packages' will do the trick.
From the moral point of view the USA also deserve another attack, simply the enormous amount of dead civilians in Iraq serves as a moral guide because the Americans were very efficient in wiping out all discussion on the numbers reported but they forget there is a big memory. And this memory are the combined graveyards of Iraq where the simple truth can be found...   

Lets make a second quote:

SITE senior analyst Adam Raisman said this message caught SITE's attention because there has been little other chatter on the forums about the U.S. election. 

SITE was struck by the message's detailed analysis—and apparent jubilation—about American financial woes. 

"What we try to do is get the pulse of the jihadist community," Raisman said. "And it's about the financial crisis." 

Comment: Once more we see how far all these experts are drown in their little version of reality. My dear Adam Raisman I searched for about half an hour to a letter that I wrote to al Qaida International about 4 or 5 months before the Spanish elections and one of the elements of that letter was that I lacked insight in what about exactly would happen if there was an attack just before some elections.
To be precise: it were the American elections. I am sorry I cannot back this up because as a scientist I think people should always back up what they say.
And to SITE senior 'analyst' Adam Raisman I can say: Want to bet no terror investigating group visits this website? All their website activities are logged and no employee wants to have 'kinkytshirts' in his or her files...
You must understand the full picture Adam: Military / psychology / economy / terror /politics / employee...

How did the average 'terror expert' react after the Madrid train bombings when asked if this may be could have anything to do with the elections? The so called experts raged that these evil people are to dumb for that...   

Hey Adam, who is the dummie now? 

__________________________ 

Item 4) Non financial news: a fractal drawn by a child.

When, beside giving advice to al Qaida International, you also have to raise a few of that stuff known as children you can do all kinds of stuff. Unlucky for some kids there will always be parents who lack elementary insight and use bamboo sticks or even baseball bats to ram some wisdom in.

I think I was lucky because my mother was a nurse...

But lets not talk about me, you can give kids rather complicated tasks if they feel secure and do not need a nurse every now and then. Only in security the mind will grow so I am pleased to put forward a nice drawing from a long time ago: 

Not bad, the age of the kids is still written in single digit numbers but the foundation for taking it to the limit is already there. 

__________________________ 

Item 5) The empty item.  

Sometimes I wonder what American parents teach their kids, after all compared to a normal democracy their murder rates and incest rates are always five fold larger...

I hope this item is empty enough for the obese fatbag arrogant slimy Americans!

Till updates. 

(21 Oct 2008) I am still waiting upon the results of the Lehman CDS party, the most meaningful quote on this detail was found today on the Asia Times Online (source), quote:

The Depository Trust and Clearing Corporation, which clears the vast majority of trades in the US over-the-counter market, said this month only $6 billion may actually change hands, Reuters reported early on Tuesday. This is because large players in the market, such as dealers and some hedge funds, have both bought and sold protection, subsequently taking both gains and losses on Lehman's default that will offset each other, the report said. 

Comment: The most mentioned number now is 360 billion US$ in outstanding principal value. Of course in theory it is possible that large players who sold too much Lehamn CDS stuff also bought extra to compensate for the risk. In theory it is possible that those who bought too much insurance, sell CDS because suddenly they became risk seekers...
So it is not impossible that the reported 6 to 8 billion US$ actually changing hands is true, but it is not very likely. 

Later I found the sad news that we have to wait a long time before the results for the Lehman party are out (Reuters source), quote:

But experts say the fears were exaggerated and in any case, losses may not be made public until companies post their next quarterly earnings in the months to come. 

Comment: In such a case the buyers of Lehman CDS insurance can show large profits while the sellers of this stuff can use the mark to market rule and write down on their own obligations and also show profits (or less than expected losses).
And the US financial circus, it moves on and on...

__________________________  

By now you have likely read the 'Food for thought' 1 and 2 in the right column on this page. At the Asian Times I found another funny news article named Gobbled up by the derivatives monster. The writer makes a very elementary fault in the next quote.

Can you see what fault he makes?

Well, the estimate from (as I recall) the International Monetary Fund is that the global total of derivative contracts outstanding is $1.125 quadrillion, whereas global gross domestic product is about $50 trillion, although both numbers are so big that I couldn't make any sense of them even if I was sober, and being sloshed, I revert to more primitive responses, like screaming in fear and holing up behind the massive blast-proof door of the Mogambo Bunker Of Raging Panic (MBORP). 

Only here, safe amongst gold, silver, guns, frozen pizzas and stacks of adult literature of the "Hot, Nasty Ladies" variety can I finally relax enough to calculate that to make this $1.125 quadrillion yield even a lowly 1%, it would take $11.25 trillion just to pay the interest! Hahaha! We're freaking doomed! A quarter of global GDP is needed just to pay a 1% yield! 

Comment: The elementary fault is you only have to pay interest on debt, if you purchase derivates with borrowed money you do not have to pay interest on the principal value but on the debt you took on.
This takes not away these kind of doom files are important because indeed: We are doomed, if not by the derivatives monster it will be the interest on loans monster.  

__________________________  

In a fiat money system like we have it is obvious that in theory the money in your hands has no value at all, these are not golden or silver coins but bank notes printed in a factory. Therefore the true value of a bank note is the cost of printing it at the local factory.

But if supply of money is limited and since money is the life blood of economies, even fiat money can serve as a storage of value. This is the main point in managing a fiat money system; make sure it serves as a storage of value by limiting the supply.

In practice the American economists have raped that idea, not once but every day. And not once a day but many times a day & the US$ is nothing but a retired ragged whore. In return the American economists got a lot of Nobel prizes so they thought they were smart. 

Another point in pouring value in a fiat money system is having enough savings on all levels of society, again a point missed by most US economists. When you have enough savings (or reserves) you can apply these savings when an emergency is there.
At the Federal Reserve they do not get such elementary points because only yesterday the FED chairman proposed a new so called 'economy stimulus package'.
Just like the previous stimulus package this will not work because the US dollar simply is no longer a 'storage of value', of course the Americans will have a hard time from the emotional point of view to swallow this but the US$ is nothing but a ragged and retired whore.

Here is the dumb White House take on it (Yahoo source):

"We're continuing to have conversations with members of Congress, and we're open to ideas that they would put forward ... that would stimulate the economy and help us pull out of this downturn faster," White House press secretary Dana Perino said Monday, shortly after Bernanke endorsed the need for a fresh and "significant" round of government action.

Comment: In the year 2005 the American consumer withdraw about 750 billion US$ of his home equity and consumed it (I have this from S&P economist chief David Wyss but I don't have links or so). So how can stupid small sized 'economic stimulus packages' work if big hammers like 2005 did not?
The answer: Pumping more dollars in leaves only less 'value' for every single US$ around. Pumping in money only works when these are savings; debt is needed after the ravages of war, in a mature economy it can only be savings that will do such a trick of 'reviving' the economy. 

__________________________  

All in all this was a strange day, I expected some good Lehman unraveling but I find myself back with hanging out the 'wise guy' when it comes to elementary thinking about the fiat money systems that are vital in the long run.

 Title: It was a boring day today...

Till updates. 

(20 Oct 2008) And another five very boring items:

Item 1) Now ING has 10 billion €, are we supposed to be happy?
Item 2) Debt hugger Bernanke: More debt please!
Item 3) Lehman CDS party tomorrow?
Item 4) Via Barry: Stiglitz on Comedy Central.
Item 5) The empty item.

Item 1) Now ING has 10 billion €, are we supposed to be happy? 

Geesh... There is constantly talk on the news that now ING has 10 billion € from the Dutch government, their tier 1 ratio is improving... Are we supposed to be happy?

Lets first look what tier 1 ratio actually is, here is a google thing and here a Dutch file from where I quote the next:

Middels de Tier 1-ratio wordt het kernvermogen van een bank uitgedrukt als percentage van het vreemd vermogen. 
-Het kernvermogen is het aandelenkapitaal plus de reserves van een onderneming. Samen met het aanvullende vermogen is dit het garantievermogen van een onderneming. 
- Het vreemd vermogen is het totaal van schulden die een onderneming bezit. 

So tier 1 capital is a bit as next:

Market cap of stock +
The borrowed reserves +
The non borrowed reserves (the real reserves) =
Tier 1 capital.

Ok ok, it might very well be that tier 1 ratio now is 8,5% instead of 6% but is this an improvement? Don't forget, it costs ING 850 million € a year in interest obligations only so dividends and profits are hollowed out.

You can also argue that the ratio between borrowed and non borrowed reserves is climbing and that this is bad.

And we are still not one quantum wiser, does ING have 'off balance' items and if so what is upon it? What is the exposure to mortgage backed securities? What is the exposure of ING to the 600 trillion over the counter derivative market? And so on and so on.

All we get are some sheets with some numbers and that has to 'proof' that ING is a healthy company... I don't buy all this shit, on a scale of 1 to 10 ING is still rated in the 3 levels.   

Item 2) Debt hugger Bernanke: More debt please!

With amazement I found the next quote on Yahoo (source) quote: 

Bernanke suggested that Congress design the stimulus package so that it will be timely, well targeted and would limit the longer-term affects on the government's budget deficit, which hit a record high in the recently ended budget year.

Any stimulus package would need to kick in quickly to entice people and businesses to boost spending and buck up the economy during the period in which economic activity would be otherwise weak, Bernanke said.

Bernanke said the package also should include provisions that would help break through the stubborn credit clog that is playing a major role in the economy's slowdown. 

Comment: So the package must be small and short lasting because of it's effects on the Federal deficit but should also contain provisions to break through the stubborn credit clog... I wonder if that guy knows what he is talking about. 

 Item 3) Lehman CDS party tomorrow? 

CDS stuff is that credit default swap stuff; it is a kind of insurance when there is default on debt. For example if you had 10 thousand US$ in Lehman bonds you can additionally buy CDS insurance in case US investment bank Lehman goes broke.

In theory a nice concept, in practice there were a lot of folks who sold Lehman CDS because they never imagined that Lehman would go broke.

A few writers said that 21 Oct would be Lehman pay day but I could not find that back in the source files, so let it be tomorrow or some other day. On the hook is something like 100 to 400 billion US$ but I think the 400 billion is a better estimate.

But on Reuters is a file that says most payments have already been made (source) quote:

The standard practice in the CDS market is that hedge funds and other counterparties must adjust collateral on a daily basis as the value of a contract changes.

As Lehman CDS fell in value, before and after it filed for bankruptcy, protection sellers would have had to provide increasing amounts of Treasury bonds or other cash-like investments as collateral for those contracts.

"The mark-to-market on the CDS is margined daily as a credit event draws near, and that mitigates a large, lumpy payment at the end," said Peter Goves, another Citigroup strategist.

In the Lehman case, the largest collateral payments would have been required in the four or five days following the bankruptcy filing in mid-September, when spreads on senior debt widened from around 700 basis points on the five-year contract to around 7,000 basis points, based on the then market view of an estimated 30 percent recovery, Hampden-Turner said.  

Comment: Indeed after the Lehman collapse suddenly a lot of contracts came 'in the money'. But if suddenly up to 400 billion US$ was placed in margin, how does this work from the accountancy point of view? We have not observed losses related to this in the third quarter so when will these losses be taken?
So lets wait and see what happens... (The Reuters article also mentions only 8 billion instead of the big hammer of almost 400 billion we are waiting for.)

__________________________ 

Lehman is only sidely mentioned in an article where I found the next nice (source) quote: 

In his book Collapse: How Societies Choose to Fail or Succeed, Jared Diamond specified the causes that encourage elites to destroy their societies."They feel safe because the perpetrators are typically concentrated (few in number) and highly motivated by the prospect of reaping big, certain, and immediate profits, while the losses are spread over large numbers of individuals."

And what to think of the next insight:

If Friedrich Engels' observation: "The essence of the state is humanity's fear of itself", ever applied, it does so today.   

Comment: For years I am wondering why my desires to destroy the US military might goes so easily. From Tora Bora to the present equation, why is it always so easy? I think understanding fear and the way it changes thinking is the key; when you are capable of inducing raw and utter fear it makes life so much more easy.
So when it comes to the USA willingly destroying herself you induce a bit of fear, you hang out the wise guy, at times you say 'enough is enough' and after that you repeat that cycle more or less.

It is all very simple: Before nine eleven in the year 2001 some Muslims tried to kill me because I had done some naughty writing. Of course I did not go to the Groninger police because those mental dwarfs are never helpful whatsoever.

So after 911 I could say to the Americans:

Three thousand of your folks died so I could live!

You see how easy it is to implement fear? 

Item 4) Via Barry: Stiglitz on Comedy Central.

On Barry's hangout there was a video from professor Stiglitz who has won two Nobel prizes for the economy. I never read work of monsieur Stiglitz, may be that work explains why the US economy is in such a great shape lately.

But to make a long story short: Stiglitz estimated a long time ago that the true costs of the war in Iraq are something like 3 trillion US$. Lets do some easy calculations; the Iraqis once had a population of about 26 million.
And 3 trillion is 3000 billions and thus 3 million millions, hence:

3,000,000,000,000 US$ / 26,000,000 Iraqis = 115,000 US$ per capita Iraqi...

Staggering numbers eh? Here is the link to Barry:  

http://bigpicture.typepad.com/comments/2008/10/stiglitz-on-col.html  

Item 5) The empty item. 

Do you see an empty item on this picture? 

There are no empty items; the empty glass and small bottle are filled with hope.
Just like empty banks; their balances might be negative so there is hope.

In case you want to have a good laugh, the US government, just like my Dutch government, think they can make profits on wise long term investment capital:

Paulson says stock purchases should make money   

I hope this item is empty enough; so that there is plenty of hope...;)  

Till updates! 

(19 Oct 2008) Here in Holland a lot happened this weekend, but lets do the itemizing thing:

Item 1) Dutch bank ING Postbank receives 10 billion € from the government.
Item 2) US bank JP Morgan plays a for more central role then folks think.
Item 3) Some curious parallels with the 1930 crisis.
Item 4) A bit more on fat tails from fooled by randomness dot com.
Item 5) An encounter with the Prudent Investor. 

Item 1) Dutch bank ING Postbank receives 10 billion € from the government.

Well well well, only four days ago on Wednesday 15 Oct I 'rated' the Dutch banks on a scale of 1 to 10. ING Postbank ended at the very end of that small rating list & within four days ING is at the well of government financial help. Only 10 billion € so only 600 € for every Dutch citizen. 

Let me quote a bit of the fun (Bloomberg source):

-- ING Groep NV, the biggest Dutch financial-services firm, will get 10 billion euros ($13.4 billion) from the Netherlands after the company said last week it expects to post its first quarterly loss. 

ING will scrap this year's final dividend and sell the government non-voting preferred securities that pay 8.5 percent annual interest and don't dilute existing shareholders, the Amsterdam-based company said today in a statement. The injection will lift ING's core Tier 1 capital to about 8 percent, the company said at a press conference attended by Dutch Finance Minister Wouter Bos and central bank President Nout Wellink. 

Comment: Now lets go back to 2004 when I formally declared economical sanctions on the USA & explained to the developing countries how they should behave in the coming time.

Of course every body who read that was 100% sure I was 100% lunatic, for example I remember that when I smashed for a rough 10 thousand € in windows at the local courthouse these folks had a very strong emotional need to portray me as a 'confused man'.
In the end of 2008 most governments are characterized as being 'confused governments' doing one strange thing after another...
On my side of the equation things could hardly go any better.

Of course I have to publish what happened to ING last Friday, a nice 27.5% haircut on her stock value: 

And a history chart:

Item 2) US bank JP Morgan plays a for more central role then folks think.

The deeper you dive into gathering knowledge about why the present mess is such a mess, the role of former US investment bank JP Morgan comes popping up on my radar screens. Lately when I pointed to some fundamental flaws in the pricing of derivates (ordinary options on stocks) it came to light that the 'value at Risk' model (the VaR model) has exactly the same kind of flaw in it:

Only using a normal distribution while you did not proof this was the only thing around is relatively stupid. Where did the VaR model came from...?

From JP Morgan, but more massive 'financial innovations' come from that source; according to portfolio dot com JP Morgan not only invented the Credit Default Swaps but also made that now 58 trillion US$ market so big as it stands today.
Please remark the CDS is only 10% of outstanding over the counter (that means no regulation) derivatives.

From the first page of this beautiful article (it is five pages long but it is a 'must read' and almost all details are correct as far as I know), let me (Jelle Eisinger Portfolio source) quote:

The structure of the first derivatives deal wasn’t as solid as Demchak’s team had intended. That initial, flawed financial instrument was later replicated thousands of times by J.P. Morgan and other banks, with the same defects repeated and magnified over and over again.   

Comment: This simply is what you get when you craft smart financial innovations and the commercial folks at the bank take it over. The commercial folks at the bank really do not understand the financial innovation but they know how to make a buck.

Item 3) Some curious parallels with the 1930 crisis.

On nakedcapitalsm I found a nice parallel with the present crisis; like said before every crisis has to be fought using her own details but in comparison sometime wisdom is found.

That makes the next quote the more funny (Naked Capitalism source):  

The Hoover administration first tried to fix the problem without involving the government directly. Instead, the government merely facilitated the formation of the National Credit Corporation, a private central lending institution. Sound familiar? Remember the MLEF (Master Liquidity Enhancement Fund), a SIV of SIVs that Treasury tried to coordinate back in the fall of 2007, only to have the banks refuse to pitch in. 

Comment: I do not remember the Master Liquidity Enhancement Fund at all. Even in the present times making a SIV of SIVs looks like a Hercules task. And what about the costs of a MLEF? Just 700 billion or 7000 or up to 70000 billion US$?
With present day knowledge we can say it is closer to 70000 billion than to 700 billion...

Item 4) A bit more on fat tails from fooled by randomness dot com.

On the Fooled by Randomness website is also a book report from Benoit Mandelbrot. Of course Mandelbrot is famous for his Mandelbrot fractal, in this I hold him in very high esteem.

Back in the eighties Benoit tried to lighten the spirits towards decomposing (historical) stock market values into fractals. Although the Mandelbrot fractal was of tremendous beauty, I was not convinced by his reasoning. You must have some kind of theory that says it is 'rather normal' that the chaos in the entire system is exactly that what rules the local parts of the system.

My thinking has not much evolved since then only now I know that a possible explanation lies in the filtering out of so called 'power laws', let me spare you the technical details.

I will not quote but only post a link to this nice book report:   

http://www.fooledbyrandomness.com/mandelbrotandhudson.pdf  

Item 5) An encounter with the Prudent Investor.  

My first encounter with the Prudent Investor was a very unlucky one: A long time ago when I tried to create havoc on some website where he published I came across some article of him. Beside the logic applied also some source files were completely out of line with only elementary Federal Reserve files.

So I gave the Prudent Investor a horrible earwash.

And since I was in some 'smelling blood' kind of state I looked in his previous articles. Very soon I understood that the economical reasoning of the Prudent Investor was ok, therefore I swiftly went back to the original attack & I don't recall exactly what I said but it must have been something like 'for the rest he is ok'.  

These days, a bit wiser, I like to read him because you can have good long term information. For example I do not understand why for the last 10 to 15 years the US stock market P/E ratio's are so high like they are flying elephants...
PI says 'This is mostly caused by the too low interest rates that forced pension funds from save US government bonds into the stock market'.

Therefore I would like to give my deeply felt excuses to the Prudent Investor, it was just an unlucky first article but I think I have to say 'sorry' for the original attack.

Today the Prudent Investor shares his insight in the next 90% of derivate unwinding that will be done after the Lehman unwinding, no quote just a link:

Coming Soon: The 600 Trillion Derivatives Emergency Meeting 

Till updates.

(17 Oct 2008) This morning I finished a very simple and non technical article about statistical testing of poisons in food. It is so horrible non technical that even political leaders can understand it's content; only seldom I have sunken so low...

Here is the pdf file, till updates. 

(16 Oct 2008) I am writing an article upon statistical testing of food poisoning, what to put in your zero hypothesis and what not. (This is induced by the milk scandal in China where many thousands of babies are sick in hospital.)

So I would like to keep this update short & I only look at the so called TICS data as observed today. The TICS data are a relatively broad measure of capital streams to and from the USA, they are of importance because in theory the US dollar can stay strong as long as the trade deficits are countered by the influx of foreign purchases of long term US securities.

Today another set of that came out, as usual the fraud continues because on a website with the name actionforex dot com it was reported as next (source), quote:

13:00 USD U.S. Net LT TIC flows Aug 14B 

Comment: These are not the net flows and this month actionforex even forgets to put the words 'purchase' in it. When you only report what foreigners have net bought and leave all other things out, it is logical you often arrive at a positive number.
This is idiot because on actionforex it might be expected to get reliable data on the real stuff, it looks more and more that actionforex is only an advertisement outlet for the US economy.

Here is the US Treasury file on it (source), quote: 

Monthly net TIC flows were negative $0.4 billion.  

Comment: Monthly trade deficit is still at the 2 billion US$ a day, so let me give you the broader measure as told by the US Treasury herself (in general as we all know US statistics are so good they will never ever get into a depression because the US government has 'statistics'). The last six months it was as next:

You see: The old theory that the US$ was protected from decline from the absurd high trade deficit is broken. A miracle is happening! The miracle is dollar strength but for the last six months there is not much support from foreign investment in that 'vital and healthy' economy that only lives on borrowed money. 

Till updates.   

(15 Oct 2008) This day I want to take a look at a few Dutch banks and what's my take on them is. In this I have (almost) no insider knowledge, all I do is bundle together the daily news as it comes to me year in year out.
Furthermore I have never worked for a bank and my scientific education has nothing to do with banking but only with math. Although later when I was a teacher I had to teach financial  math so I am one of those guys who can calculate your monthly mortgage fee with only a calculator and without a computer program.

Lets start with the stuff:

SNS Reaal, it is bank that has a stock listing but they have it for only a few years now. Before that they were a bank that stated they were not there for the profits but to deliver good banking services. Their judicial form was a foundation (in Dutch: een stichting).
Given their relatively short time on the stock markets I would be highly surprised if they engaged in all that obscure haute finance with lots of securities in the 'off balance' items.

__________________________

Rabo bank, from all the Dutch banks I hold them in the highest esteem. They have no stock listing so all these years they have avoided the easy to get billions from an IPO. Even stronger: one of their captains (I don't know anymore if it was the CEO or the CFO) stated more or less 'Within 10 to 15 years all banks will be nationalized'.
When a non stock listing bank tells you that you understand that it is highly likely they have their stuff on order.

My children have their savings accounts at Rabo, this has nothing to do with the above but with the fact that my ex got a free museum pass with her Rabo account many years back. And she opened the kids saving accounts...;)

__________________________

ABN Amro, the former Fortis. It is now a 100% state bank. When it came to the news that ABN Amro was sold for 24 billion € it also came to light they also had 25 billion € in so called 'off balance' items. This is my own bank but I do not hold them in high esteem.
Lets face the facts: Because now they are a state bank and because it was sold so high in the past, rather likely it was garbage in the past.
But they are still my bank yet we must not forget that at the moment they would fall in foreign hands for real I would go to some other bank. I guess sometimes I can be a nationalist too...

__________________________

Binckbank, this is not a real bank but because they have the name 'bank' in it their stock value often is lousy. All they are is a stock broker company; at relatively low costs you can place your buy and sell orders of the Amsterdam market and a lot of other markets there.
It is hard to say what their value is because when folks sell stocks like crazy, Binckbank makes some Euro's but the same goes when folks buy stock like crazy.
Therefore it all depends on the management of Binckbank, if they have a proper business model there is no problem. If they are risk taking while not understanding their market like AIG they will be in trouble.

__________________________

ING Postbank. After my humble opinion this could be the most dangerous bank, in terms of assets they are also the biggest: up to 300% of the Dutch gross domestic product. I really have no solid proof but I think they are up to their noses in risky securities and may be even derivatives.
But all I have is so called 'circumstantial evidence', lets sum up some easy to understand emotion stuff:

Lately the 20 billion € bank rescue plan was announced in my little country of just 16 million people, how did the major banks react? Very simple:

-- Rabo: We are just as solvent as the Dutch state, we do not need it.
-- SNS Reaal: We have plenty of liquidity, we do not use it.
-- ING Postbank: We welcome this plan very much, it will bring stability.

__________________________ 

XXX SmallBank. I cannot reveal the real name of XXX SmallBank but from an analyst of that bank I learned how the Basel I and Basel II accords will work in the long run. Under Basel I the 'off balance' items are not counted into the reserve calculations...
I learned a lot from that, I will not nail them down... 

In the end, let me hang out the rating officer, lets hope you get more insight in what happens at for example Moody's, Standard and Poors or Flitch rating agencies.
The rating are on a scale of 1 to 10 so I avoid stuff like BB minus:

SNS reaal, looks like a solid 6 to 7.
Rabo bank: could be as high as 9 but for the time being only 8.
ABN Amro: in real life at most a 3 but now it is a state bank it is a forced 6.
Binckbank: not rateable given their focus on stock markets only.
ING Postbank: 3 may be 4, but they still do not post anything that says they will be safe.

Till updates.    

(14 Oct 2008) Another batch of five items:

Item 1) Criticism on the Value at Risk model & Wouter Bos.
Item 2) Some Extra Terrestrial visit to former FED chief Alan Greenspan.
Item 3) The US dollar and the five stages of grieving.
Item 4) Why I support the McCain Palin ticket to the White house Part II.
Item 5) The empty item. 

Item 1) Criticism on the Value at Risk model & Wouter Bos.

In the wikipedia file I linked to yesterday was also a link to some criticism of the Value at Risk model. It dates back to 1997 and in science this is very young critique.

The most beautiful detail I found was more or less as next (Fooled by randomness source), quote:

You can use the Value at Risk model to find some risks, but that does not protect you from the risk of using that model.    

This is a very good insight, it brings wisdom. In the past I has similar insights, when you try to find a common cause that brings down the most mighty empires a common cause is that often their might and powers turn into weakness.

Lets turn to present day with the troubles with bank Fortis who took over ABN Amro some time ago. It was asked at the Dutch minister of finance Wouter Bos why this takeover was allowed Wouter more or less stated:

All the experts we consulted agreed that this takeover would not cause a serious problem.

And now you see: When you consult some experts, they might point you towards some risks. But you must also take into account the risk this particular expert brings along...   

After my humble opinion, when it comes to banking most experts are only highly paid idiots. 

Item 2) Some Extra Terrestrial visits former FED chief Alan Greenspan.

On the Prudent Bear I found a very nice hypothetical visit from some outer space visit to former US Federal Reserve chairman Alan Greenspan. It is funny reading but it also contains a very important detail (Prudent Bear source), quote:

ET: Hmmm … wonder if the fact that the Debt/GDP ratio has surpassed the point that it hit early in your last Great Depression is significant. Tell me EZ Al, do you think that there are any ‘natural limits’ to this debt load … that there comes a point when, to use a nuclear metaphor, it reaches ‘critical mass’ – causing a ‘core meltdown’? 

EZ Al: Well, if there is such a natural limit, we on Earth are unaware of it. Macro-Economic Science has no such concept. Yes there have always been jeremiahs, doomsayers, chicken littles – take your choice of labels – who have been warning that the sky is falling. But what can you do about people who cry wolf – and always there is no wolf and the sky is still intact above? You ignore them. 

Comment: It is indeed rather strange that the US Federal Reserve in her economical models do not use some upper threshold of debt allowed into a fiat money system.
Any idiot can see total debt levels need to be contained, so not the Americans.
Again it is strength turning into weakness; hand in hand with the debt levels come the obesity rates. Fatter and fatter by the year they are & again: Former strength and health has turned into obese weakness.

Item 3) The US dollar and the five stages of grieving.

David Merkel also has a 'Five stages of grieving' file, it is not as good as Barry's but Barry is a better writer and David has to put out that composure of being 'wise'.

This is what David thinks of the last stage (Alhepblog source), quote: 

Finally, stage five, acceptance. The foreign currencies rise to sustainable levels versus the US dollar. Inflation and real economic activity decline in the foreign countries. They begin buying more goods and services from the US, and dollar claims are redeemed. Inflation and interest rates rise in the US, as we have to produce more to pay off the dollar reserves now being redeemed by foreigners.

Comment: This particular outcome is not what I have in mind, destruction of your military might is advised now that it is utterly clear your political process is only one other version of hanging out the 'American idol'.   

Item 4) Why I support the McCain Palin ticket to the White house Part II.

Of course after 8 years of the Republican Dubya at the helm of the US economic and military might I hope McCain will bring 4 more years of wisdom in the White House seat.

Don't get me wrong: I am not ironic or so, I mean it. I want to destroy the USA military might and the best way to do it is via John McCain but the Democrat candidate will also do.

Lets look why I need McCain and his complete lack of all elementary economical insight (again former strength has turned into weakness). (CNN source), quote:

As the Arizona senator outlined his new economic proposals, he used some of his most pointed language to date to describe what he said was the difference between himself and Obama on the economy.

"He's an eloquent speaker, but even he can't turn a record of supporting higher taxes into a credible promise to cut taxes. What he promises today is the opposite of what he has done his entire career," McCain said at a rally in Blue Bell, Pennsylvania.

"Perhaps never before in history have the American people been asked to risk so much based on so little. You can look at the record of what he's done or you can just go with your gut, but either way you're left with the same conclusion: Sen. Obama is going to raise your taxes, and in this economy, raising taxes is the surest way to turn a recession into a depression."     

Comment: With his wild ideas on taxes McCain does not understand he pulls the rug from the funding of the US military. Lets look at some basic facts:

The US military needs about 700 billion a year to keep functioning.

Right now we have a 700 billion US$ rescue plan to save the banks but elementary calculations and only little brains indicate we need at least 3000 billion more to save the banking sector only.

So if McCain truly wants to stay another 100 years in Iraq, he might have some tax problem like 'Read my lips, no more taxes'.   

Item 5) The empty item.  

Empty empty empty;

Read my lips: 'No more weird American military adventures!'

But I need your help; if you can bring big harm to the USA please do not hesitate!
Weird emotions like 'They liberated us in 1945' are not allowed.
For the rest: use your own brain, the Almighty gave it to you so why not use it?  

Till updates. 

(13 Oct 2008) In the itemizing thing we have:

Item 1) More on the Value at Risk model.
Item 2) Here we have that idiot IMF director Dominique Strauss Kahn again.
Item 3) Who is on the hook for the Lehman mess?
Item 4) The Nobel prize for economics goes to...Paul Krugman!
Item 5) The empty item. 

Item 1) More on the Value at Risk model.

I have never studied risk models before and I only looked about it for about a minute or fifteen, but of course there are serious problems with this VaR model that seems to be widely in use. But it is not as bad as reported last Saturday, in the Wikipedia file you see actually a matrix of covariances used, link:

http://en.wikipedia.org/wiki/Value_at_risk  

Again I am not an expert, but there seems to be a bit of a problem with the VaR model, quote from the wiki source:

A subtle technical problem is that VaR is not sub-additive. That is, it's possible to construct two portfolios, A and B, in such a way that VaR (A + B) > VaR(A) + VaR(B). This is unexpected because we'd hope that portfolio diversification would reduce risk.

Comment 1: I think that in such a case the diversification was not for real and that in such a case there is too much positive correlation in the portfolio.
But again I only looked 15 minutes at the VaR model so may be I am talking 'starter nonsense'. 

Comment 2: In my mind comes an example from a long gone past where I had to teach the ANOVA model to students. ANOVA = Analysis of Variances and that model needs normal distribution assumptions at the entry level too.
You had to test if a bunch of averages were coming from the same family distribution...
So I crafted a test where you only needed the averages (that often are normally distributed) and made a test from that. You did not need the stupid normal distribution assumption at the data entry level anymore... 

Item 2) Here we have that idiot IMF director Dominique Strauss Kahn again.

Now do they never ever learn it at the International Monetary Fund? Every time this Strauss Kahn comes out I get a serious headache! Look what we have now the European rescue plan to save the banks is out (Bloomberg source), quote: 

``What has been done over the last three days should provide elements of reassurance,'' Dominique Strauss-Kahn, chief of the International Monetary Fund said on French radio Europe 1 today. The worst of the financial crisis ``may be behind us.'' 

Comment: This once more shows that at the IMF they have no clue whatsoever what the future US house price declines will do. Let me sum it up once more: At least another 6 trillion US$ in family house value will be wiped out before long term house affordability is restored again.
Besides families this could have an impact of over 3 trillion on the balances of the US banks, a more  complete study could give sharper bounds on this detail.   

__________________________ 

Ok ok, even I think that interbank lending could be improved by the large state guarantees. In my country Holland we now have a 20 billion rescue fund and a staggering 200 billion fund for securing interbank loans.

By the way these 'funds' do not exist in reality, it is not like our unemployment or pension funds. It is only borrowed money, just like all USA funds are.

Will this give new interbank lending? Hard to say, all that past interbank lending was mostly to feed the beasts on the off balance items. Now most of these off balance beasts are dead it looks reasonable that there will be little need for interbank lending...   

Item 3) Who is on the hook for the Lehman mess?

On seekingalpha was a nice article on who is on this very important hook, see the previous Friday update below for what I think of that. Today some German financial official reported about 300 billion US$ in foreign damage only, if we add the internal USA damage we are looking at a very nice bankruptcy of Lehman Brothers...
Oh, Lehman was small stuff so they were allowed to fail...

Quote of the fun (Seekingalpha source):

On Oct 21, somebody [group A] will have to pay somebody else [group B] billions in cash to settle Credit Default Swaps (CDS) on Lehman. Estimates on what this entails range from $100 billion to as much as $400 billion.

Group A will almost certainly include AIG, the biggest net seller of CDS, and many hedge funds, who have been using CDS selling as their cheap (HA!) financing source for the past few years. Besides single-name CDS specifically on Lehman, other credit derivatives such as CMCDS, CDS options, or Nth to Defaults, CDX indices and bespoke CDOs with Lehman in them will also settle, partially or in full.

This will be arguably the biggest cash-exchange day in human history to date. I don't care how much taxpayer money the government will use to bail them out, somebody will fail.  

Comment: If the info I have right now is more or less correct it will be closer to 400 than 100 billion US$. Another problem: the US$ is rather strong lately so it is extra expensive for a whole lot of foreigners...
Don't forget the CDS market is only about 10% of the total amount of outstanding contracts in over the counter derivatives.
Makes you wonder: what jokes are hidden in the other 90%?  

Item 4) The Nobel prize for economics goes to...Paul Krugman!

Well congratulations my dear Paul. I have no clue why they gave it to you; the hypothesis that all other US economists are less smart looks like the prevailing scenario.

Very nice to observe that urbanization leads to lower transportation costs and also sucks in more laborers. These kind of theories are just what we need right now.

Why bother about the stability of entire economical systems when these systems have no real reserves anyway? When all funds needed are only accountancy vehicles and all real money is wasted away with making the population an obese population?

Item 5) The empty item.  

Only emptiness found at entry number five; floss your brain please! 

Till updates. 

(12 Oct 2008) Itemize it:

Item 1) The economical crisis from 1870.
Item 2) An oversight of the last five weeks in market fun.
Item 3) New 'mark to market' rule: Unobservable inputs are allowed from now.
Item 4) More on the fool Alan Greenspan on derivatives & regulation.
Item 5) The empty item.     

Item 1) The economical crisis from 1870.

It seems there was a huge economical crisis in 1870 too, I never knew this but there are indeed some striking similarities. Of course, just like wars, each economical/financial crisis should be studied upon her own merits but making comparisons can sometimes give a deeper insight. And every crisis has her own beautiful details (Chronicle source) quote:  

The problems had emerged around 1870, starting in Europe. In the Austro-Hungarian Empire, formed in 1867, in the states unified by Prussia into the German empire, and in France, the emperors supported a flowering of new lending institutions that issued mortgages for municipal and residential construction, especially in the capitals of Vienna, Berlin, and Paris. Mortgages were easier to obtain than before, and a building boom commenced. Land values seemed to climb and climb; borrowers ravenously assumed more and more credit, using unbuilt or half-built houses as collateral. The most marvelous spots for sightseers in the three cities today are the magisterial buildings erected in the so-called founder period.

Comment: Indeed when you walk around in some European countries you wonder where they did get all the supplies from to erect so much large buildings. I already knew this was done at the expense of a large poor worker force and now I know a bit of real crisis was also needed. 

Item 2) An oversight of the last five weeks in market fun.

If you have a job combined with a bit of family life, it is easy to loose oversight. the New York Times has an oversight of the last five weeks. It is only headline news and I almost had no dull moments in the last five weeks, but when you see it that way it is rather impressive... 

http://www.nytimes.com/interactive/2008/09/27/30927_WEEKS_TIMELINE.html 

Item 3) New 'mark to market' rule: Unobservable inputs are allowed from now.

Yes, unobservable inputs from future cash flows are allowed...

To understand how weird this is let me give you an example for bringing 500 trillion in real USA bucks right in the hands of the US Treasury:

It is utterly clear that in the year 3000 American citizens will pay taxes to the US government, this is about 100% sure. The same goes for the year 3500 and all years in between; it is 100% sure that there will go large sums of tax money to the US government in these five centuries.
Since we now know for 100% sure these future payments will be there, it must have some value today. That is logical; even Dubya, Bernanke and clown Paulson understand the math rigor behind this.
And since the five centuries of future tax revenues are gigantic, US Congress and Senate should craft a law that it is at least 500 trillion US$ worth today...
The 500 trillion are handed to the US Treasury and the future Americans from 3000 to 3500 will be glad that their future was secured in 2008.

Let me quote a bit of this garbage (Financial Week source) quote: 

In late September, FASB and the Securities and Exchange Commission issued a joint clarification allowing companies to use more internal inputs, related to future cash flow, for instance, when markets are inactive and it is difficult to find trading prices. 

And: 

Earlier this week, Robert Willens, a corporate tax and accounting consultant and former managing director in Lehman Brothers’ equity research division, wrote that, with FASB and the SEC having acknowledged that markets are now largely inactive, “the use of unobservable inputs for the purpose of valuing many securities ought to proliferate.” 

Comment: We all know what it means when 'future cash flows' are activated on today's balances. This simply validates once more the entire US financial sector is only a Ponzi scam, a so called Ponzi financial unit where the interest on the debt can only be paid with more debt.
This was already known of course but now the FASB and SEC make it formal, it is formal...  

Item 4) More on the fool Alan Greenspan on derivatives & regulation.

Also from the New York Times a four page long article about the fool Alan Greenspan, regulations and derivative markets...

Source: 

http://www.nytimes.com/2008/10/09/fools/economy/09greenspan.html?ref=business 

Only one quote from that long article: 

Mr. Greenspan, according to lawmakers, then used his prestige to make sure Congress followed through. “Alan was held in very high regard,” said Jim Leach, an Iowa Republican who led the House Banking and Financial Services Committee at the time. “You’ve got an area of judgment in which members of Congress have nonexistent expertise.” 

Comment: It is strange to observe that both Congress and Senate lack all kinds of elementary insights. Even the Dutch parliament has more insight in one week compared to the USA weirdo's in seven years. 

  
Item 5) The empty item.      

As usual, try to use your own brain.
If you need a lot of pain killers to let your brain work properly, Barry had a link that explains that we are in this crisis because people do not read the Talmut.
Wow wow wow, that also explains the economical hardships of the Palestines: they still do not read the Talmut... 

Till updates. 

(10 Oct 2008, updated 11 Oct) After my humble opinion the most important news of today was the auctioning of the debt of the former Lehman Brothers; the debt of that former US investment bank is only 8.625 cents on the dollar.

Some people at Bloomberg dot com think that 'therefore' the idiots that insured the countless billions of debt from Lehman only have to pay 93.375 cents on the dollar insured. This is a rather strange proposition; did the debt insurers not insure it for the full 100%? The judicial element is not explained, but let me give you a bit of (source) quote:

Oct. 10 (Bloomberg) -- Sellers of credit-default protection on bankrupt Lehman Brothers Holdings Inc. will have to pay 91.375 cents on the dollar to settle the contracts, setting up the biggest-ever payout in the $55 trillion market. 

An auction to determine the size of the settlement on Lehman credit-default swaps set a value of 8.625 cents on the dollar for the debt, according to Creditfixings.com, a Web site run by auction administrators Creditex Group Inc. and Markit Group Ltd. The auction may lead to payments of more than $270 billion, BNP Paribas SA strategist Andrea Cicione in London said. 

Comment: This is a good lesson for the Dubya regime: If for once they follow the ideology they believe in and follow the elementary logic 'do not reward private failure' in that case the rest of their financial sector gets a nice bill of just 270 billion US$ or more.
I am hoping for some good multiplication factor in this; the 270 billion US$ that now needs to be paid for will trigger a bit more of 'the good stuff'. I mean the 270 billion is above the US write downs so far in relation with the housing correction & don't forget the 200+ billion US$ that was 'written up' by US financial institutions because they 'wrote down' their own debt obligations to other parties.
All small bank failures are already hooked to the US taxpayer mouth because the FDIC fund is a fake funk with only US treasuries in it, after Lehman all large bank failures will be hooked on the US taxpayer mouth too so could this all be more perfect?

To the traitors and betrayers of religion I can say: More bear market fun will follow for that obese nation & the scientist in me never speaks idle words... 

With some slightly different parameters you get the next bear: 

I think the second bear is slightly better, it does not have that 'amateur feeling' that comes with the first picture.

Update from 11 Oct: Here is a Bloomberg file stating that indeed the debt auction has only little relation with what the debt holders actually get, it seems there is only little judicial information on large stuff like this. End of the update. 

Till updates, have a nice bear market or try to get one. 

(08 Oct 2008, updated 11 Oct) Today it was a boring day on the financial markets, after my humble opinion the declines simply do not go fast enough while on the other hand I understand there is a lot of so called 'emotional resistance' in the brains of the diverse folks.

Therefore, after waiting so long, I decided today to attack the so called 'derivative positions' that are traded by folks who do not understand their stuff.

Since I am a teacher I split the stuff in only two items:

Item 1) Derivatives for dummies.
Item 2) Derivatives for smart guys like the Princeton dummies. 

Item 1) Derivatives for dummies.

In the next video there is a wise lesson for dummies; the one trillion number mentioned is not needed at all. All banks that did this are vulnerable; they only got a phone call in the morning from a client with the specified risk and return needed and sliced some millions off stuff needed & sold that to the client. 

Item 2) Derivatives for smart guys like the Princeton dummies.

To the Princeton smarties now we have over 600 trillion in contract obligations on weird over the counter stuff I can say: The USA has some fundamental flaws in the pricing of derivates.  

The flaw is very easy to understand, the USA traders think that their scientists have protected them because they are 'so smart'. In practice the option sellers should have used 'empirical info' that far more accurately describes the so called 'striking price'.

In order for the Princeton dummies to understand this, click on the next pic and sing the 52.05 minute vid out.

Wanna bet you don't understand all the details???   

My main point of criticism is you must need the empirical distribution of the company in study and not use some stupid plus or minus 1%  'what is the difference' kind of attitude. The dangers in the 600+ trillion US$ derivative joke (with contracting value of about one US GDP) are in the tails of the distribution; the tails are likely far fatter then the standard theory tells us.

Update from 11 Oct:

To my amazement I found the next quote today, this was not for option pricing but risk management. It seems that Wall Street uses a so called VaR model (VaR =  Value at Risk) and this model has the same fault as the option prices have. Quote:

Lurking behind the models, however, was a colossal conceptual error: the belief that risk is randomly distributed and that each event has no bearing on the next event in a sequence. 

And:

The more enlightened among the value-at-risk practitioners understand that extreme events occur more frequently than their models predict. So they embellish their models with "fat tails" (upward bends on the wings of the bell curve) and model these tails on historical extremes such as the post-Sept. 11 market reaction.  

Washington Post source link, also worth a visit is the Prudent Bear (home page) and their must read files.

Comment: The guy that wrote the Washington Post file can be trusted, his name is James G. Rickards and was general counsel of Long-Term Capital Management from 1994 to 1999. So he could study the blow up of LTCM from close and after years of thinking he could write an article like that.
I myself studied the stochastic equations that rule the option pricing stuff but after a few weeks I lost interest because I did not agree with the Black Scholes approach and had other ideas on that detail.
Now many years later I find that even those VaR models have the same kind of fault in it, it makes you wonder why the Nobel price for economics goes so often to the USA...

End of the update. 

Till updates.   

(07 Oct 2008) What a lovely day! All the Iceland banks capitalized by the Iceland government, although it is only small collateral damage it is still a lovely detail.
Now serious, today I want to look at the next items:

Item 1) My opinion on the European rules for deposit insurance at the retail banks.
Item 2) Some lessons, not for the faint hearted from naked capitalism.
Item 3) Via Barry: More on the Wall Street Shadow system.
Item 4) Today's chopped meat: Debt hugger Ambrose Evans-Pritchard.
Item 5) As usual the empty item.   

Item 1) My opinion on the European rules for deposit insurance at the retail banks.

According to the Dutch minister of finance Wouter Bos, the new consumer bank deposit insurance rules are rather simple and they are as follows:

Minimum insurance threshold is set at 50 thousand € but countries can go above that and here in Holland it is raised from 38 thousand to 100 thousand € for the period of one year.

So my compliments go to the European finance ministers: I see no way to explain this will increase systematic risk. On the contrary: If the European model is better because local wisdom can be applied for setting the insurance threshold on the local level, we could beat the Americans that can only do Central stuff. 
From the consumer point of view there are some folks who have more savings than the local 100 thousand threshold but all they have to do is park them among more deposits.

No way this will lead to more instability or more cross border money travel.

Also the small companies can live with this; but big multinationals might suddenly avoid some countries. I have little insight in that but the word 'multinational' says it all and for the time being I do not expect them to blow up the European financial system. 

Lets go to the next item:    

Item 2) Some lessons, not for the faint hearted from naked capitalism.

Strangely enough it are the weirdo's from the IMF who came up with a study of 124 banking crisis... Are they coughing up some value for their salaries? They do, it is just for one time but they do.

Before I quote the statistical bundling of these 124 banking crisis I want to bring to your attention once more that I started the second activation of the NightmareOnWallStreet on 12 Nov 2007, tactical goal was to half the 14 thousand points of the DOW. Strategical goal = bringing down US military might.

I hope all noses point in the same direction now and let me quote the fun (source)   

The episodes of credit crunches and housing busts are often long and deep. For example, a credit crunch episode typically lasts two and a half years and is associated with nearly a 20 percent decline in real credit. A housing bust tend to last even longer: four and a half years with a 30 percent fall in real house prices. And an equity price bust lasts some 10 quarters and when it is over, the real value of equities has dropped to half. 

Comment: Before 12 Nov 2008 my calculations indicated that US housing value could decline as much as 50% before century long house affordability is restored again. The IMF says that a 30% in house price decline gives rise to about 50% of the main stock markets so all and every statistic out there is only helping me and not helping the US military...

Item 3) Via Barry: More on the Wall Street Shadow system.

On the one hand USA CBS has an exiting item; something with a 60 trillion derivate thing. On the other hand it is very boring; when the total market of nominal value of over 600 trillion in over the counter financial derivatives will unravel we will have true fun.

But if you are young and have a high IQ or if you are old, do not have a high IQ but managed it to Item 3 anyway, here is a good video:

Item 4) Today's chopped meat: Debt hugger Ambrose Evans-Pritchard. 

Compared to the previous chopped meat this Ambrose thing is only a mosquito but we all know mosquito's bring not forward happiness on a global scale. On the contrary, it is only logical you slab mosquito's to death while you respect the entire eco system.  

To understand why Ambrose is not worth his weight in recycled toilet paper I only quote (source) the next: 

The European Central Bank – which raised rates into the teeth of the crisis in July – has played a shockingly destructive role in this enveloping slump. Its growth predictions this year have been, and still are, delusional. Neglecting its global role, it has vastly complicated the fire-fighting efforts of Washington. 

Comment: Against so much stupidity I refrain from comment. 

Item 5) As usual the empty item.    

As usual the empty item is a 'use your own brain please' item. 

Till updates.

(06 Oct 2008, item 1 updated on 07 Oct) As usual I itemize some news from today, stuff goes great by the way.

Item 1) The USA Plunge Protection Team at work.
Item 2) Making chopped meat of USA Princeton professor Paul Krugman.
Item 3) The European governments are helping me too.
Item 4) Yes yes, end of year 900 billion US$ FED money auction 'help'.
Item 5) The empty item.   

Item 1) The USA Plunge Protection Team at work.

The local journalists were already expecting it, of course I expected it too: Today we will have one of those days where the USA Plunge Protection Team will do it's stinking best... Anyone with only elementary market psychology insight will agree with me that it is impossible to make such a remarkable recovery after a 800 point plunge.
On all other stock markets worldwide we never see such stuff; we believe in free markets while the USA believes in plunge protection... 

Update from 07 Oct:

By sheer coincidence the Plunge Protection team goes to work today! They will work with 'market participants' to 'restore confidence'...
I found the next picture on a weblog named themessthatgreespanmade, if you click on the pic below you can read the rather boring statements from the Plunge Protection Team. A better reading is the wikepedia file on this 

Item 2) Making chopped meat of USA Princeton professor Paul Krugman.

Princeton prof Paul Krugman is a so called 'hot shot', people turn to him for questions and advice. Paul has a job, he has money in his pockets. I am unemployed, have no money to spend and rather likely the Dutch government will do it's stinking best to prevent me from going on the most cheap holiday for at least 3 more years.

The YouTube video from below was posted on 10 Sept 2006. In the video Paul clearly states that the damage of the housing bubble could be as large as the dot com bubble.

More proof that Paul is indeed a debt hugging mental dwarf is not needed: right after the dot com bubble burst I understood the dimensions of the housing market. I wanted to get rid of the US military and this was my opportunity; all I had to do was shut my mouth and wait. Wait wait wait & more and longer waiting.

Click on the picture to go to YouTube.   

Item 3) The European governments are helping me too.

In the past the European officials in general and the local Dutch in particular have always been very unhelpful. For example: With an axe I smashed for over 10 thousand Euro's of glass at the local courthouse & made no difference between bullet proof glass and non bullet proof glass.

When I wanted to talk about some terror stuff they laughed and definitely heard the best joke of the day... In those long lost years they also had a strong need to portray me as being a 'confused man'.

Yet miracle miracle, the Europeans made themselves 'confused governments' with only the Georgian equation and now we have this lovely banking crisis at hand true confusion sets in and I will only help them further into confusion...

Here is the fun to be quoted (Ass Press source)    

LONDON (AP) -- Individual European governments issued a cascade of deposit guarantees to shore up their banks but fell short of any coordinated action Monday to deal with the crisis sweeping financial markets, even as stock markets crashed and the euro sank to its lowest level for over a year. 

Comment: It is good to know that when it comes to real brains, the European leaders show their real face. Entropy and chaos in the financial sector only climbs with stuff like this and this could not have been any better for me.

Item 4) Yes yes, end of year 900 billion US$ FED money auction 'help'.

As far as I know reality, the best news of this day was the fact that the US Federal Reserve will broaden it's money auctions from 150 billion to 900 billion US$ to help with 'year's end'. This is some accountancy stuff because all garbage collateral the FED takes in is at that point in time free from the 'mark to market' rule.
It is all so simple to understand my dear reader, all you need is the right paradigm's in your head..

Reuters source file & quote:  

The U.S. Federal Reserve said it would begin paying interest on reserves banks hold at the Fed, a move that would allow it to keep flooding markets with cash without driving its benchmark federal funds rate below target.

The Fed also expanded the amount of money offered in its 28-day and 84-day Term Auction Facility -- or TAF -- auctions to $150 billion each, and increased the amount to be offered in two forward TAF auctions in November to $150 billion each as it tries to ease end-of-year funding strains.

In all, the Fed said $900 billion in TAF credit would be available for year-end needs. 

Comment: this is great news!

Item 5) The empty item.    

Consumers can fight the credit crisis via making their own beer, just 35 cents for a liter of superb high quality beer. When you have a job you pay over 2 € for this in your local supermarket, so your beer leverage is above 6: 

I hope this item is empty enough. 

Till updates, have a nice beer or try to get one! 

(04 Oct 2008) Ok ok, just a few items...

Item 1) A proposal for a poll in the Dutch parliament.
Item 2) And the right answer is...
Item 3) In fact it is even worse; therefore control of money supply is king.
Item 4) More on the ING Postbank rumor.
Item 5) The empty item.     

Item 1) A proposal for a poll in the Dutch parliament. 

My dear Dutch parliament folks, in the previous weekend the Dutch minister of finance Wouter Bos threw almost 5 billion to Fortis bank and we were told that the Dutch government owned 49% of local Fortis stock.
Belgia and Luxembourgh announced similar stuff.
We the people were not told if this was dillutive stock or stuff bought on the 'free markets' but since the 'base capital' of Fortis was now reenforced it had to be that dillutive kind of stuff (new stock offered by Fortis to some governments).

That was the previous weekend, Monday followed and on Tuesday already Fortis run out of liquidity while they just received an amazing amount of 5 billion Euro...

Of course the mental dwarfs of the Dutch parliament must be bewildered!

Therefore my proposal for a poll in the Dutch parliament to separate the completely idiots from the lesser idiots. 

Item 2) And the right answer is...

The most accurate answer is B, in fact beside 'borrowed reserves' banks also have 'non borrowed reserves'. From the language point of view it is horribly strange to view the real reserves as being 'non borrowed reserves'.

I hope that by now you understand that in a financial universe where non borrowed reserves can be positive but also negative, it is logical that elephants can fly.
Have you never observed a flying elephant?
Here is one, look in the third column and scroll down where we observe -158340 million US$ in real reserves of some country from far far away. 

Item 3) In fact it is even worse; therefore control of money supply is king.

Lets go back to that Dutch parliament that park 100 € in bank A. Bank A has 100 € in borrowed reserves on the balance and borrow 1150 € more because they are 'straight sailors'. What can bank A do with this 1150 €?

For example they could bundle all kinds of obligations together, some AAA rated stuff, a bit of A and BB^- and a bit of F rated stuff for that spicy feeling that pumps up the returns of their 1150 € bundle.
Bank B also has 1150 € of freshly borrowed money and decide to buy the asset of bank A.

Now bank B has 1150 € of assets on her balances, borrowed or not is relevant because now this asset is on her balance (or on the 'off balance' balance) they can borrow about 13 thousand more €.

You see: The 8% rule is not an 'equilibrium seeking' rule. 

When on all levels there are no 'real reserves' the system will crash.

Luckily we have all those bankers who understand their stuff so we won't run into trouble...

Fiat money like we have can actually work if you keep the money growth under control, this has been lacking for many years mostly in the USA but also in Europe where the ECB still keeps the rates far to low in order not to break the spell. 

Item 4) More on the ING Postbank rumor. 

My latest data are from the UK Financial Times so I will not be as dumb as to post a source link because in no time it will be hidden behind the 'subscription wall'.

The reported data look a bit shaky and not very reliable but it says a bit like:

Total Fortis assets = 250% of Dutch GDP,
Total ING assets = 300% of Dutch GDP.  

Needless to say both Fortis and ING operate in a lot of countries so how this equates to our beloved Netherlands only is hard to say.

Yet my gut feeling still says something is wrong with ING, lets not rush things because if the ING bankers are of the 'right kind' there is no problem at all. 

Item 5) The empty item.

Only emptiness found here. 

Till updates, have a nice bank or try to get one. 

(03 Oct 2008) This day the 700 billion US$ bailout plan was approved by the US Congress after it was approved by the US Senate some time ago. Actually due to extra tax cuts and a whole lot of so called earmarks (earmarks are more or less pet projects for individual members of Congress or Senate) it costs now about 850 billion US$.

Today I found a clue to a question I have for a long long time: For every dollar lost in home value, how much damage gives this on average for the banks and mortgage lenders? Just by accident I saw a Congress man in anger stating more or less the next:

"I came just back one hour ago from a meeting with the chairman of the FDIC and he told me that if house prices decline another 5 or 10% then there will be about one trillion more troubled assets at the banks." 

This is extremely important information, 5 to 10% decline is something like 1 to 2 trillion US$ for the home owners and hence about 50% of declined home equity leads to losses for the banks and mortgage lenders. So every dollar lost in home value is about 50 cents loss for the financial institutions and the further house prices decline the worse it will be.
So it is estimated that at least another 3 trillion of losses will be there since at least 6 trillion in home value will evaporate until long term affordability is restored again...
If the US government also bails that 3 trillion out then we are looking at at least 5 years of military spending but it could easily climb to 7 years of US military spending.

My dear Iraqis and my beloved mujahedin from the Afghan landscape: I had a very good day today & I hope you had a pleasant day either!

Lets proceed with the fun, via Barry's hangout I found a new 700 billion US$ sized hedge fund named Strategery Capital Management. It is a joke of course but a very funny joke. Here is a link to their home page.  

But they also have a job application file, since I am unemployed and surely would like to work for a hedge fund I decided to file an application.
Here is a screenshot of my application, if you click on the pic you go to that job file:

Lets leave it with that, till updates & live well and work well.  

(01 Oct 2008) Don't you think that the American university Princeton is a high shot university with very clever people? Today I found out that the Princeton economists and finance experts are nothing but dumb debt huggers; they do not understand the nature of their own science!

Lets resume what happened in the US financial sector lately:

The five investment banks gone because they did not understand the risks they took.
Insurance company AIG (who as a company should handle risk calculations with ease) gone because they did not understand the risk they took.
Freddie Mac & Fannie Mae; same stuff, they did not understand their own business fundamentals.

After my humble opinion the economic and finance departments of Princeton university can be placed in that line too. On Barry's hangout I found a 70 minutes long youtube video where these hotshot economists and finance folks tried to explain what was going on.

But the Princeton debt huggers video is only a weather report, they only describe the weather but do not tell how the weather works. They think they have found 'causes' but they interchange cause and effect; these guys are weird beyond belief.
Just like the management folks of the above mentioned companies were weird beyond belief.  

Here are the names of these fake scientists:

- Hyun Shin, Professor of Economics.
- Markus Brunnermeier, Professor of Economics.
- Harrison Hong, Professor in Finance.
- Paul Krugman, professor of economics and international affairs.
- Alan Blinder, Professor of Economics and Public Affairs.  

Oh, now I remember why a long time ago I stopped reading American economical analysis; stuff like that is often only an advertisement for the USA economy and has only little to do with real economical and financial thinking.

A far better analysis should have the American attitude towards debt as a starting point, after that you see with ease that this 700 billion US$ bailout program will falter just like more clever programs of such a small size will.

Yet the video still contains lots of nice things like 'maturity mismatch'; the fake scientists think this is a 'cause' to the collapse of the five investment banks but this is plain wrong. The fact that the Americans think they have a constitutional right to refi was the cause of all this stuff. Again: Social attitude towards debt is the starting point of serious analysis, not all these debt hugging principles...

Don't forget: The Princeton folks never saw it coming while I already in the Spring of 2004 gave advice at the Central Banks of the developing countries about 'how to behave'. 

End of my preaching to the fake US scientists, here is the link:

http://bigpicture.typepad.com/comments/2008/10/princeton-crisi.html?
cid=132989487#comment-132989487 

Till updates.  

(02 Nov 2008) Only one item and one link today.

Item 1) Prudent Bear guest commentary; the good stuff.
Link 1) More on chained dollars.

Item 1) Prudent Bear guest commentary; the good stuff.

I only did a little or financial news reading this weekend (because most things run the expected course) but on the Prudent Bear website the most significant news was found.

It was around the US 10 year CDS spread, for normal folks this means:
How expensive is it to insure the value of your US government bonds?
It is now 40 pips or 0.40% a year, the contracts are usually five years long so it costs now 2% of your investment in US government bonds to insure this against USA default for a period of five years...

Still bargain prices if you would ask me. 

Click on the next picture to get the graph a bit sharper: 

Lets do the math: 40 pips is 0.4% and as a number this is 0.004. Therefore the sellers of this insurance think that the USA only defaults every 250 years (this given the present turmoil). I only repeat: European pension funds should buy this while it is at such bargain prices.

Think for yourself: once in 250 years?????

For the rest, only a quote from the file (source):

This has perplexed, and even amused, some market observers. How, they ask, could a private sector contract against default be expected to pay out in the case of a US government default – which would be the equivalent of a nuclear explosion in the financial markets? So what’s the point of buying such a contract? 

Comment: For inside the USA it does not make much sense to buy stuff like this, for long term European pension funds it makes a lot of sense. Lets leave it with that.  

Link 1) More on chained dollars. 

In the chained dollars department there was a good link found (USA statistics of course):

Real Per Capita Disposable Income Biggest Drop Since 1949  

The link contains good info (another link), scroll down to line 37: 

Scroll down to line 37 

Till updates.  

(01 Nov 2008) As usual five items:

Item 1) New food: Mark 77 Fire Sauce.
Item 2) Hedge fund and pension fund hammering.
Item 3) More on the USA gross domestic product.
Item 4) Jesse still thinks the system can be saved with more debt.
Item 5) The empty item. 

Item 1) New food: Mark 77 Fire Sauce.

My dear Afghanis and most of all my dear Iraqis, I know I have been lax on my duties towards you. I am sorry for this, but the breaking down of funding for the US military goes so good that I mostly concentrate on that...

Here is only a third food thing named Mark 77 Fire Sauce, the fish soup and the other food items still have to be published & lets not rush and declare victory when in fact the US military is still alive...  

Most of all, the final calculations around the zero one project still have to be published. And since I hope that by now my fellow scientists know that I can craft good statistical tests, the zero one project will be taken a little bit more seriously... 

Item 2) Hedge fund and pension fund hammering.

From Pension Pulse we have two good links, one about hedge fund hammering and one about pension hammering: 

http://pensionpulse.blogspot.com/2008/10/closing-gates-of-hedge-hell.html  

http://pensionpulse.blogspot.com/2008/10/kaboom-pension-bombs-exploding.html  

No comment, have fun reading it. 

Item 3) More on the USA gross domestic product.

Two days ago I did some exotic attack on the US real domestic product and shaved about one trillion off that number. In case such stuff is too exotic for you, there is also more down to earth stuff.

Econ Browser analyzed the diverse components of the latest USA gross domestic product report & it looks that without US government spending things would be far more worse... Welcome to the United Socialists of America:

http://www.econbrowser.com/archives/2008/10/some_additional_1.html  

And from some Time web log we have:

The GDP report: Moderately bad, perhaps more than moderately misleading. 

Again no comment, use your own brain!  

Item 4) Jesse still thinks the system can be saved with more debt.

A lot of otherwise smart people think that when you borrow yourself into trouble, you can also borrow your way out of these troubles.

Yet the law of gravity forbids anti gravity, that is an elementary fact of live.

Beside Jesse also Barry still thinks the present system can survive & so I ponder if there is a flaw in my own thinking. I cannot find the flaw, I think that when you borrow yourself into troubles you can not borrow your way out but you have to work your way out...

After so many years of overspending, there will be years of underspending. If there still is some borrowing capacity left this only means the years of overspending are not entirely over. It' s all pretty simple...   

Here is what Jesse thinks: 

Avoiding a Great Depression: Rescue, Rebalance, Reform. 

Again, no comment.  

Item 5) The empty item.  

Today on CNN I viewed a report from a graveyard in Iraq. The CNN reporter told stuff like 'until now we could not visit a site like this because the security situation did not allow for this'.

This was a strange remark because so many years so many reports were there from 'embedded reporters'  from 'dangerous places'.

The report of this day only validates we could easily look at a so called 'excess death toll' inside Iraq of over one million. The US military has full responsibility for that because we all know the present US government is just a bunch of idiots.

The US military started to use Iraqis to kill Iraqis and the wisdom of that can be measured on the graveyards of Iraq.

The US military cannot hide behind her political leaders, the US military were the boots on the ground that did this. And they did nothing, just absolutely nothing to report to the White House what the consequences of followed policies were...

Lets hope this item is empty enough...

Till updates. 

(31 Oct 2008) With all this emotion in the air with all these declining stock market stuff, every body starts cherry picking data to proof his or her fabulous insight.

Let me do the same, it is just two hours after US market closure and here is my source file and here is my cherry picking:

-- The Dow fell for eight straight sessions -- the longest losing streak since the eight days of declines following the Sept. 11, 2001, terror attacks, when the blue chips lost 1,038.12, or 10.8 percent. It lost a staggering 2,400 points, or 22.1 percent.

-- The market's volatility was so intense that there were just three days during the month that the Dow didn't rise or fall in triple digits. The Dow set new records for one-day point gains, 936.42 and 889.35, and for one-day point losses, 777.68 and 733.08. 

Comment: Not bad, for the rest no comment. 

Till updates.  

(30 Oct 2008, item 3 is updated and corrected on 31 Oct) Today's five items: 

Item 1) New wallpaper made (1024 by 768 pixels).
Item 2) The Macro Man has absolute fantastic graphics.
Item 3) USA chained dollars gross domestic product: 11,720.0 million.
Item 4) The USA GDP deflator and conspiracy huggers.
Item 5) The empty item.

Item 1) New wallpaper made (1024 by 768 pixels).  

For many years I use wall papers from the Hubble space telescope, today I modified one of them. Here is the original: 

And this is the modification:

At http://hubblesite.org/gallery/wallpaper/ there are a lot more.
From the moral point of view you can use them because using them has no positive contribution to the nominal or real US gross domestic product...;) 

Item 2) The Macro Man has absolute fantastic graphics.  

On Seeking Alpha the Marco Man has absolutely fantastic graphics, in the picture below you see all daily returns from the DOW Jones (SA source). 

I hope you understand a 'return' of 0.1 refers to a 10% increase... You observe: Since 1995 the negative spikes are often larger than the positive spikes, if this goes for now the biggest declines still have to come!

Item 3) USA chained dollars gross domestic product: 11,720.0 million.

Today I wanted to start an investigation if indeed the USA deflator figures are understated yes or no. That is because a few days ago I wrote that the US gross domestic product could be overstated by as much as 10% & beside idle I have a habit of backing up my words.

Although I could find some data needed in this table oversight from the US Department of Commerce, Bureau of Economical Analysis, at first glimpse I could not find all the information I need.

But I found another 'cut the corner' table that gives a clue that indeed this structural overstatement of the US gross domestic product is there.

When you look at so called chained dollars you can craft the next table of the US gross domestic product in chained dollars:  

To be honest, I never heard of chained dollars, here is a definition that explains the word 'chain' but technical details lack.

Lets make some easy to understand calculations:

11720 / 9695.6 = 1.2088 hence 20.88% GDP growth in 8.5 years.

Thus a yearly 'chained' GDP growth of 1.2088^(1/8.5) = 2.26%.

That is not very much, but the US Department of Commerce introduced it herself to let 'changes in the purchasing power of the dollar' out.

Good stuff isn't it? Because 2.26% is beyond the long term GDP growth since we left the golden standard and started hugging fiat money...

Begin: Update & correction from 31 Oct 2008.

Yesterday I made a gigantic mistake, I was thinking that 'US dollar purchase power' contributed to stuff like the US dollar index and this was utterly wrong.

It seems that this dollar chain thing is only an inflation thing, it has nothing to do with global purchasing power of the US$ but only a local (inside the USA) thing. The 'chaining technique' is not relevant, just like their are many ways to construct a price index there are many ways to calculate the present GDP in 'year 2000 dollars'.

So the present USA GDP of over 14 trillion US$ is only 11.72 trillion in 'chained dollars' And when using this real USA GDP growth over the last 8.5 years was only 2.26% a year...

The problem remains the same: Can I shoot a 5 to 10% hole in the 11.72 trillion?

Of course I can, as a matter of fact it is a cakewalk.

<Begin: Cakewalk.

As the Americans are experiencing; the costs of living in your house can be a large part of your budget. And if these costs climb wouldn't it be nice if that would be reflected in the consumer price indices?

As a matter of fact the costs of living in your house is nicely kept out of the inflation numbers; all those years house prices went through the roof so called 'consumer inflation' was artificially low. This was handy for the US government so they could keep the rates on debt too low for too long.

The US government uses so called 'rental equivalence' to measure the cost of living in a house, they do this because using rental equivalence differentiates between the 'true costs' and your 'investment component' on paying the mortgage.

There is only a little problem: On average you folks only live about seven years in a new home and given the present decades of mortgage payments your 'investment component' is rather neglectable. (Only in the last seven years of your mortgage payments you make significant 'investment components').

To make a long story short: You were fooled all those years when house prices climbed too fast and credit was too cheap. Housing is a large part of consumer payments and all those years the deflator was too low.

Hence from the reported so called 'real US gross domestic product' we can easily withdraw another trillion to arrive at something like 10+ trillion in so called 'year 2000 dollars'. 

End: Cakewalk> 

End: Update & correction from 31 Oct 2008.  

Item 4) The USA GDP deflator and conspiracy huggers.

One of the strange characteristics of the US society is that when you doubt some generally accepted things, you are suddenly a 'conspiracy seeker'. Instead of going into a debate and look at arguments pro and contra, you are suddenly a 'conspiracy seeker'.

There are some roots to this, remember the Iran contra scandal under Ronald Reagan? Folks who tried to expose reality were of course only 'conspiracy seekers'.

But let not loose ourselves in old history; Barry was complaining that rising oil prices (from imported oil) brought down the deflator and thus the GDP was propped up by this.
Barry had a good point in this because the Americans do not hug the real GDP but it's (price) inflated version.

Here is some of the conspiracy feeders critique (source)     

Over at the Big Picture, Barry Ritholtz has been constantly complaining that the GDP deflator is underestimating inflation. Well I’m not particularly surprised since the GDP deflator does not measure inflation persee.

His specific concern is that the rising oil prices have decreased the GDP deflator - he thinks this is ridiculous, however, if we are willing to stop being conspiracy theorists for a little while we will see that it is fine.


GDP=Consumption + Investment + Government Spending + Exports - Imports

As a result, if the volume of everything was unchanged (such that real GDP was unchanged) but import prices rose, nominal GDP would fall. As a result, rising import prices lower the GDP deflator (as this is what is used to adjust the nominal figure to a real figure). Since oil is imported, and since the imported price went up a lot over the June quarter, this drove the GDP deflator down.

Real GDP is a measurement of the volume of production in the economy, which is why this makes sense. 

Comment: It also makes sense that when prices go up, sold volumes go down. Imported or locally produced does not make much of a difference I guess. So the example given (leaving all other changes out beside oil prices) is rather dumb: it works only with small changes if and only if these small changes can be borrowed...
One way or the other the extra money needed for oil cannot be spend on other items. 
Matter of fact is there is a whole range of problems with the official US statistics and they have nothing to do with conspiracy but with people not understanding their core business.
Just like insurance company AIG did not understand her own core business (insuring risk)... 

Item 5) The empty item. 

Empty empty empty & more of that vacuum cleaner stuff; think for yourself!  

Till updates. 

(29 Oct 2008) Just a lazy update today, a few links and a short reflection on the Federal Reserve rate decision from today.

Four days ago I posted an update around a guy named Nassim (Nassim and me have strong correlation in the way to view financial risks) and my colleague in math Benoit Mandelbrot. There seems to be a video of the conversation I quoted from, I hope this link works:

http://www.pbs.org/newshour/video/module.html?mod=0&pkg=21102008&seg=5  

And if that does not work you can try:

http://bigpicture.typepad.com/comments/2008/10/pbs-video-taleb.html   

Most other financial weblogs of importance already linked to it, but for reasons of being complete let me quote some fun (Bloomberg source): 

``This year's financing needs will be unprecedented,'' said Anthony Ryan, the Treasury's acting undersecretary for domestic finance, at a Securities Industry and Financial Markets Association conference in New York, where he was a last-minute substitute for Treasury Secretary Henry Paulson. 

Comment: Indeed from a macro economical point of view this is very interesting because even without 700 billion bailout programs it was already doubted that the USA could pay back her debt, let it be local or foreign debt. 

 __________________________

Now a short reflection about the US Federal Reserve rate decision (50 basis points down to 1% & this is viewed as 'aggressive).

Begin intellectual reflection.

A few months ago the worlds Central Bankers gathered in Basel and one of the more important statements was that 'from now on even in economical prosperous times interest rates should be higher to avoid another round of this present chaos'.

There he was sitting: The idiot Bernanke, no sweat always mister cool. He 'agreed' to that insight too.

And so the first thing the FED does is lowering and lowering, this is a first solid clue the USA will not oblige her future payments on US government bonds.
That is only lesson number one we can draw from this rate cut.   

Lesson number two is a future lesson:

When given the choice between funding the US military and paying her international debt off, the USA will always choose for funding the US military.

If you don't believe me, why don't you start a study of murder rates in the USA? Historically they are five fold compared to normal democracies, if you do a bit of deep thinking and connect the dots there will be only one conclusion left:

Country first & military first...

And dumb Central Banks like those in China or Japan will take heavy losses and say 'This was not foreseen by all experts'.

End intellectual reflection. 

 Title: The Americans are so easy to understand:
Dumb, fat & obese, hautain & arrogant.

At last don't forget there are a whole lot of dumb Central Banks around that give away their reserves in exchange for US dollars, here is a Yahoo link:

Fed announces new credit lines with foreign banks  

Till updates. 

(28 Oct 2008, second update) Now in effect former Federal chairman Alan Greenspan is trashed, it is time to move on and trash the battalions of debt hugging USA economists. Let me first give you some workable definition of a trashable debt hugging economist:

This is a person who sees no problem when debt levels blow up exponentially at a higher rate than the gross domestic product.

In general these are folks who borrow a lot of their thinking from economic theories from the old days of the golden standard where the total global gold reserves served as a natural ceiling for too high debt levels.

The USA economist I have to trash today is James Galbraith (found via Barry's hangout; source). I could write a complete book about why this guy is wrong in almost every detail so I only highlight one:

Somewhere in the video James Galbraith states that in the USA they have social security and that for about 40% of the elderly this is their only source of income.

Debt hugger James Galbraith forgets to mention that these social security funds only contain Treasuries, the money collected in the past is long long gone on weird stuff like wars or outbailing banks. Debt hugger James Galbraith thinks that the rest of the world is a piggy bank for the USA, but James why should we borrow you folks more money when you have already the most 'vibrant economy' around?

Seldom you see so many economical nonsense as in the next video:

http://www.pbs.org/moyers/journal/10242008/watch2.html  

Till updates.       

(28 Oct 2008) Items here, item there, items that are everywhere:

Item 1) Case Shiller fun fun fun!
Item 2) Porsche & VW do some good hedge fund ramming.
Item 3) The Upas tree kills everything in a 15 mile radius.
Item 4) For the first time in history: S&P down in a 10 year period.
Item 5) The empty item.

Item 1) Case Shiller fun fun fun!

This day we had the latest Case Shiller housing index out, compared to the official Federal statistics this index is always some good cool aid. Here is the fun:

You see the year on year speed is still growing; when this speed does not grow any longer the fall in house prices is halfway.

Until now US family home house prices have fallen only 19.5% (source), from the top level mid 2006 they will fall another 30% until long term affordability is restored again. So from the present prices another 37 to 38% decline looks logical.

In terms of lost housing value; the 19.5% decline equate to about 4 to 4.5 trillion US$ lost, together with the losses on the stock markets we are looking at about 7 trillion US$ combined in lost value from the unbubbling fun...

Future losses in home equity could reach another 9 trillion US$ more, you see it is 'fun fun fun' over here. 

Item 2) Porsche & VW do some good hedge fund ramming.

In Germany today the stock value of car producer VW almost doubled, hedge funds and the like had borrowed about 12% of total market cap of VW so they could go short on that stock. Hedge funds borrow from example from pension funds, the pension funds get some money for that so these pension fund index investors can always (miracle miracle) show above index performances.

This day it went all a bit different because Porsche decided to use her options on VW and the hedge funds found themselves in the next funny position: They had borrowed VW stock, they went short for the day and suddenly had to buy more to keep the losses under control.

The move was so massive that VW became the largest market cap in the world; that must have beaten some of those hedge funds...;)   

Here is a market watch source. 

Item 3) The Upas tree kills everything in a 15 mile radius.

On the weblog naked capitalism there was a link to the New Scientist with

Seven of the greatest scientific hoaxes   

A very good hoax was 'quantum gravity is a social and linguistic construct' but the most funny scientific hoax was the Upas tree that was supposed to kill all and everything in a 15 mile radius... (Source) quote:

An account was published in the London Magazine in 1783 by a Dutch surgeon named Foersch (his initials were variously given as NP and JN). It claimed the existence of a tree on the island of Java so poisonous that it killed everything within a 15-mile radius. 

Comment: That's a nasty tree! But when you substitute 'bank' for 'tree' it could be true, some banks can create so much unpaid debt that entire economies are killed. That is simply what you get when you use economical insight from the debt huggers from the USA.

Item 4) For the first time in history: S&P down in a 10 year period.

For the last item to be published I waited until the US stock markets were closed.
I waited because it was clear that the obese not understanding economics stock traders from the DOW, Nasdaq and S & P 500 were busy doing a thing called 'staging a rally'.

When you ask one of those dumb obese 'professional' stock traders how the economy is doing you will rather likely get an answer like 'We staged a rally today so the economy is doing fine'.

As a matter of fact a broad stock value measure like the Standard & Poors 500 is down on a decade long scale and this is the first time ever that this happened.

S&P rallied over 9% today, this on only negative news...
It looks like the USA folks have some 'emotional issues' with the declining stock values, oh oh those poor fatbags. 

Of course news like that never makes it to the front pages of the main stream media, main stream always has a bias to concentrate on the positive side of the story (we must not talk ourselves into a recession). In the picture below you see that in fact the NightmareOnWallStreet rules and not these obese not understanding economy Wall Street stock traders. Click on the picture for a bigger version or check the yahoo source file.

Item 5) The empty item. 

As usual the empty item, use your own brain (Wall Street traders are always advised to take enough pain killers before they try to think for themselves). 

Till updates.

(27 Oct 2008) Today only two items: We take another look at US house prices and volumes sold and inside military thinking we take a look at four US helicopters bringing death inside Syria.

Item 1) House prices and volumes sold.

This day there was a lot of news about US homes sales that were 'unexpected' up 2.7% and thus we had all the ingredients for a nice DOW rally.

Here you have one of those Ass Press files:

New home sales post unexpected increase as prices fall to lowest level in 4 years

Even the local journalists from the RTL7 channel brought in wisdom like 'unexpected the sales went up'. It has to be remarked that a lot of those RTL7 journalists have in fact a degree in economical science...

I do not know if they got their degree at a local university or got it for 49.95 € at some website but RTL7 keeps on telling crap where science should prevail.

Therefore I advice the RTL7 team to look at a few links and a graph from those links, if they do not do this and prefer to keep their idiotery a bit longer they will get some severe punishment in the future.

Here we go my dear but stupid RTL7 team:

When studying prices and volumes sold in economical science it could be handy if you have some handle on so called 'seasonal components'. It is clear the RTL7 journalists do not understand the pricing and volumes sold after more then two years into the US housing crisis.  

Let me give the stupid RTL7 journalists only one graph and after that only a few links & please let me hope here in Holland we have some better brains to rule the place... 

The graph showed above was found via Barry and his source link is very much worth reading: 

http://calculatedrisk.blogspot.com/2008/10/september-new-home-sales-lowest.html   

Item 2) Some military thinking. 

The news from Syria is so strange to me: For the last year the US military has extreme low death toll compared to the entire war and compared to the 'zero one project' (that killed US military slime in a nice three digit fashion for three months on a row).

The news is so strange because the US enjoying such low casualties numbers inside Iraq, why fly out to Syria with the object of killing civilians?

Don't forget, one of the 'anonymous sources' from the US military stated 'There is no need to hide amongst innocents, we will find you'. (No source file because I got angry.)

Why fly with attack machines to Syria to fulfill your groupthink of reality?

And kill children under the rather weird axiom of 'You cannot hide among innocents'?

In order to expose the US military fine crafted qualities of targeting the enemy, let me  (Ass Press source) quote:

The raid Sunday targeted the home of Abu Ghadiyah, the nickname for the leader of a key cell of foreign fighters in Iraq, according to the U.S. official, who spoke on condition of anonymity to discuss sensitive intelligence. The U.S. Treasury Department has identified him as one of four major figures in al-Qaida's Iraq wing who were living in Syria. 

Comment: I am not an expert inside international law, but after my humble opinion every house of every military member of the US military is easy cake. When the US military can kill children inside Syria from the decade long stuff counties like Iraq and Afghanistan can do the same thing... 

Only very seldom you observe a military action as stupid as this Syrian joke. 

Till updates. 

(26 Oct 2008) The previous update was also updated: for the first time in this credit crisis there are some details that I do not understand at all, so please read that too!

For the rest: As usual five items as I found them to have some interest:

Item 1) From immobilienblasen: Volvo sales a bit down.
Item 2) Real reserves US commercial banks: minus 362550 million US$.
Item 3) Guest commentary Prudent Bear: Real interest rates.
Item 4) Is there a new bank regulator in town?
Item 5) As usual the empty item. 

Item 1) From immobilienblasen: Volvo sales a bit down.

This weblog has a fascinating name; may be at one point in time in the future I can ask a German female the next: Kannst du mir immobiel blasen?

But all madness on a stick, here is the (source) quote:

Volvo said it received 115 order bookings for heavy trucks in Europe in the quarter, down from 41,970 trucks a year earlier. Customers in Europe are taking a ``wait and see'' attitude amid turmoil in global financial markets, Volvo said. 

Comment: If this figure is correct it is clear the the European economy will get a lot more very hard hits. Please recall that when I declared economical sanctions on the USA back in 2004, everybody thought I was crazy.
But if these economical sanctions were carefully implemented since then, we would not have all these shells shocks from the present days.
So Volvo & Swedish government, let this be a good lesson for you:
Never ignore wise advice...
What are you saying, I cannot hear you...? Oh you did not understand why it was wise??? Sorry, that is your problem and not mine!  

Item 2) Real reserves US commercial banks: minus 362550 million US$.

I have been lax on my duties following the combined 'non borrowed reserves' of the US commercial banks. For years and years the real reserves stood at +40 billion but in this financial universe where elephants still can fly, the real reserves are now minus 363 billion.

That is about ten times lower compared to what it was all those years; this implies the US Federal Reserve has about 400 billion US$ in garbage collateral on her balances only in relation with the money auctions.

Seldom the Almighty was so harsh for a bunch of obese corrupt people, sorry it is not me but it is the Almighty who shows America what she is: 363 billion negative real reserves...    

Here is the link, look in the third column and scroll down to 22 Oct:

http://www.federalreserve.gov/releases/h3/Current/   

Item 3) Guest commentary Prudent Bear: Real interest rates.

To me the info found at the guest commentary was completely new, although I expected the US Treasuries (the government bonds) to turn to worthless pieces of paper in the future, until now this was only a 'gut feeling' of me.

Therefore to my surprise this was a common trait among all large economic declines, it is nice to observe that my 'estimated guesses' often turn out to be true...  

http://www.prudentbear.com/index.php/commentary/guestcommentary?art_id=10141  

Scroll down to the easy to understand graphs... 

Item 4) Is there a new bank regulator in town?

The political leaders of a lot of nations will gather mid November for a weekend to put forward a common strategy for the present crisis. Of course this will not help one quantum because the USA will insist, as usual, on her 'leadership role'.

Of course when they have that leadership role, as usual, nothing will happen.
It will take some more years for the Americans to loose their arrogance and for the other nations it will take even longer before they arrive at the conclusion humanity is served best by imposing economic and financial sanctions against the USA.

For example: Now the US dollar is artificially high because of the unwinding of the carry trades, for China this is simply the best time to get rid of all those US Treasuries. In the future they will be rather worthless, now will China do this?
Of course they won't because they lack all kinds of insight into how 'financial stuff works'. Mark my words: China will not unload even now there are trillions in unsold US Treasuries...

But I have done my stinking best in finding a new international regulator, I have done lots of prayers and I asked the Almighty what would be best to preserve a system where the rich get richer every year, the poor poorer every year. I asked the Almighty what would be best to preserve a financial system where rich folks can speculate on food markets to make more money and poor folks understand far better what it means to be poor.

The Almighty, wise as the Almighty is, guided my hand to the next international regulator. Isn't she cute? She has it all, if she can tame double headed dragons she can also tame banks with official balances and 'off balance' items.

If this dragon chick cannot pull it off, in that case not only the financial sector is doomed but the entire future existence of humanity is at stake! Really true...;)

Item 5) As usual the empty item.  

This is the empty item so use your own brain: Do we need to kill most of the rich people because they leaded us into this situation? Should we keep on worshipping the rich or is it better to kill a lot of them?

In Zimbabwe the killing was executed rather stupid...

Arguments pro and contra please but my vote goes to some smart killings! 

Till updates.

(25 Oct 2008, updated 26 Oct) Lets suppose that yesterday's graph from Jesse is in fact correct, what can cause such a large spike in failed US Treasury settlement failures?

Don't forget, for the time being this is pure speculation but when a trader from a bank or whatever financial firm makes such a fake sell of lets say 10 million US$ in US treasuries, in that case the 10 million are instantly reported on the daily balances (the trading books). If some time later the sell does not go through, the 10 million is withdrawn again (but of course another trader or the same one has already sold another batch of non existent treasuries).

This all could be a vehicle in artificially pumping up the trading books...
If the above speculation is true, it makes a lot of sense.

There is another reason why Jesse could be in the right, he places the following link rather prominent on his weblog:

http://www.pbs.org/newshour/bb/business/july-dec08/psolman_10-21.html  

There you can find a discussion with Taleb and colleague in math Benoit Mandelbrot. The ideas they unfold are like hand in glove with mine although I crafted the stuff at first inside military thinking.

In military thinking it amounts to that when during war you must never apply all the military recourses you have because otherwise you cannot accelerate when needed. During war it is important that you can decellerate and accelerate.

In April / May / June 2007 the so called 'zero one project' was executed in Iraq, these were the three most bloody months for that US military slime. Lets quote the fun once more:

These were the three most bloody months for the US military, but this could only be achieved because we had so called 'zero days' when killed US slime was supposed to be under the average and 'one days' where this was supposed to be above average.
In practice (to make it workable for the Iraqis) we had stuff like seven consecutive 'zero days' followed by ten 'one days'. Very simple...

The military model is the same in for example the banking industry or government finances, only there you have to have enough reserves in the system to make it stable and healthy for the long run. The savings (the reserves) compare to the 'zero days' and increase in debt amounts to the 'one days'.

It's a very universal model, no wonder a lot of other folks have found it too...

So not the USA government, but this is not a miracle since corruption is deeply rooted in the USA (elementary examples are the earmarks in the law crafting process and the power of the lobbyists). From history we know that corrupt regimes always under perform and always lead their societies into the void.  

Lets give some nice quotes from the article mentioned above:

PAUL SOLMAN: Taleb's book, published in April 2007, was called "The Black Swan" because, in 1697, Dutch explorers discovered Australia and black swans. 

Comment: This is new to me, I did not know my fellow countrymen discovered black swans. Beside this it is rather likely the local Australian aboriginals discovered them thousands of years before... 

NASSIM NICHOLAS TALEB: Let me tell you why it's not like before. Look at what's happening. The world is getting so fragile that a small shortage of oil -- small -- can lead to the price going from $25 to $150. 

Comment: This is true but in oil there were always plenty of reserves, the problem there was that stocks did not perform enough for the fast return seeking hedge funds. Lets kill the hedge funds & lets kill the rich people who leveraged the entire economy up so much. Only after some serious killing the healing can start, why let these criminals get away with it? 

BENOIT MANDELBROT: That is not well-understood. In fact, that is misunderstood for which tools have been developed which assume that changes are always very small. 

Comment: May I thank my colleague Benoit for ramming a full fist in the heads of the risk departments of the banks?

NASSIM NICHOLAS TALEB: Now you understand why I'm worried. I hope I'm wrong. I wake up every morning -- actually, I don't wake up every morning now. I start to wake up at night the last couple of weeks hoping that I'm wrong, begging to be wrong. 

Comment: Sometimes when I go to bed a bit late, I feel obliged to wake up early and check if stock values have 'declined enough'. Don't be afraid for a complete system crash my dear Nassim, there is plenty of intellectual capital around to craft a better banking system.
The present system is doomed anyway so why worry about that?
Better look for a way out, like I did years ago when I informed my readers that a new 'golden standard' is not wise and currencies should be tied to a labor standard. It has all kinds of benefits, like for example in the USA declining obesity rates... 

Once more the Jesse graph: 

Update from 26 Oct:

On Bloomberg I found an article that also goes around this topic of settlement failures, let me (Bloomberg source) quote:

Failures, an indication of scarcity, jumped about 35 percent to $4.79 trillion in the week ended Oct. 1, according to data on the Federal Reserve Bank of New York's Web site. Fails averaged about $185 billion a week since July 1990. 

Comment: These are absolutely staggering numbers given the fact that the 'official Federal deficit is only about 10 trillion US$. This is the first time in the credit crisis I simply do not understand what is happening; Where the hell is the price elasticity on US Treasuries? If these numbers of settlement failures are in fact correct in that case the price of that stuff should go through the roof... 

Till updates. 

(24 Oct 2008) We had good market action today on the stock markets but sometimes it is wise to keep an eye on the bond markets.

The most weird news I found today is also the most important news in case it is true.
Is it true that 2.29 trillion US$ in US government bonds are sold short and the seller cannot deliver?

Yes think about that... Could such a weird proposition be true?

At the moment of writing it was just over 30 minutes ago when I came across a weblog named Jesse's Café Américan and he had that strange statistic upon failed US Treasury deliveries. I don't know how reliable Jesse is but he claims to be tracking stuff like this since he started tracking this on a weekly basis since 2003, so for the time being I give him the benefit of the doubt.

For the time being I only post what I found at Jesse's hangout and you are allowed to do your own thinking on this. Here is the basic graph with US Treasuries failed deliveries:

The graph does not say what the 'unit' is so Jesse does not have an education in math and statistic; please always report what the unit on the Y-axis is...
But it seems to be 'millions of US$' reported in failure on the Y-axis.

Here are a few source links:

A Record Number of Buyers Cannot Take Delivery of the US Treasuries that They 'Own' 

And from 10 Oct:

Stand and Deliver - Significant Fails in the US Treasury Market  

Luckily today I can also unveil the third reason why I support the McCain / Palin ticket to the White House. The picture below says it all, why do difficult things with 'international diplomacy' when you can get a chick like this at the helm of the US military?

Till updates.

(23 Oct 2008) Boring things continue:

Item 1) Why the USA will never ever enter a depression...
Item 2) A bit more on the Value at Risk model.
Item 3) Greenspan, conondrum and a 'once a 100 year' problem.
Item 4) Another good intraday swing.
Item 5) The empty item. 

Item 1) Why the USA will never ever enter a depression...

The USA will never ever enter a depression, not even a small one. You might think this is a proposition that cannot be valid; in the past at least once the USA had a serious depression.

The answer is very simple: The US government has so called 'official statistics' and these official statistics are so good, they will prevent all depressions and even a lot of recessions!

Don't believe me? Let me back it up with a little quote (Bloomberg source):

Home prices dropped 5.9 percent from a year earlier, the biggest decline since 1991, when the Federal Housing Finance Agency data starts. Foreclosure filings increased 71 percent in the third quarter from a year earlier, according to Irvine, California-based RealtyTrac, a seller of foreclosure data. 

Comment: Do the free market data with foreclosures up 71% while we know that foreclosures are a large part of houses bought contradict or validate the 5.9% of the FHFA? Of course the Federal data are to be doubted.
Same goes for the Federal reported US gross domestic product, I cannot proof this because I lack a long list of deflator figures and compare these to reported inflation figures but my gut feeling says that over the last decade the combined reports of US GDP could be overstated as much as 10%...

Item 2) A bit more on the Value at Risk model.

Here is a Working paper from 2002 about the Value at Risk model:

http://129.3.20.41/eps/mhet/papers/0207/0207001.pdf   

On page 24 you can find a 'third problem' with the Value at Risk model from former investment bank JP Morgan, quote:

Consider a situation when volatilities rise and there are some trading losses. VaR’s would be higher and tolerances for risk would likely be lower. For an individual firm, it would appear reasonable to reduce trading positions; however, if everybody were to act similarly, it would put pressure on their common trading positions.

Comment: There are a lot of reasons why the VaR model should be only one of the tools in the toolbox and there are a lot of reasons why this is more or less the only tool in it.
Let me give you some statistics from when I was a student: I started with more or less 50 other students in the first year of math, computer science had about 60 and after one or two years about 50 to 60% of those students were gone because the education path was too rough for them.
The faculty of economics easily got 500 students a year but you never did see only 250 survive after one or two years. In those long lost years it was rather clear to me: the economy folks are not a real science, they do it for the money...
Bankers are recruited from economical or financial faculties, input from real brains is never very much accepted by those commercial economical guys.
To make matters worse, people with a law study often take pride in not understanding math (the never be a nerd syndrome).  

Item 3) Greenspan, conondrum and a 'once a 100 year' problem.

Some years ago the former chairman to the US Federal Reserve has some weird problem; it was the conondrum thing (my spell checker says it is conundrum, so ok ok).

The conundrum was very simple: Long term rates on the free markets were below the short term rates set by monsieur Greenspan.

Nobody sounded the alarm, all other Central Banks kept their mouth shut and this only proofs: We are ruled by idiots.

These days the financial journalists from the television follow daily / monthly / etc so called LIBOR / Euribor / HIBOR rates to see if they are coming down and if they come down a bit this is 'proof' that the measures of our leaders are working...   

After my humble opinion these are all idiots in a fishbowl.

Let me quote a bit of the stuff Alan Greenspan debited today (source) quote:

Despite concerns he had in 2005 that risks were being underestimated by investors, "this crisis, however, has turned out to be much broader than anything I could have imagined," Greenspan said in remarks prepared for delivery to the House of Representatives Committee on Oversight and Government Reform.

"Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity -- myself especially -- are in a state of shocked disbelief," said Greenspan, who stepped down from the Fed in 2006. 

Comment: In the face of so much wisdom I have no comment.

Greenspan thinks this credit crisis is a 'one in a 100 year event' and this is plain stupid of course. But the google news search pops nothing up when I search for 'greenspan 100 year'; the financial journalists still are journalists and not very 'financial' I just guess. 

Item 4) Another good intraday swing.

In the picture below you see some good intraday swing on the DOW Jones index, the swing is above 500 and below 600 and all I want is to observe swings above 10% of this index.

That would be some real testing if the US economy is in fact a vital and vibrant economy or a thing that is classified as a Ponzi scheme where everything is centered around 'can we get more credit'. To put it simple: I would like larger intraday swings...

 Item 5) The empty item.  

Pure emptiness around here: Use the thing behind your eyes and between your ears and try to think for yourself! 

Till updates.

(22 Oct 2008) Sorry, more boring items:

Item 1) More on the Lehman CDS & the Value at Risk model.
Item 2) The Californian economy.
Item 3) Al Qaida backing the McCain / Palin ticket?
Item 4) Non financial news: a fractal drawn by a child.
Item 5) The empty item. 

Item 1) More on the Lehman CDS & the Value at Risk model.

Yesterday some so called 'experts' would like us to believe that almost all of the 300 to 400 billion US$ CDS contracts canceled each other out and there would be only about 6 to 8 billion US$ actually change hands. The rationale was that some companies not only bought that stuff but also sold it.

What I forgot to mention yesterday is that Lehman had about 140 billion US$ in bonds outstanding and that it is hard to believe that only 8 billion of those bond were covered by credit default swap insurance. Conclusion: Very likely it is much much larger than the reported 8 billion US$.  

__________________________ 

In another development I learned of the existence of a company named the Risk Metric Group, it seems they sell software that is used by a lot of risk departments in the banks. I was curious if I could chop up their risk models just like the option price model lately. But since it is a stock listed company there are so many thousands of web pages about that company that I gave up for the time being.

Then I came across a nice Seeking Alpha article with the title:

How Good are RiskMetrics' Tools? 

There was a very funny quote found about insuring sub prime mortgage debt from the USA, quote:

Most educated investors know about the details of the Paramax/UBS lawsuit - where UBS “insured” $1.3 billion in sub-prime loans for a premium of 0.155% per year. That is a premium of $1.55 million a year for a notional value of $1.3 billion. In fact, the numbers are in-line with actuarial numbers for insuring a house against the possibility of destruction from earthquake - but that has a 15% deductible. In the world of CDS’s, there are no deductibles. The insurer pays for all losses - including those from “markdowns”. 

Comment: This is sheer unbelievable, it might have been she 'super senior' tranche of that pile of sub prime garbage... But only 1.55 million a year to insure on 1.3 billion???  

The Paramax / UBS lawsuit is also funny reading from a very strange financial planet. 

__________________________ 

Item 2) The Californian economy.

The Californian economy is of interest because it is an area where the house prices went through the roof and as so serves as an example for what will happen in the rest of the country. (Both climbing and decline happened early there.)

Here is the Seeking Alpha source file:

Is California's Economy Sending a Warning Signal?  

Just some funny quotes:

Last week, I talked to a London-based investment banker who is convinced that many senior bank officials do not understand their own “financial instruments.” Not just why they failed, by how they worked in the first place. 

Comment: As we have for example the Value at Risk model   :)  

And what to think of:

If you live in a $2,000,000 mansion, typically you are cushioned from the worst type of financial devastation. However, the “cushion” is likely the equity in your home and stocks. When these both lose 50% of their value and you’re in debt up to your eyeballs – a few missed payments –suddenly the bank owns your house.  

Comment: A lot of scientists say there have been dozens and dozens of credit crisis / housing bubbles / stock market bubbles and so there is no real problem because a few years later every thing is back on track...
They miss the point that because of the debt hugging culture in the USA and the Federal Reserve policies from the past we have at least 3 bubbles going 'back to normal'. Don't you think there are at least 3 bubbles? You can choose from:

1) Housing prices.
2) Stock prices.
3) Credit prices.
4) US government bond prices.

If my insights in financial / psychology matters are correct, somewhere down the timeline foreigners (but also US citizens) will come to realize the true value of the US government bonds... Will taxes be raised to pay them off? Of course not. 

__________________________ 

Item 3) Al Qaida backing the McCain / Palin ticket?

I am glad that my support for the White House Presidential ticket for McCain / Palin has not fallen on deaf ears. Lets first quote the fun and later discuss if we need a 'Spanish election' yes or no.

Here is the Breitbart source file:  

Al-Qaida-linked Web site backs McCain as president 

The message, posted Monday on the password-protected al-Hesbah Web site, said if al-Qaida wants to exhaust the United States militarily and economically, "impetuous" Republican presidential candidate Sen. John McCain is the better choice because he is more likely to continue the wars in Iraq and Afghanistan. 

"This requires presence of an impetuous American leader such as McCain, who pledged to continue the war till the last American soldier," the message said. "Then, al-Qaida will have to support McCain in the coming elections so that he continues the failing march of his predecessor, Bush." 

SITE Intelligence Group, based in Bethesda, Md., monitors the Web site and translated the message. 

"If al-Qaida carries out a big operation against American interests," the message said, "this act will be support of McCain because it will push the Americans deliberately to vote for McCain so that he takes revenge for them against al-Qaida. Al-Qaida then will succeed in exhausting America till its last year in it." 

Comment: Very likely this is true; a large enough attack will draw the obese and stupid US voter population towards McCain. When you study McCain you understand he thinks America owns the places known as Iraq and Afghanistan.
From the military point of view it makes much sense to push for another Republican Presidency, from Spain we know that about 200 dead civilians give rise to about 10% in voter swing. If an attack is pulled it has to be bigger than the Madrid bombings...
From the economical point of view it does not make much of a difference who will be the US President, both parties lack all kinds of insight and think more debt via 'economy stimulus packages' will do the trick.
From the moral point of view the USA also deserve another attack, simply the enormous amount of dead civilians in Iraq serves as a moral guide because the Americans were very efficient in wiping out all discussion on the numbers reported but they forget there is a big memory. And this memory are the combined graveyards of Iraq where the simple truth can be found...   

Lets make a second quote:

SITE senior analyst Adam Raisman said this message caught SITE's attention because there has been little other chatter on the forums about the U.S. election. 

SITE was struck by the message's detailed analysis—and apparent jubilation—about American financial woes. 

"What we try to do is get the pulse of the jihadist community," Raisman said. "And it's about the financial crisis." 

Comment: Once more we see how far all these experts are drown in their little version of reality. My dear Adam Raisman I searched for about half an hour to a letter that I wrote to al Qaida International about 4 or 5 months before the Spanish elections and one of the elements of that letter was that I lacked insight in what about exactly would happen if there was an attack just before some elections.
To be precise: it were the American elections. I am sorry I cannot back this up because as a scientist I think people should always back up what they say.
And to SITE senior 'analyst' Adam Raisman I can say: Want to bet no terror investigating group visits this website? All their website activities are logged and no employee wants to have 'kinkytshirts' in his or her files...
You must understand the full picture Adam: Military / psychology / economy / terror /politics / employee...

How did the average 'terror expert' react after the Madrid train bombings when asked if this may be could have anything to do with the elections? The so called experts raged that these evil people are to dumb for that...   

Hey Adam, who is the dummie now? 

__________________________ 

Item 4) Non financial news: a fractal drawn by a child.

When, beside giving advice to al Qaida International, you also have to raise a few of that stuff known as children you can do all kinds of stuff. Unlucky for some kids there will always be parents who lack elementary insight and use bamboo sticks or even baseball bats to ram some wisdom in.

I think I was lucky because my mother was a nurse...

But lets not talk about me, you can give kids rather complicated tasks if they feel secure and do not need a nurse every now and then. Only in security the mind will grow so I am pleased to put forward a nice drawing from a long time ago: 

Not bad, the age of the kids is still written in single digit numbers but the foundation for taking it to the limit is already there. 

__________________________ 

Item 5) The empty item.  

Sometimes I wonder what American parents teach their kids, after all compared to a normal democracy their murder rates and incest rates are always five fold larger...

I hope this item is empty enough for the obese fatbag arrogant slimy Americans!

Till updates. 

(21 Oct 2008) I am still waiting upon the results of the Lehman CDS party, the most meaningful quote on this detail was found today on the Asia Times Online (source), quote:

The Depository Trust and Clearing Corporation, which clears the vast majority of trades in the US over-the-counter market, said this month only $6 billion may actually change hands, Reuters reported early on Tuesday. This is because large players in the market, such as dealers and some hedge funds, have both bought and sold protection, subsequently taking both gains and losses on Lehman's default that will offset each other, the report said. 

Comment: The most mentioned number now is 360 billion US$ in outstanding principal value. Of course in theory it is possible that large players who sold too much Lehamn CDS stuff also bought extra to compensate for the risk. In theory it is possible that those who bought too much insurance, sell CDS because suddenly they became risk seekers...
So it is not impossible that the reported 6 to 8 billion US$ actually changing hands is true, but it is not very likely. 

Later I found the sad news that we have to wait a long time before the results for the Lehman party are out (Reuters source), quote:

But experts say the fears were exaggerated and in any case, losses may not be made public until companies post their next quarterly earnings in the months to come. 

Comment: In such a case the buyers of Lehman CDS insurance can show large profits while the sellers of this stuff can use the mark to market rule and write down on their own obligations and also show profits (or less than expected losses).
And the US financial circus, it moves on and on...

__________________________  

By now you have likely read the 'Food for thought' 1 and 2 in the right column on this page. At the Asian Times I found another funny news article named Gobbled up by the derivatives monster. The writer makes a very elementary fault in the next quote.

Can you see what fault he makes?

Well, the estimate from (as I recall) the International Monetary Fund is that the global total of derivative contracts outstanding is $1.125 quadrillion, whereas global gross domestic product is about $50 trillion, although both numbers are so big that I couldn't make any sense of them even if I was sober, and being sloshed, I revert to more primitive responses, like screaming in fear and holing up behind the massive blast-proof door of the Mogambo Bunker Of Raging Panic (MBORP). 

Only here, safe amongst gold, silver, guns, frozen pizzas and stacks of adult literature of the "Hot, Nasty Ladies" variety can I finally relax enough to calculate that to make this $1.125 quadrillion yield even a lowly 1%, it would take $11.25 trillion just to pay the interest! Hahaha! We're freaking doomed! A quarter of global GDP is needed just to pay a 1% yield! 

Comment: The elementary fault is you only have to pay interest on debt, if you purchase derivates with borrowed money you do not have to pay interest on the principal value but on the debt you took on.
This takes not away these kind of doom files are important because indeed: We are doomed, if not by the derivatives monster it will be the interest on loans monster.  

__________________________  

In a fiat money system like we have it is obvious that in theory the money in your hands has no value at all, these are not golden or silver coins but bank notes printed in a factory. Therefore the true value of a bank note is the cost of printing it at the local factory.

But if supply of money is limited and since money is the life blood of economies, even fiat money can serve as a storage of value. This is the main point in managing a fiat money system; make sure it serves as a storage of value by limiting the supply.

In practice the American economists have raped that idea, not once but every day. And not once a day but many times a day & the US$ is nothing but a retired ragged whore. In return the American economists got a lot of Nobel prizes so they thought they were smart. 

Another point in pouring value in a fiat money system is having enough savings on all levels of society, again a point missed by most US economists. When you have enough savings (or reserves) you can apply these savings when an emergency is there.
At the Federal Reserve they do not get such elementary points because only yesterday the FED chairman proposed a new so called 'economy stimulus package'.
Just like the previous stimulus package this will not work because the US dollar simply is no longer a 'storage of value', of course the Americans will have a hard time from the emotional point of view to swallow this but the US$ is nothing but a ragged and retired whore.

Here is the dumb White House take on it (Yahoo source):

"We're continuing to have conversations with members of Congress, and we're open to ideas that they would put forward ... that would stimulate the economy and help us pull out of this downturn faster," White House press secretary Dana Perino said Monday, shortly after Bernanke endorsed the need for a fresh and "significant" round of government action.

Comment: In the year 2005 the American consumer withdraw about 750 billion US$ of his home equity and consumed it (I have this from S&P economist chief David Wyss but I don't have links or so). So how can stupid small sized 'economic stimulus packages' work if big hammers like 2005 did not?
The answer: Pumping more dollars in leaves only less 'value' for every single US$ around. Pumping in money only works when these are savings; debt is needed after the ravages of war, in a mature economy it can only be savings that will do such a trick of 'reviving' the economy. 

__________________________  

All in all this was a strange day, I expected some good Lehman unraveling but I find myself back with hanging out the 'wise guy' when it comes to elementary thinking about the fiat money systems that are vital in the long run.

 Title: It was a boring day today...

Till updates. 

(20 Oct 2008) And another five very boring items:

Item 1) Now ING has 10 billion €, are we supposed to be happy?
Item 2) Debt hugger Bernanke: More debt please!
Item 3) Lehman CDS party tomorrow?
Item 4) Via Barry: Stiglitz on Comedy Central.
Item 5) The empty item.

Item 1) Now ING has 10 billion €, are we supposed to be happy? 

Geesh... There is constantly talk on the news that now ING has 10 billion € from the Dutch government, their tier 1 ratio is improving... Are we supposed to be happy?

Lets first look what tier 1 ratio actually is, here is a google thing and here a Dutch file from where I quote the next:

Middels de Tier 1-ratio wordt het kernvermogen van een bank uitgedrukt als percentage van het vreemd vermogen. 
-Het kernvermogen is het aandelenkapitaal plus de reserves van een onderneming. Samen met het aanvullende vermogen is dit het garantievermogen van een onderneming. 
- Het vreemd vermogen is het totaal van schulden die een onderneming bezit. 

So tier 1 capital is a bit as next:

Market cap of stock +
The borrowed reserves +
The non borrowed reserves (the real reserves) =
Tier 1 capital.

Ok ok, it might very well be that tier 1 ratio now is 8,5% instead of 6% but is this an improvement? Don't forget, it costs ING 850 million € a year in interest obligations only so dividends and profits are hollowed out.

You can also argue that the ratio between borrowed and non borrowed reserves is climbing and that this is bad.

And we are still not one quantum wiser, does ING have 'off balance' items and if so what is upon it? What is the exposure to mortgage backed securities? What is the exposure of ING to the 600 trillion over the counter derivative market? And so on and so on.

All we get are some sheets with some numbers and that has to 'proof' that ING is a healthy company... I don't buy all this shit, on a scale of 1 to 10 ING is still rated in the 3 levels.   

Item 2) Debt hugger Bernanke: More debt please!

With amazement I found the next quote on Yahoo (source) quote: 

Bernanke suggested that Congress design the stimulus package so that it will be timely, well targeted and would limit the longer-term affects on the government's budget deficit, which hit a record high in the recently ended budget year.

Any stimulus package would need to kick in quickly to entice people and businesses to boost spending and buck up the economy during the period in which economic activity would be otherwise weak, Bernanke said.

Bernanke said the package also should include provisions that would help break through the stubborn credit clog that is playing a major role in the economy's slowdown. 

Comment: So the package must be small and short lasting because of it's effects on the Federal deficit but should also contain provisions to break through the stubborn credit clog... I wonder if that guy knows what he is talking about. 

 Item 3) Lehman CDS party tomorrow? 

CDS stuff is that credit default swap stuff; it is a kind of insurance when there is default on debt. For example if you had 10 thousand US$ in Lehman bonds you can additionally buy CDS insurance in case US investment bank Lehman goes broke.

In theory a nice concept, in practice there were a lot of folks who sold Lehman CDS because they never imagined that Lehman would go broke.

A few writers said that 21 Oct would be Lehman pay day but I could not find that back in the source files, so let it be tomorrow or some other day. On the hook is something like 100 to 400 billion US$ but I think the 400 billion is a better estimate.

But on Reuters is a file that says most payments have already been made (source) quote:

The standard practice in the CDS market is that hedge funds and other counterparties must adjust collateral on a daily basis as the value of a contract changes.

As Lehman CDS fell in value, before and after it filed for bankruptcy, protection sellers would have had to provide increasing amounts of Treasury bonds or other cash-like investments as collateral for those contracts.

"The mark-to-market on the CDS is margined daily as a credit event draws near, and that mitigates a large, lumpy payment at the end," said Peter Goves, another Citigroup strategist.

In the Lehman case, the largest collateral payments would have been required in the four or five days following the bankruptcy filing in mid-September, when spreads on senior debt widened from around 700 basis points on the five-year contract to around 7,000 basis points, based on the then market view of an estimated 30 percent recovery, Hampden-Turner said.  

Comment: Indeed after the Lehman collapse suddenly a lot of contracts came 'in the money'. But if suddenly up to 400 billion US$ was placed in margin, how does this work from the accountancy point of view? We have not observed losses related to this in the third quarter so when will these losses be taken?
So lets wait and see what happens... (The Reuters article also mentions only 8 billion instead of the big hammer of almost 400 billion we are waiting for.)

__________________________ 

Lehman is only sidely mentioned in an article where I found the next nice (source) quote: 

In his book Collapse: How Societies Choose to Fail or Succeed, Jared Diamond specified the causes that encourage elites to destroy their societies."They feel safe because the perpetrators are typically concentrated (few in number) and highly motivated by the prospect of reaping big, certain, and immediate profits, while the losses are spread over large numbers of individuals."

And what to think of the next insight:

If Friedrich Engels' observation: "The essence of the state is humanity's fear of itself", ever applied, it does so today.   

Comment: For years I am wondering why my desires to destroy the US military might goes so easily. From Tora Bora to the present equation, why is it always so easy? I think understanding fear and the way it changes thinking is the key; when you are capable of inducing raw and utter fear it makes life so much more easy.
So when it comes to the USA willingly destroying herself you induce a bit of fear, you hang out the wise guy, at times you say 'enough is enough' and after that you repeat that cycle more or less.

It is all very simple: Before nine eleven in the year 2001 some Muslims tried to kill me because I had done some naughty writing. Of course I did not go to the Groninger police because those mental dwarfs are never helpful whatsoever.

So after 911 I could say to the Americans:

Three thousand of your folks died so I could live!

You see how easy it is to implement fear? 

Item 4) Via Barry: Stiglitz on Comedy Central.

On Barry's hangout there was a video from professor Stiglitz who has won two Nobel prizes for the economy. I never read work of monsieur Stiglitz, may be that work explains why the US economy is in such a great shape lately.

But to make a long story short: Stiglitz estimated a long time ago that the true costs of the war in Iraq are something like 3 trillion US$. Lets do some easy calculations; the Iraqis once had a population of about 26 million.
And 3 trillion is 3000 billions and thus 3 million millions, hence:

3,000,000,000,000 US$ / 26,000,000 Iraqis = 115,000 US$ per capita Iraqi...

Staggering numbers eh? Here is the link to Barry:  

http://bigpicture.typepad.com/comments/2008/10/stiglitz-on-col.html  

Item 5) The empty item. 

Do you see an empty item on this picture? 

There are no empty items; the empty glass and small bottle are filled with hope.
Just like empty banks; their balances might be negative so there is hope.

In case you want to have a good laugh, the US government, just like my Dutch government, think they can make profits on wise long term investment capital:

Paulson says stock purchases should make money   

I hope this item is empty enough; so that there is plenty of hope...;)  

Till updates! 

(19 Oct 2008) Here in Holland a lot happened this weekend, but lets do the itemizing thing:

Item 1) Dutch bank ING Postbank receives 10 billion € from the government.
Item 2) US bank JP Morgan plays a for more central role then folks think.
Item 3) Some curious parallels with the 1930 crisis.
Item 4) A bit more on fat tails from fooled by randomness dot com.
Item 5) An encounter with the Prudent Investor. 

Item 1) Dutch bank ING Postbank receives 10 billion € from the government.

Well well well, only four days ago on Wednesday 15 Oct I 'rated' the Dutch banks on a scale of 1 to 10. ING Postbank ended at the very end of that small rating list & within four days ING is at the well of government financial help. Only 10 billion € so only 600 € for every Dutch citizen. 

Let me quote a bit of the fun (Bloomberg source):

-- ING Groep NV, the biggest Dutch financial-services firm, will get 10 billion euros ($13.4 billion) from the Netherlands after the company said last week it expects to post its first quarterly loss. 

ING will scrap this year's final dividend and sell the government non-voting preferred securities that pay 8.5 percent annual interest and don't dilute existing shareholders, the Amsterdam-based company said today in a statement. The injection will lift ING's core Tier 1 capital to about 8 percent, the company said at a press conference attended by Dutch Finance Minister Wouter Bos and central bank President Nout Wellink. 

Comment: Now lets go back to 2004 when I formally declared economical sanctions on the USA & explained to the developing countries how they should behave in the coming time.
Of course every body who read that was 100% sure I was 100% lunatic, for example I remember that when I smashed for a rough 10 thousand € in windows at the local courthouse these folks had a very strong emotional need to portray me as a 'confused man'.
In the end of 2008 most governments are characterized as being 'confused governments' doing one strange thing after another...
On my side of the equation things could hardly go any better.

Of course I have to publish what happened to ING last Friday, a nice 27.5% haircut on her stock value: 

And a history chart:

 
Item 2) US bank JP Morgan plays a for more central role then folks think.

The deeper you dive into gathering knowledge about why the present mess is such a mess, the role of former US investment bank JP Morgan comes popping up on my radar screens. Lately when I pointed to some fundamental flaws in the pricing of derivates (ordinary options on stocks) it came to light that the 'value at Risk' model (the VaR model) has exactly the same kind of flaw in it:

Only using a normal distribution while you did not proof this was the only thing around is relatively stupid. Where did the VaR model came from...?

From JP Morgan, but more massive 'financial innovations' come from that source; according to portfolio dot com JP Morgan not only invented the Credit Default Swaps but also made that now 58 trillion US$ market so big as it stands today.
Please remark the CDS is only 10% of outstanding over the counter (that means no regulation) derivatives.

From the first page of this beautiful article (it is five pages long but it is a 'must read' and almost all details are correct as far as I know), let me (Jelle Eisinger Portfolio source) quote:

The structure of the first derivatives deal wasn’t as solid as Demchak’s team had intended. That initial, flawed financial instrument was later replicated thousands of times by J.P. Morgan and other banks, with the same defects repeated and magnified over and over again.   

Comment: This simply is what you get when you craft smart financial innovations and the commercial folks at the bank take it over. The commercial folks at the bank really do not understand the financial innovation but they know how to make a buck.

Item 3) Some curious parallels with the 1930 crisis.

On nakedcapitalsm I found a nice parallel with the present crisis; like said before every crisis has to be fought using her own details but in comparison sometime wisdom is found.

That makes the next quote the more funny (Naked Capitalism source):  

The Hoover administration first tried to fix the problem without involving the government directly. Instead, the government merely facilitated the formation of the National Credit Corporation, a private central lending institution. Sound familiar? Remember the MLEF (Master Liquidity Enhancement Fund), a SIV of SIVs that Treasury tried to coordinate back in the fall of 2007, only to have the banks refuse to pitch in. 

Comment: I do not remember the Master Liquidity Enhancement Fund at all. Even in the present times making a SIV of SIVs looks like a Hercules task. And what about the costs of a MLEF? Just 700 billion or 7000 or up to 70000 billion US$?
With present day knowledge we can say it is closer to 70000 billion than to 700 billion...

Item 4) A bit more on fat tails from fooled by randomness dot com.

On the Fooled by Randomness website is also a book report from Benoit Mandelbrot. Of course Mandelbrot is famous for his Mandelbrot fractal, in this I hold him in very high esteem.

Back in the eighties Benoit tried to lighten the spirits towards decomposing (historical) stock market values into fractals. Although the Mandelbrot fractal was of tremendous beauty, I was not convinced by his reasoning. You must have some kind of theory that says it is 'rather normal' that the chaos in the entire system is exactly that what rules the local parts of the system.

My thinking has not much evolved since then only now I know that a possible explanation lies in the filtering out of so called 'power laws', let me spare you the technical details.

I will not quote but only post a link to this nice book report:   

http://www.fooledbyrandomness.com/mandelbrotandhudson.pdf  

Item 5) An encounter with the Prudent Investor.  

My first encounter with the Prudent Investor was a very unlucky one: A long time ago when I tried to create havoc on some website where he published I came across some article of him. Beside the logic applied also some source files were completely out of line with only elementary Federal Reserve files.

So I gave the Prudent Investor a horrible earwash.

And since I was in some 'smelling blood' kind of state I looked in his previous articles. Very soon I understood that the economical reasoning of the Prudent Investor was ok, therefore I swiftly went back to the original attack & I don't recall exactly what I said but it must have been something like 'for the rest he is ok'.  

These days, a bit wiser, I like to read him because you can have good long term information. For example I do not understand why for the last 10 to 15 years the US stock market P/E ratio's are so high like they are flying elephants...
PI says 'This is mostly caused by the too low interest rates that forced pension funds from save US government bonds into the stock market'.

Therefore I would like to give my deeply felt excuses to the Prudent Investor, it was just an unlucky first article but I think I have to say 'sorry' for the original attack.

Today the Prudent Investor shares his insight in the next 90% of derivate unwinding that will be done after the Lehman unwinding, no quote just a link:

Coming Soon: The 600 Trillion Derivatives Emergency Meeting 

Till updates.

(17 Oct 2008) This morning I finished a very simple and non technical article about statistical testing of poisons in food. It is so horrible non technical that even political leaders can understand it's content; only seldom I have sunken so low...

Here is the pdf file, till updates. 

(16 Oct 2008) I am writing an article upon statistical testing of food poisoning, what to put in your zero hypothesis and what not. (This is induced by the milk scandal in China where many thousands of babies are sick in hospital.)

So I would like to keep this update short & I only look at the so called TICS data as observed today. The TICS data are a relatively broad measure of capital streams to and from the USA, they are of importance because in theory the US dollar can stay strong as long as the trade deficits are countered by the influx of foreign purchases of long term US securities.

Today another set of that came out, as usual the fraud continues because on a website with the name actionforex dot com it was reported as next (source), quote:

13:00 USD U.S. Net LT TIC flows Aug 14B 

Comment: These are not the net flows and this month actionforex even forgets to put the words 'purchase' in it. When you only report what foreigners have net bought and leave all other things out, it is logical you often arrive at a positive number.
This is idiot because on actionforex it might be expected to get reliable data on the real stuff, it looks more and more that actionforex is only an advertisement outlet for the US economy.

Here is the US Treasury file on it (source), quote: 

Monthly net TIC flows were negative $0.4 billion.  

Comment: Monthly trade deficit is still at the 2 billion US$ a day, so let me give you the broader measure as told by the US Treasury herself (in general as we all know US statistics are so good they will never ever get into a depression because the US government has 'statistics'). The last six months it was as next:

You see: The old theory that the US$ was protected from decline from the absurd high trade deficit is broken. A miracle is happening! The miracle is dollar strength but for the last six months there is not much support from foreign investment in that 'vital and healthy' economy that only lives on borrowed money. 

Till updates.   

(15 Oct 2008) This day I want to take a look at a few Dutch banks and what's my take on them is. In this I have (almost) no insider knowledge, all I do is bundle together the daily news as it comes to me year in year out.
Furthermore I have never worked for a bank and my scientific education has nothing to do with banking but only with math. Although later when I was a teacher I had to teach financial  math so I am one of those guys who can calculate your monthly mortgage fee with only a calculator and without a computer program.

Lets start with the stuff:

SNS Reaal, it is bank that has a stock listing but they have it for only a few years now. Before that they were a bank that stated they were not there for the profits but to deliver good banking services. Their judicial form was a foundation (in Dutch: een stichting).
Given their relatively short time on the stock markets I would be highly surprised if they engaged in all that obscure haute finance with lots of securities in the 'off balance' items.

__________________________

Rabo bank, from all the Dutch banks I hold them in the highest esteem. They have no stock listing so all these years they have avoided the easy to get billions from an IPO. Even stronger: one of their captains (I don't know anymore if it was the CEO or the CFO) stated more or less 'Within 10 to 15 years all banks will be nationalized'.
When a non stock listing bank tells you that you understand that it is highly likely they have their stuff on order.
My children have their savings accounts at Rabo, this has nothing to do with the above but with the fact that my ex got a free museum pass with her Rabo account many years back. And she opened the kids saving accounts...;)

__________________________

ABN Amro, the former Fortis. It is now a 100% state bank. When it came to the news that ABN Amro was sold for 24 billion € it also came to light they also had 25 billion € in so called 'off balance' items. This is my own bank but I do not hold them in high esteem.
Lets face the facts: Because now they are a state bank and because it was sold so high in the past, rather likely it was garbage in the past.
But they are still my bank yet we must not forget that at the moment they would fall in foreign hands for real I would go to some other bank. I guess sometimes I can be a nationalist too...

__________________________

Binckbank, this is not a real bank but because they have the name 'bank' in it their stock value often is lousy. All they are is a stock broker company; at relatively low costs you can place your buy and sell orders of the Amsterdam market and a lot of other markets there.
It is hard to say what their value is because when folks sell stocks like crazy, Binckbank makes some Euro's but the same goes when folks buy stock like crazy.
Therefore it all depends on the management of Binckbank, if they have a proper business model there is no problem. If they are risk taking while not understanding their market like AIG they will be in trouble.

__________________________

ING Postbank. After my humble opinion this could be the most dangerous bank, in terms of assets they are also the biggest: up to 300% of the Dutch gross domestic product. I really have no solid proof but I think they are up to their noses in risky securities and may be even derivatives.
But all I have is so called 'circumstantial evidence', lets sum up some easy to understand emotion stuff:

Lately the 20 billion € bank rescue plan was announced in my little country of just 16 million people, how did the major banks react? Very simple:

-- Rabo: We are just as solvent as the Dutch state, we do not need it.
-- SNS Reaal: We have plenty of liquidity, we do not use it.
-- ING Postbank: We welcome this plan very much, it will bring stability.

__________________________ 

XXX SmallBank. I cannot reveal the real name of XXX SmallBank but from an analyst of that bank I learned how the Basel I and Basel II accords will work in the long run. Under Basel I the 'off balance' items are not counted into the reserve calculations...
I learned a lot from that, I will not nail them down... 

In the end, let me hang out the rating officer, lets hope you get more insight in what happens at for example Moody's, Standard and Poors or Flitch rating agencies.
The rating are on a scale of 1 to 10 so I avoid stuff like BB minus:

SNS reaal, looks like a solid 6 to 7.
Rabo bank: could be as high as 9 but for the time being only 8.
ABN Amro: in real life at most a 3 but now it is a state bank it is a forced 6.
Binckbank: not rateable given their focus on stock markets only.
ING Postbank: 3 may be 4, but they still do not post anything that says they will be safe.

Till updates.    

(14 Oct 2008) Another batch of five items:

Item 1) Criticism on the Value at Risk model & Wouter Bos.
Item 2) Some Extra Terrestrial visit to former FED chief Alan Greenspan.
Item 3) The US dollar and the five stages of grieving.
Item 4) Why I support the McCain Palin ticket to the White house Part II.
Item 5) The empty item. 

Item 1) Criticism on the Value at Risk model & Wouter Bos.

In the wikipedia file I linked to yesterday was also a link to some criticism of the Value at Risk model. It dates back to 1997 and in science this is very young critique.

The most beautiful detail I found was more or less as next (Fooled by randomness source), quote:

You can use the Value at Risk model to find some risks, but that does not protect you from the risk of using that model.    

This is a very good insight, it brings wisdom. In the past I has similar insights, when you try to find a common cause that brings down the most mighty empires a common cause is that often their might and powers turn into weakness.

Lets turn to present day with the troubles with bank Fortis who took over ABN Amro some time ago. It was asked at the Dutch minister of finance Wouter Bos why this takeover was allowed Wouter more or less stated:

All the experts we consulted agreed that this takeover would not cause a serious problem.

And now you see: When you consult some experts, they might point you towards some risks. But you must also take into account the risk this particular expert brings along...   

After my humble opinion, when it comes to banking most experts are only highly paid idiots. 

Item 2) Some Extra Terrestrial visits former FED chief Alan Greenspan.

On the Prudent Bear I found a very nice hypothetical visit from some outer space visit to former US Federal Reserve chairman Alan Greenspan. It is funny reading but it also contains a very important detail (Prudent Bear source), quote:

ET: Hmmm … wonder if the fact that the Debt/GDP ratio has surpassed the point that it hit early in your last Great Depression is significant. Tell me EZ Al, do you think that there are any ‘natural limits’ to this debt load … that there comes a point when, to use a nuclear metaphor, it reaches ‘critical mass’ – causing a ‘core meltdown’? 

EZ Al: Well, if there is such a natural limit, we on Earth are unaware of it. Macro-Economic Science has no such concept. Yes there have always been jeremiahs, doomsayers, chicken littles – take your choice of labels – who have been warning that the sky is falling. But what can you do about people who cry wolf – and always there is no wolf and the sky is still intact above? You ignore them. 

Comment: It is indeed rather strange that the US Federal Reserve in her economical models do not use some upper threshold of debt allowed into a fiat money system.
Any idiot can see total debt levels need to be contained, so not the Americans.
Again it is strength turning into weakness; hand in hand with the debt levels come the obesity rates. Fatter and fatter by the year they are & again: Former strength and health has turned into obese weakness.

Item 3) The US dollar and the five stages of grieving.

David Merkel also has a 'Five stages of grieving' file, it is not as good as Barry's but Barry is a better writer and David has to put out that composure of being 'wise'.

This is what David thinks of the last stage (Alhepblog source), quote: 

Finally, stage five, acceptance. The foreign currencies rise to sustainable levels versus the US dollar. Inflation and real economic activity decline in the foreign countries. They begin buying more goods and services from the US, and dollar claims are redeemed. Inflation and interest rates rise in the US, as we have to produce more to pay off the dollar reserves now being redeemed by foreigners.

Comment: This particular outcome is not what I have in mind, destruction of your military might is advised now that it is utterly clear your political process is only one other version of hanging out the 'American idol'.   

Item 4) Why I support the McCain Palin ticket to the White house Part II.

Of course after 8 years of the Republican Dubya at the helm of the US economic and military might I hope McCain will bring 4 more years of wisdom in the White House seat.

Don't get me wrong: I am not ironic or so, I mean it. I want to destroy the USA military might and the best way to do it is via John McCain but the Democrat candidate will also do.

Lets look why I need McCain and his complete lack of all elementary economical insight (again former strength has turned into weakness). (CNN source), quote:

As the Arizona senator outlined his new economic proposals, he used some of his most pointed language to date to describe what he said was the difference between himself and Obama on the economy.

"He's an eloquent speaker, but even he can't turn a record of supporting higher taxes into a credible promise to cut taxes. What he promises today is the opposite of what he has done his entire career," McCain said at a rally in Blue Bell, Pennsylvania.

"Perhaps never before in history have the American people been asked to risk so much based on so little. You can look at the record of what he's done or you can just go with your gut, but either way you're left with the same conclusion: Sen. Obama is going to raise your taxes, and in this economy, raising taxes is the surest way to turn a recession into a depression."     

Comment: With his wild ideas on taxes McCain does not understand he pulls the rug from the funding of the US military. Lets look at some basic facts:

The US military needs about 700 billion a year to keep functioning.

Right now we have a 700 billion US$ rescue plan to save the banks but elementary calculations and only little brains indicate we need at least 3000 billion more to save the banking sector only.

So if McCain truly wants to stay another 100 years in Iraq, he might have some tax problem like 'Read my lips, no more taxes'.   

Item 5) The empty item.  

Empty empty empty;

Read my lips: 'No more weird American military adventures!'

But I need your help; if you can bring big harm to the USA please do not hesitate!
Weird emotions like 'They liberated us in 1945' are not allowed.
For the rest: use your own brain, the Almighty gave it to you so why not use it?  

Till updates. 

(13 Oct 2008) In the itemizing thing we have:

Item 1) More on the Value at Risk model.
Item 2) Here we have that idiot IMF director Dominique Strauss Kahn again.
Item 3) Who is on the hook for the Lehman mess?
Item 4) The Nobel prize for economics goes to...Paul krugman!
Item 5) The empty item. 

Item 1) More on the Value at Risk model.

I have never studied risk models before and I only looked about it for about a minute or fifteen, but of course there are serious problems with this VaR model that seems to be widely in use. But it is not as bad as reported last Saturday, in the Wikipedia file you see actually a matrix of covariances used, link:

http://en.wikipedia.org/wiki/Value_at_risk  

Again I am not an expert, but there seems to be a bit of a problem with the VaR model, quote from the wiki source:

A subtle technical problem is that VaR is not sub-additive. That is, it's possible to construct two portfolios, A and B, in such a way that VaR (A + B) > VaR(A) + VaR(B). This is unexpected because we'd hope that portfolio diversification would reduce risk.

Comment 1: I think that in such a case the diversification was not for real and that in such a case there is too much positive correlation in the portfolio.
But again I only looked 15 minutes at the VaR model so may be I am talking 'starter nonsense'. 

Comment 2: In my mind comes an example from a long gone past where I had to teach the ANOVA model to students. ANOVA = Analysis of Variances and that model needs normal distribution assumptions at the entry level too.
You had to test if a bunch of averages were coming from the same family distribution...
So I crafted a test where you only needed the averages (that often are normally distributed) and made a test from that. You did not need the stupid normal distribution assumption at the data entry level anymore... 

Item 2) Here we have that idiot IMF director Dominique Strauss Kahn again.

Now do they never ever learn it at the International Monetary Fund? Every time this Strauss Kahn comes out I get a serious headache! Look what we have now the European rescue plan to save the banks is out (Bloomberg source), quote: 

``What has been done over the last three days should provide elements of reassurance,'' Dominique Strauss-Kahn, chief of the International Monetary Fund said on French radio Europe 1 today. The worst of the financial crisis ``may be behind us.'' 

Comment: This once more shows that at the IMF they have no clue whatsoever what the future US house price declines will do. Let me sum it up once more: At least another 6 trillion US$ in family house value will be wiped out before long term house affordability is restored again.
Besides families this could have an impact of over 3 trillion on the balances of the US banks, a more  complete study could give sharper bounds on this detail.   

__________________________ 

Ok ok, even I think that interbank lending could be improved by the large state guarantees. In my country Holland we now have a 20 billion rescue fund and a staggering 200 billion fund for securing interbank loans.

By the way these 'funds' do not exist in reality, it is not like our unemployment or pension funds. It is only borrowed money, just like all USA funds are.

Will this give new interbank lending? Hard to say, all that past interbank lending was mostly to feed the beasts on the off balance items. Now most of these off balance beasts are dead it looks reasonable that there will be little need for interbank lending...   

  
Item 3) Who is on the hook for the Lehman mess?

On seekingalpha was a nice article on who is on this very important hook, see the previous Friday update below for what I think of that. Today some German financial official reported about 300 billion US$ in foreign damage only, if we add the internal USA damage we are looking at a very nice bankruptcy of Lehman Brothers...
Oh, Lehman was small stuff so they were allowed to fail...

Quote of the fun (Seekingalpha source):

On Oct 21, somebody [group A] will have to pay somebody else [group B] billions in cash to settle Credit Default Swaps (CDS) on Lehman. Estimates on what this entails range from $100 billion to as much as $400 billion.

Group A will almost certainly include AIG, the biggest net seller of CDS, and many hedge funds, who have been using CDS selling as their cheap (HA!) financing source for the past few years. Besides single-name CDS specifically on Lehman, other credit derivatives such as CMCDS, CDS options, or Nth to Defaults, CDX indices and bespoke CDOs with Lehman in them will also settle, partially or in full.

This will be arguably the biggest cash-exchange day in human history to date. I don't care how much taxpayer money the government will use to bail them out, somebody will fail.  

Comment: If the info I have right now is more or less correct it will be closer to 400 than 100 billion US$. Another problem: the US$ is rather strong lately so it is extra expensive for a whole lot of foreigners...
Don't forget the CDS market is only about 10% of the total amount of outstanding contracts in over the counter derivatives.
Makes you wonder: what jokes are hidden in the other 90%?  

Item 4) The Nobel prize for economics goes to...Paul Krugman!

Well congratulations my dear Paul. I have no clue why they gave it to you; the hypothesis that all other US economists are less smart looks like the prevailing scenario.

Very nice to observe that urbanization leads to lower transportation costs and also sucks in more laborers. These kind of theories are just what we need right now.

Why bother about the stability of entire economical systems when these systems have no real reserves anyway? When all funds needed are only accountancy vehicles and all real money is wasted away with making the population an obese population?

Item 5) The empty item.  

Only emptiness found at entry number five; floss your brain please! 

Till updates. 

(12 Oct 2008) Itemize it:

Item 1) The economical crisis from 1870.
Item 2) An oversight of the last five weeks in market fun.
Item 3) New 'mark to market' rule: Unobservable inputs are allowed from now.
Item 4) More on the fool Alan Greenspan on derivatives & regulation.
Item 5) The empty item.     

Item 1) The economical crisis from 1870.

It seems there was a huge economical crisis in 1870 too, I never knew this but there are indeed some striking similarities. Of course, just like wars, each economical/financial crisis should be studied upon her own merits but making comparisons can sometimes give a deeper insight. And every crisis has her own beautiful details (Chronicle source) quote:  

The problems had emerged around 1870, starting in Europe. In the Austro-Hungarian Empire, formed in 1867, in the states unified by Prussia into the German empire, and in France, the emperors supported a flowering of new lending institutions that issued mortgages for municipal and residential construction, especially in the capitals of Vienna, Berlin, and Paris. Mortgages were easier to obtain than before, and a building boom commenced. Land values seemed to climb and climb; borrowers ravenously assumed more and more credit, using unbuilt or half-built houses as collateral. The most marvelous spots for sightseers in the three cities today are the magisterial buildings erected in the so-called founder period.

Comment: Indeed when you walk around in some European countries you wonder where they did get all the supplies from to erect so much large buildings. I already knew this was done at the expense of a large poor worker force and now I know a bit of real crisis was also needed. 

Item 2) An oversight of the last five weeks in market fun.

If you have a job combined with a bit of family life, it is easy to loose oversight. the New York Times has an oversight of the last five weeks. It is only headline news and I almost had no dull moments in the last five weeks, but when you see it that way it is rather impressive... 

http://www.nytimes.com/interactive/2008/09/27/30927_WEEKS_TIMELINE.html 

Item 3) New 'mark to market' rule: Unobservable inputs are allowed from now.

Yes, unobservable inputs from future cash flows are allowed...

To understand how weird this is let me give you an example for bringing 500 trillion in real USA bucks right in the hands of the US Treasury:

It is utterly clear that in the year 3000 American citizens will pay taxes to the US government, this is about 100% sure. The same goes for the year 3500 and all years in between; it is 100% sure that there will go large sums of tax money to the US government in these five centuries.
Since we now know for 100% sure these future payments will be there, it must have some value today. That is logical; even Dubya, Bernanke and clown Paulson understand the math rigor behind this.
And since the five centuries of future tax revenues are gigantic, US Congress and Senate should craft a law that it is at least 500 trillion US$ worth today...
The 500 trillion are handed to the US Treasury and the future Americans from 3000 to 3500 will be glad that their future was secured in 2008.

Let me quote a bit of this garbage (Financial Week source) quote: 

In late September, FASB and the Securities and Exchange Commission issued a joint clarification allowing companies to use more internal inputs, related to future cash flow, for instance, when markets are inactive and it is difficult to find trading prices. 

And: 

Earlier this week, Robert Willens, a corporate tax and accounting consultant and former managing director in Lehman Brothers’ equity research division, wrote that, with FASB and the SEC having acknowledged that markets are now largely inactive, “the use of unobservable inputs for the purpose of valuing many securities ought to proliferate.” 

Comment: We all know what it means when 'future cash flows' are activated on today's balances. This simply validates once more the entire US financial sector is only a Ponzi scam, a so called Ponzi financial unit where the interest on the debt can only be paid with more debt.
This was already known of course but now the FASB and SEC make it formal, it is formal...  

Item 4) More on the fool Alan Greenspan on derivatives & regulation.

Also from the New York Times a four page long article about the fool Alan Greenspan, regulations and derivative markets...

Source: 

http://www.nytimes.com/2008/10/09/fools/economy/09greenspan.html?ref=business 

Only one quote from that long article: 

Mr. Greenspan, according to lawmakers, then used his prestige to make sure Congress followed through. “Alan was held in very high regard,” said Jim Leach, an Iowa Republican who led the House Banking and Financial Services Committee at the time. “You’ve got an area of judgment in which members of Congress have nonexistent expertise.” 

Comment: It is strange to observe that both Congress and Senate lack all kinds of elementary insights. Even the Dutch parliament has more insight in one week compared to the USA weirdo's in seven years. 

  
Item 5) The empty item.      

As usual, try to use your own brain.
If you need a lot of pain killers to let your brain work properly, Barry had a link that explains that we are in this crisis because people do not read the Talmut.
Wow wow wow, that also explains the economical hardships of the Palestines: they still do not read the Talmut... 

Till updates. 

(10 Oct 2008, updated 11 Oct) After my humble opinion the most important news of today was the auctioning of the debt of the former Lehman Brothers; the debt of that former US investment bank is only 8.625 cents on the dollar.

Some people at Bloomberg dot com think that 'therefore' the idiots that insured the countless billions of debt from Lehman only have to pay 93.375 cents on the dollar insured. This is a rather strange proposition; did the debt insurers not insure it for the full 100%? The judicial element is not explained, but let me give you a bit of (source) quote:

Oct. 10 (Bloomberg) -- Sellers of credit-default protection on bankrupt Lehman Brothers Holdings Inc. will have to pay 91.375 cents on the dollar to settle the contracts, setting up the biggest-ever payout in the $55 trillion market. 

An auction to determine the size of the settlement on Lehman credit-default swaps set a value of 8.625 cents on the dollar for the debt, according to Creditfixings.com, a Web site run by auction administrators Creditex Group Inc. and Markit Group Ltd. The auction may lead to payments of more than $270 billion, BNP Paribas SA strategist Andrea Cicione in London said. 

Comment: This is a good lesson for the Dubya regime: If for once they follow the ideology they believe in and follow the elementary logic 'do not reward private failure' in that case the rest of their financial sector gets a nice bill of just 270 billion US$ or more.
I am hoping for some good multiplication factor in this; the 270 billion US$ that now needs to be paid for will trigger a bit more of 'the good stuff'. I mean the 270 billion is above the US write downs so far in relation with the housing correction & don't forget the 200+ billion US$ that was 'written up' by US financial institutions because they 'wrote down' their own debt obligations to other parties.
All small bank failures are already hooked to the US taxpayer mouth because the FDIC fund is a fake funk with only US treasuries in it, after Lehman all large bank failures will be hooked on the US taxpayer mouth too so could this all be more perfect?

To the traitors and betrayers of religion I can say: More bear market fun will follow for that obese nation & the scientist in me never speaks idle words... 

With some slightly different parameters you get the next bear: 

I think the second bear is slightly better, it does not have that 'amateur feeling' that comes with the first picture.

Update from 11 Oct: Here is a Bloomberg file stating that indeed the debt auction has only little relation with what the debt holders actually get, it seems there is only little judicial information on large stuff like this. End of the update. 

Till updates, have a nice bear market or try to get one. 

(08 Oct 2008, updated 11 Oct) Today it was a boring day on the financial markets, after my humble opinion the declines simply do not go fast enough while on the other hand I understand there is a lot of so called 'emotional resistance' in the brains of the diverse folks.

Therefore, after waiting so long, I decided today to attack the so called 'derivative positions' that are traded by folks who do not understand their stuff.

Since I am a teacher I split the stuff in only two items:

Item 1) Derivatives for dummies.
Item 2) Derivatives for smart guys like the Princeton dummies. 

Item 1) Derivatives for dummies.

In the next video there is a wise lesson for dummies; the one trillion number mentioned is not needed at all. All banks that did this are vulnerable; they only got a phone call in the morning from a client with the specified risk and return needed and sliced some millions off stuff needed & sold that to the client. 

  
Item 2) Derivatives for smart guys like the Princeton dummies.

To the Princeton smarties now we have over 600 trillion in contract obligations on weird over the counter stuff I can say: The USA has some fundamental flaws in the pricing of derivates.  

The flaw is very easy to understand, the USA traders think that their scientists have protected them because they are 'so smart'. In practice the option sellers should have used 'empirical info' that far more accurately describes the so called 'striking price'.

In order for the Princeton dummies to understand this, click on the next pic and sing the 52.05 minute vid out.

Wanna bet you don't understand all the details???   

My main point of criticism is you must need the empirical distribution of the company in study and not use some stupid plus or minus 1%  'what is the difference' kind of attitude. The dangers in the 600+ trillion US$ derivative joke (with contracting value of about one US GDP) are in the tails of the distribution; the tails are likely far fatter then the standard theory tells us.

Update from 11 Oct:

To my amazement I found the next quote today, this was not for option pricing but risk management. It seems that Wall Street uses a so called VaR model (VaR =  Value at Risk) and this model has the same fault as the option prices have. Quote:

Lurking behind the models, however, was a colossal conceptual error: the belief that risk is randomly distributed and that each event has no bearing on the next event in a sequence. 

And:

The more enlightened among the value-at-risk practitioners understand that extreme events occur more frequently than their models predict. So they embellish their models with "fat tails" (upward bends on the wings of the bell curve) and model these tails on historical extremes such as the post-Sept. 11 market reaction.  

Washington Post source link, also worth a visit is the Prudent Bear (home page) and their must read files.

Comment: The guy that wrote the Washington Post file can be trusted, his name is James G. Rickards and was general counsel of Long-Term Capital Management from 1994 to 1999. So he could study the blow up of LTCM from close and after years of thinking he could write an article like that.
I myself studied the stochastic equations that rule the option pricing stuff but after a few weeks I lost interest because I did not agree with the Black Scholes approach and had other ideas on that detail.
Now many years later I find that even those VaR models have the same kind of fault in it, it makes you wonder why the Nobel price for economics goes so often to the USA...

End of the update. 

Till updates.   

(07 Oct 2008) What a lovely day! All the Iceland banks capitalized by the Iceland government, although it is only small collateral damage it is still a lovely detail.
Now serious, today I want to look at the next items:

Item 1) My opinion on the European rules for deposit insurance at the retail banks.
Item 2) Some lessons, not for the faint hearted from naked capitalism.
Item 3) Via Barry: More on the Wall Street Shadow system.
Item 4) Today's chopped meat: Debt hugger Ambrose Evans-Pritchard.
Item 5) As usual the empty item.   

Item 1) My opinion on the European rules for deposit insurance at the retail banks.

According to the Dutch minister of finance Wouter Bos, the new consumer bank deposit insurance rules are rather simple and they are as follows:

Minimum insurance threshold is set at 50 thousand € but countries can go above that and here in Holland it is raised from 38 thousand to 100 thousand € for the period of one year.

So my compliments go to the European finance ministers: I see no way to explain this will increase systematic risk. On the contrary: If the European model is better because local wisdom can be applied for setting the insurance threshold on the local level, we could beat the Americans that can only do Central stuff. 
From the consumer point of view there are some folks who have more savings than the local 100 thousand threshold but all they have to do is park them among more deposits.

No way this will lead to more instability or more cross border money travel.

Also the small companies can live with this; but big multinationals might suddenly avoid some countries. I have little insight in that but the word 'multinational' says it all and for the time being I do not expect them to blow up the European financial system. 

Lets go to the next item:    

Item 2) Some lessons, not for the faint hearted from naked capitalism.

Strangely enough it are the weirdo's from the IMF who came up with a study of 124 banking crisis... Are they coughing up some value for their salaries? They do, it is just for one time but they do.

Before I quote the statistical bundling of these 124 banking crisis I want to bring to your attention once more that I started the second activation of the NightmareOnWallStreet on 12 Nov 2007, tactical goal was to half the 14 thousand points of the DOW. Strategical goal = bringing down US military might.

I hope all noses point in the same direction now and let me quote the fun (source)   

The episodes of credit crunches and housing busts are often long and deep. For example, a credit crunch episode typically lasts two and a half years and is associated with nearly a 20 percent decline in real credit. A housing bust tend to last even longer: four and a half years with a 30 percent fall in real house prices. And an equity price bust lasts some 10 quarters and when it is over, the real value of equities has dropped to half. 

Comment: Before 12 Nov 2008 my calculations indicated that US housing value could decline as much as 50% before century long house affordability is restored again. The IMF says that a 30% in house price decline gives rise to about 50% of the main stock markets so all and every statistic out there is only helping me and not helping the US military...

Item 3) Via Barry: More on the Wall Street Shadow system.

On the one hand USA CBS has an exiting item; something with a 60 trillion derivate thing. On the other hand it is very boring; when the total market of nominal value of over 600 trillion in over the counter financial derivatives will unravel we will have true fun.

But if you are young and have a high IQ or if you are old, do not have a high IQ but managed it to Item 3 anyway, here is a good video:

 Item 4) Today's chopped meat: Debt hugger Ambrose Evans-Pritchard. 

Compared to the previous chopped meat this Ambrose thing is only a mosquito but we all know mosquito's bring not forward happiness on a global scale. On the contrary, it is only logical you slab mosquito's to death while you respect the entire eco system.  

To understand why Ambrose is not worth his weight in recycled toilet paper I only quote (source) the next: 

The European Central Bank – which raised rates into the teeth of the crisis in July – has played a shockingly destructive role in this enveloping slump. Its growth predictions this year have been, and still are, delusional. Neglecting its global role, it has vastly complicated the fire-fighting efforts of Washington. 

Comment: Against so much stupidity I refrain from comment. 

Item 5) As usual the empty item.    

As usual the empty item is a 'use your own brain please' item. 

Till updates.

(06 Oct 2008, item 1 updated on 07 Oct) As usual I itemize some news from today, stuff goes great by the way.

Item 1) The USA Plunge Protection Team at work.
Item 2) Making chopped meat of USA Princeton professor Paul Krugman.
Item 3) The European governments are helping me too.
Item 4) Yes yes, end of year 900 billion US$ FED money auction 'help'.
Item 5) The empty item.   

Item 1) The USA Plunge Protection Team at work.

The local journalists were already expecting it, of course I expected it too: Today we will have one of those days where the USA Plunge Protection Team will do it's stinking best... Anyone with only elementary market psychology insight will agree with me that it is impossible to make such a remarkable recovery after a 800 point plunge.
On all other stock markets worldwide we never see such stuff; we believe in free markets while the USA believes in plunge protection... 

Update from 07 Oct:

By sheer coincidence the Plunge Protection team goes to work today! They will work with 'market participants' to 'restore confidence'...
I found the next picture on a weblog named themessthatgreespanmade, if you click on the pic below you can read the rather boring statements from the Plunge Protection Team. A better reading is the wikepedia file on this 

Item 2) Making chopped meat of USA Princeton professor Paul Krugman.

Princeton prof Paul Krugman is a so called 'hot shot', people turn to him for questions and advice. Paul has a job, he has money in his pockets. I am unemployed, have no money to spend and rather likely the Dutch government will do it's stinking best to prevent me from going on the most cheap holiday for at least 3 more years.

The YouTube video from below was posted on 10 Sept 2006. In the video Paul clearly states that the damage of the housing bubble could be as large as the dot com bubble.

More proof that Paul is indeed a debt hugging mental dwarf is not needed: right after the dot com bubble burst I understood the dimensions of the housing market. I wanted to get rid of the US military and this was my opportunity; all I had to do was shut my mouth and wait. Wait wait wait & more and longer waiting.

Click on the picture to go to YouTube.   

 
Item 3) The European governments are helping me too.

In the past the European officials in general and the local Dutch in particular have always been very unhelpful. For example: With an axe I smashed for over 10 thousand Euro's of glass at the local courthouse & made no difference between bullet proof glass and non bullet proof glass.

When I wanted to talk about some terror stuff they laughed and definitely heard the best joke of the day... In those long lost years they also had a strong need to portray me as being a 'confused man'.

Yet miracle miracle, the Europeans made themselves 'confused governments' with only the Georgian equation and now we have this lovely banking crisis at hand true confusion sets in and I will only help them further into confusion...

Here is the fun to be quoted (Ass Press source)    

LONDON (AP) -- Individual European governments issued a cascade of deposit guarantees to shore up their banks but fell short of any coordinated action Monday to deal with the crisis sweeping financial markets, even as stock markets crashed and the euro sank to its lowest level for over a year. 

Comment: It is good to know that when it comes to real brains, the European leaders show their real face. Entropy and chaos in the financial sector only climbs with stuff like this and this could not have been any better for me.

tem 4) Yes yes, end of year 900 billion US$ FED money auction 'help'.

As far as I know reality, the best news of this day was the fact that the US Federal Reserve will broaden it's money auctions from 150 billion to 900 billion US$ to help with 'year's end'. This is some accountancy stuff because all garbage collateral the FED takes in is at that point in time free from the 'mark to market' rule.
It is all so simple to understand my dear reader, all you need is the right paradigm's in your head..

Reuters source file & quote:  

The U.S. Federal Reserve said it would begin paying interest on reserves banks hold at the Fed, a move that would allow it to keep flooding markets with cash without driving its benchmark federal funds rate below target.

The Fed also expanded the amount of money offered in its 28-day and 84-day Term Auction Facility -- or TAF -- auctions to $150 billion each, and increased the amount to be offered in two forward TAF auctions in November to $150 billion each as it tries to ease end-of-year funding strains.

In all, the Fed said $900 billion in TAF credit would be available for year-end needs. 

Comment: this is great news! 

Item 5) The empty item.    

Consumers can fight the credit crisis via making their own beer, just 35 cents for a liter of superb high quality beer. When you have a job you pay over 2 € for this in your local supermarket, so your beer leverage is above 6: 

I hope this item is empty enough. 

Till updates, have a nice beer or try to get one! 

(04 Oct 2008) Ok ok, just a few items...

Item 1) A proposal for a poll in the Dutch parliament.
Item 2) And the right answer is...
Item 3) In fact it is even worse; therefore control of money supply is king.
Item 4) More on the ING Postbank rumor.
Item 5) The empty item.     

Item 1) A proposal for a poll in the Dutch parliament. 

My dear Dutch parliament folks, in the previous weekend the Dutch minister of finance Wouter Bos threw almost 5 billion to Fortis bank and we were told that the Dutch government owned 49% of local Fortis stock.
Belgia and Luxembourgh announced similar stuff.
We the people were not told if this was dillutive stock or stuff bought on the 'free markets' but since the 'base capital' of Fortis was now reenforced it had to be that dillutive kind of stuff (new stock offered by Fortis to some governments).

That was the previous weekend, Monday followed and on Tuesday already Fortis run out of liquidity while they just received an amazing amount of 5 billion Euro...

Of course the mental dwarfs of the Dutch parliament must be bewildered!

Therefore my proposal for a poll in the Dutch parliament to separate the completely idiots from the lesser idiots. 

Item 2) And the right answer is...

The most accurate answer is B, in fact beside 'borrowed reserves' banks also have 'non borrowed reserves'. From the language point of view it is horribly strange to view the real reserves as being 'non borrowed reserves'.

I hope that by now you understand that in a financial universe where non borrowed reserves can be positive but also negative, it is logical that elephants can fly.
Have you never observed a flying elephant?
Here is one, look in the third column and scroll down where we observe -158340 million US$ in real reserves of some country from far far away. 

Item 3) In fact it is even worse; therefore control of money supply is king.

Lets go back to that Dutch parliament that park 100 € in bank A. Bank A has 100 € in borrowed reserves on the balance and borrow 1150 € more because they are 'straight sailors'. What can bank A do with this 1150 €?

For example they could bundle all kinds of obligations together, some AAA rated stuff, a bit of A and BB^- and a bit of F rated stuff for that spicy feeling that pumps up the returns of their 1150 € bundle.
Bank B also has 1150 € of freshly borrowed money and decide to buy the asset of bank A.

Now bank B has 1150 € of assets on her balances, borrowed or not is relevant because now this asset is on her balance (or on the 'off balance' balance) they can borrow about 13 thousand more €.

You see: The 8% rule is not an 'equilibrium seeking' rule. 

When on all levels there are no 'real reserves' the system will crash.

Luckily we have all those bankers who understand their stuff so we won't run into trouble...

Fiat money like we have can actually work if you keep the money growth under control, this has been lacking for many years mostly in the USA but also in Europe where the ECB still keeps the rates far to low in order not to break the spell. 

Item 4) More on the ING Postbank rumor. 

My latest data are from the UK Financial Times so I will not be as dumb as to post a source link because in no time it will be hidden behind the 'subscription wall'.

The reported data look a bit shaky and not very reliable but it says a bit like:

Total Fortis assets = 250% of Dutch GDP,
Total ING assets = 300% of Dutch GDP.  

Needless to say both Fortis and ING operate in a lot of countries so how this equates to our beloved Netherlands only is hard to say.

Yet my gut feeling still says something is wrong with ING, lets not rush things because if the ING bankers are of the 'right kind' there is no problem at all. 

Item 5) The empty item.

Only emptiness found here. 

Till updates, have a nice bank or try to get one. 

(03 Oct 2008) This day the 700 billion US$ bailout plan was approved by the US Congress after it was approved by the US Senate some time ago. Actually due to extra tax cuts and a whole lot of so called earmarks (earmarks are more or less pet projects for individual members of Congress or Senate) it costs now about 850 billion US$.

Today I found a clue to a question I have for a long long time: For every dollar lost in home value, how much damage gives this on average for the banks and mortgage lenders? Just by accident I saw a Congress man in anger stating more or less the next:

"I came just back one hour ago from a meeting with the chairman of the FDIC and he told me that if house prices decline another 5 or 10% then there will be about one trillion more troubled assets at the banks." 

This is extremely important information, 5 to 10% decline is something like 1 to 2 trillion US$ for the home owners and hence about 50% of declined home equity leads to losses for the banks and mortgage lenders. So every dollar lost in home value is about 50 cents loss for the financial institutions and the further house prices decline the worse it will be.
So it is estimated that at least another 3 trillion of losses will be there since at least 6 trillion in home value will evaporate until long term affordability is restored again...
If the US government also bails that 3 trillion out then we are looking at at least 5 years of military spending but it could easily climb to 7 years of US military spending.

My dear Iraqis and my beloved mujahedin from the Afghan landscape: I had a very good day today & I hope you had a pleasant day either!

Lets proceed with the fun, via Barry's hangout I found a new 700 billion US$ sized hedge fund named Strategery Capital Management. It is a joke of course but a very funny joke. Here is a link to their home page.  

But they also have a job application file, since I am unemployed and surely would like to work for a hedge fund I decided to file an application.
Here is a screenshot of my application, if you click on the pic you go to that job file:

Lets leave it with that, till updates & live well and work well.  

(01 Oct 2008) Don't you think that the American university Princeton is a high shot university with very clever people? Today I found out that the Princeton economists and finance experts are nothing but dumb debt huggers; they do not understand the nature of their own science!

Lets resume what happened in the US financial sector lately:

The five investment banks gone because they did not understand the risks they took.
Insurance company AIG (who as a company should handle risk calculations with ease) gone because they did not understand the risk they took.
Freddie Mac & Fannie Mae; same stuff, they did not understand their own business fundamentals.

After my humble opinion the economic and finance departments of Princeton university can be placed in that line too. On Barry's hangout I found a 70 minutes long youtube video where these hotshot economists and finance folks tried to explain what was going on.

But the Princeton debt huggers video is only a weather report, they only describe the weather but do not tell how the weather works. They think they have found 'causes' but they interchange cause and effect; these guys are weird beyond belief.
Just like the management folks of the above mentioned companies were weird beyond belief.  

Here are the names of these fake scientists:

- Hyun Shin, Professor of Economics.
- Markus Brunnermeier, Professor of Economics.
- Harrison Hong, Professor in Finance.
- Paul Krugman, professor of economics and international affairs.
- Alan Blinder, Professor of Economics and Public Affairs.  

Oh, now I remember why a long time ago I stopped reading American economical analysis; stuff like that is often only an advertisement for the USA economy and has only little to do with real economical and financial thinking.

A far better analysis should have the American attitude towards debt as a starting point, after that you see with ease that this 700 billion US$ bailout program will falter just like more clever programs of such a small size will.

Yet the video still contains lots of nice things like 'maturity mismatch'; the fake scientists think this is a 'cause' to the collapse of the five investment banks but this is plain wrong. The fact that the Americans think they have a constitutional right to refi was the cause of all this stuff. Again: Social attitude towards debt is the starting point of serious analysis, not all these debt hugging principles...

Don't forget: The Princeton folks never saw it coming while I already in the Spring of 2004 gave advice at the Central Banks of the developing countries about 'how to behave'. 

End of my preaching to the fake US scientists, here is the link:

http://bigpicture.typepad.com/comments/2008/10/princeton-crisi.html?
cid=132989487#comment-132989487 

Till updates. 

(30 Sept 2008) Itemize it!

Item 1) A case against democracy.
Item 2) More on the ING Postbank rumor.
Item 3) US house price decline fun; a new record. 
Item 4) The Ponzi US consumer; new 845 billion US$ record.
Item 5) The empty item: take a pain killer and think for yourself! 

Item 1) A case against democracy.

Churchill once said something like "Just a conversation of five minutes with one voter makes a strong case against democracy". There might be a kernel of truth in that but democracy is also a mechanism of getting rid of incompetent leaders without the need of a full blown civil war.

Yesterday I observed another two cases against democracy; the ramblings in the USA and UK parliament. I know the credit crisis is very difficult to understand: when debt always grows exponentially faster than the GDP at a certain point in time you hit the wall. I know that political 'leaders' never understand such a phrase because it has the word 'exponentially' in it and many political folks take much pride in stating 'I do not understand math'.

The USA session of Congress was horribly dumb but the UK folks made the crown when one of those explained to his fellows that accountancy rule 157 give rise to a growing cycle of down writings. We the people better look for some rope and some trees and not wait until the next elections.

Item 2) More on the ING Postbank rumor.  

More on the ING Postbank rumor: Everybody expected ING to be in the race for the takeover of ABN Amro. Originally ABN Amro was sold to Fortis for 24 billion Euro and now ING could buy it for only 10 billion Euro. ABN Amro is now only retail banking stuff so there is little danger of skeletons in the closet.

But ING doesn't do it (Reuters source), quote:  

"After careful consideration ING concluded that a transaction would not meet its financial requirements," ING said in a statement.

"ING remains committed to a disciplined approach when considering acquisitions, especially in the current extraordinary market circumstances," it said.

ING was expected to close a deal within two weeks on buying ABN's Dutch operations, people familiar with discussions said earlier on Monday. 

Comment: The above is no proof of course, but it is definitely a clue that there might be some troubles at ING Postbank. I guess we have to wait for the quarterly figures... (And it might all be a storm in a glass of water.)

Item 3) US house price decline fun; a new record.

Yes! The 20 city area Case Schiller is just in and year on year house price decline is 16.30% and that is up from the previous month 15.90%.
The 10 city index was 17.5%.
For the combined US home owners this translates to something like 3 to 4 trillion in lost home value in the last 12 months and it is still getting worse by the month.  

So the year on year speed is still increasing and this implies we are not halfway the house prices decline... This is good news.

All in all: this month the acceleration in price decline was about 5% a year, in theory when there is enough demand in the lower price ranges we will see an S shaped price decline. And when it is S shaped, only when the acceleration is zero we are halfway the price declines.

When wages would start to decline or inflation picks up too much, an S shaped model is not likely and things will be worse. 

Item 4) The Ponzi US consumer.

I don't know what exactly falls under this consumer loan graphic from the Federal Reserve Bank of St. Louis but that is not relevant. On all levels of US society / economy / government they are a classical Ponzi financial unit.

In case you do not know what a Ponzi financial unit is, here is a definition:

In a Ponzi financial unit debt levels are so high that the interest can only be paid by borrowing more money.

The picture below says 845 billion US$ in consumer loans and this is a new record. Therefore we are only at the very beginning of the credit crisis, only when outstanding debt starts to decline we will be in the real phase of the credit crisis.

Most people think that a little bit less access to new debt is a 'crisis' but that is one of the things stupid political 'leaders' still have to learn.
Right now a lot of the new consumer debt is explained via high interest rates and most of them only paying the monthly minimum fee.

Item 5) The empty item: take a pain killer and think for yourself!  

Till updates, have a nice Ponzi economy or try to get one.

(29 Sept 2008) What a beautiful trading day it has been on the stock markets; over 5% losses on most markets worldwide. Lots of banks are bailed out in a lot of countries but that party is only getting started...
Lets go to work and post some items:

Item 1) How my 10 year old son takes the credit crisis.
Item 2) It was indeed accountancy rule 157 they wanted to kill.
Item 3) A rumor around the ING Postbank from the local journalists.
Item 4) Just a screenshot from the US markets.
Item 5) The empty item.   

Item 1) How my 10 year old son takes the credit crisis.

Lately every time my son sees a number like 515243 he makes it verbal via telling how you speak it out. So he has some rudimentary representation in his head about how big one million is.

We looked at the news and I explained to him how big one billion is, on the news was something of a 700 billion bailout plan in some country far away.
He thought about half a minute about 700 billion and he jumped to the conclusion:
"So the Americans still have a lot of money!"

I told him they did not have that money but they had to borrow it...

More thinking was done on his behalf and he comes up with:
"Do they have a problem?"  

Item 2) It was indeed accountancy rule 157 they wanted to kill.

Scroll down to 25 Sept where I explain that the haste of the bailout plan likely has something to do with accountancy rule 157 (the mark to market rule).

On Barry's hangout it was found that this was indeed correct, here is a very good quote (source):   

SEC. 132. AUTHORITY TO SUSPEND MARK-TO-MARKET ACCOUNTING. 

(a) AUTHORITY.—The Securities and Exchange Commission shall have the authority under the securities laws (as such term is defined in section 3(a)(47) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47)) to suspend, by rule, regulation, or order, the application of Statement Number 157 of the Financial Accounting Standards Board for any issuer (as such term is defined in section 3(a)(8) of such Act) or with respect to any class or category of transaction if the Commission determines that is necessary or appropriate in the public interest and is consistent with the protection of investors.*

Comment: You see why the Barry blog is worth a visit every few days? This section 132 is of course the main prize; so many billions in losses could be hidden so easily if this was 'in the public interest' and consistent with the protection of 'investors'.
As far as I know reality now, Barry's blog is the best...  

Item 3) A rumor around the ING Postbank from the local journalists.

Today the local journalists from Radio Tele Luxembourgh 7 (that's RTL7) did a lot but they also interviewed an old financial guru named Rienk Kamer. Back in my teenage years I already read books from Rienk with titles like 'How to become a millionaire'. Well I never became a millionaire because I had more important stuff to do, but what's the rumor?

The rumor is that ING Postbank simply does not lean out any money to what business proposal whatsoever until next year.

And we are not talking about a baker down the street that needs some extra money for a new oven, it is the big stuff.

Rienk is not known for telling fantasies and I remember reading a long long Volkskrant article where the workings of the ING Postbank trading desk is described (the article was from before the credit crisis). To me it was clear: ING Postbank is up to her nose in creating, buying and selling all kinds of securities made from weird stuff.
In fact, it was the first article from where I learned 'how they did it'.

To make a long story short: I never understood why ING Postbank would never make it to the headline news. But if the rumor is true, ING Postbank is toast too. Just like the Fortis bank was toasted in the last hours.
That means that from the big Dutch banks only SNS Real and Rabobank will survive (guess where my children have a savings account; at Rabobank of course.)
What will happen to ABN Amro reminds to be seen by the way (I still bank at ABN Amro and have not closed my account until this day.) 

Item 4) Just a screenshot from the US markets.

On the CNN news it is constantly 'this is just as big as the drops after nine eleven' but for me it was only a pleasant working day. Just a pleasant day, more pleasant days will follow: 

 
Item 5) The empty item.    

This item is empty so fill it with your own brain please... 

Till updates. 

(28 Sept 2008, temporary update) I feel lazy and tranquil today:

With some modifications the Pandora Fund for America's Future was approved. This is very important; after the first PFAF the next ones will only get bigger and therefore the future problems for the US military are a fact... Now it is formal!

__________________________ 

To the Iraqis I can say: I am glad that after 10 months my advice to you (stop military attacks) has been followed up. Thanks for following the advice!
To the Iraqi government (mostly the oil ministry) and oil company Shell I can say:

For weeks I have thought on the gas deal in Southern Iraq, it took so long because Shell is both a Dutch and a UK company.
The verdict is as next:
For a period of 15 years (that equals the decade of economical sanctions + the war years) all profits made in Iraq are to be invested locally.
That's it.

If Shell follows the advice they can be in Iraq many decades longer, for the time being it is advised at the Iraqi oil Ministry to keep American oil companies out. Please do not view this as interference with you on a nation scale; I need your help so we can avoid future economical sanctions from hysterical Americans.

__________________________ 

For the rest only a few links and some comment:

From Barry we have an old but important file named The five stages of market grief.
Please read it, it has a lot of wisdom in it:

http://bigpicture.typepad.com/comments/2008/01/5-stages-of-mar.html    

If you understand it; it is clear the US government is still in phase 1 and 2 where a rich guy like Warren Buffet is somewhere in stage 3 (the bargaining stage; he endorses the 700 billion bailout while this is rather dumb).

From nakedcapitalism dot com we have funny hedge fund news (even the fund of funds is reporting losses so all hedge strategies combined are loosing it).

http://www.nakedcapitalism.com/2008/09/hedge-funds-face-record-redemptions.html  

From the Telegraph we have funny news like:

Bailout failure 'will cause US crash’ 

Most funny quote from that is from the Democrat Senator Harry Reid, quote:

Senator Harry Reid of Nevada, the majority leader, said: “We hope sometime [Sunday] evening we can announce some kind of agreement in principle. We may not have another day.”  

Comment: Dumbo Harry does not exactly explain why there suddenly would be a need for this speed. Why say that we may not have another day without explaining why?
(See the 25 Sept temporary update from below for a possible explanation.)

__________________________ 

In the mean time more and more poor nations feel the effects of the credit crisis. They have more and more hunger and poverty inside their countries. 
Well I am very sorry for the millions that will die from hunger but back in the Spring of 2004 I already explained to the local Central Banks how they should behave. 

If they did not do this, this is not my problem. It is theirs and not mine...  

Till updates. 

(26 Sept 2008) As usual five items:

Item 1) “If money isn’t loosened up, this sucker could go down”
Item 2) Reasons why the DOW must rally today.
Item 3) More FDIC propaganda observed; an open letter to Bloomberg.
Item 4) After waiting about 9 hours; item 2 is updated.
Item 5) My lifelong problem.  

Item 1) “If money isn’t loosened up, this sucker could go down”

Via via I arrived at this NY Times article, it is about the bipartisan 700 billion Pandora rescue fund (source) quote:

“If money isn’t loosened up, this sucker could go down,” President Bush declared Thursday as he watched the $700 billion bailout package fall apart before his eyes, according to one person in the room.

It was an implosion that spilled out from behind closed doors into public view in a way rarely seen in Washington.  

Comment: A very nice quote, but who or what is the 'sucker'? Is it Dubya himself because he is a sucker? Is it the US financial sector that sucked up another slice of just 10% of GDP in new borrowed money?
Who knows? 

Item 2) A few reasons why the DOW must rally today.

Yesterday the US stock markets rallied on the news of the bailout plan; the good news was that a deal has been struck.

Today the DOW can rally on the news it doesn't go through; the good news is that the US Federal deficit will grow less fast than expected.

In another development Washington Mutual has fallen and this is the biggest bank failure in the history of the United States.

Let me explain to the Wall Street weirdo's in a simple manner why this is good news:

Suppose there is one cake of a kilogram and 10 children on a birthday party; there is 100 gram cake for every child. Now grab a bazooka and shoot one of those kids to the heavens, now 9 children have 111,11 gram cake each.
Hence on average each kid has 11% more cake; in stock market terms the financial sector can grow 11% and once that sector grows it will have a positive effect on all other sectors.
May be it is even better to mutilate and torture that child instead of the bazooka thing. In that case the hospital has lots of work to do and hence the doctors and the nurses will have money in their pockets. And once they have money in their pockets something beautiful will happen: the local economy will grow and grow because all that money will stream around and do it's healing work.  

 Item 3) More FDIC propaganda observed; an open letter to Bloomberg.   

Lately there was one of those stupid articles on Bloomberg where it was told that the bank insurance fund could run out of money and possibly needed another 150 billion US$.

In practice this is only an accountancy fund that measures how much the US banks have laid in and how much has flown out. In practice all this money is spend a long time ago and in the FDIC fund are only Treasuries.
The money is long gone, just like in all other US Federal funds it is gone. There are only Treasuries left.

Therefore it is utterly wild to observe an open letter on the FDIC website stating the next (source) quote:    

Dear Mr. McCorry:

Bloomberg reporter David Evans' piece ("FDIC May Need $150 Billion Bailout as Local Bank Failures Mount," Sept. 25) does a serious disservice to your organization and your readers by painting a skewed picture of the FDIC insurance fund. Let me be clear: The insurance fund is in a strong financial position to weather a significant upsurge in bank failures. The FDIC has all the tools and resources necessary to meet our commitment to insured depositors, which we view as sacred. I do not foresee – as Mr. Evans suggests – that taxpayers may have to foot the bill for a "bailout."

Let's look at the real facts about the FDIC insurance fund. The fund's current balance is $45 billion – but that figure is not static. The fund will continue to incur the cost of protecting insured depositors as more banks may fail, but we continually bring in more premium income. 

Comment: See the 14 Sept Nightmare update on this and here is the link to the article from a former FDIC chairman where it rather simply says that there are only Treasuries in the FDIC insurance fund.
The interest is also paid in US government bonds (just like in the Social Security and medic funds), again it is only an accountancy vehicle and not a real fund.
Every cent and every dollar needed for falling banks are paid with more borrowed money.
This is very normal in the country of the debt huggers; all real reserves are gone a long time ago. All that is left is the ability to borrow more and more.

Item 4) After waiting about 9 hours; item 2 is updated.   

Item 1, 2 and 3 were posted before the US markets opened.
Here is a screenshot of today's market action now the markets have closed: 

For the time being I have no comment.

Item 5) My lifelong problem.   

When I was 17 years of age I finally solved a problem that I thought upon for about one year. Why do cars need their transmission of power to their rubber wheels and why is there no mechanism to skip this and let the car go forward?

Then, one evening, I found the device. I found the principle.

But at 17 years of age my math skills were far to infantile to proof the principle. And there was all this emotion because those years were the highs in the military MAD doctrine (MAD = mutual assured destruction). 

And for the principle to work big time in space you needed nuclear technology in space. As a 17 year old I understood: better hold your mouth because all kind of idiots will fill the space with military stuff.

So at the age of 17 I understood the military playing rules needed to be adjusted (of course I did not have the words in those days, I was only scarred to hell inside my emotional system).

Right now I am 45 years of age and after my humble opinion it could be that military stuff has evolved a little bit into the right direction. It is just a little bit but I am not without hope.

Yet my dear reader, the military powers and budgets that rule this planet have to bow much more deeper before I can only publish one quantum of how such a device could work.

Lets leave it with that (I know that about 99.99% of my readers think I am crazy but I am crazy for 45 - 17 = 28 years right now).   

Till updates, have a nice life or try to get one. 

(25 Sept 2008, temporary update status lifted on 29 Sept; Updated 26 Sept) 

Begin update:
Hours after I uploaded the stuff below, the 700 billion Pandora plan fell apart.
Today the talks will resume so lets hope for the best & let these obese US taxpayers be on the hook!
End update.

Today the economical news was a bit as next:

--The 700 billion US$ Pandora Fund for America's Future was approved (the bailout plan);
--New home sales fall to a 17 year low and record price declines observed (the housing market is one of the main driving factors of the present troubles);
--Jobless claims to a 7 year high and the trend is clearly going upwards (so it is only waiting for the recession to set in). 

I have two questions for you:

Question 1) Why is there a need for such speed in the PFAF bailout plans? What explains the haste and the speed, why is it so urgent to 'act now'?
Question 2) Why should the DOW rally hundreds of points on the above news?

My answer on both questions is: Accountancy rule 157 (the mark to market rule).

Please remark, I am not an accountant! So the rest of my thinking could contain some little faults here and there but this is how it works I think:

1) On the market books of the banks, rule 157 is done frequently.
2) On some parts of the banking books it is done every quarter.
3) The rest is done once a year, likely at the end of the fiscal year.

Rule 157 went into effect on 15 Nov 2007, as far as I know reality the US fiscal year ends 30 Sept.

Dear reader, do you understand the implications of this?

Again I am not an accountant, but given the 700 billion size we can calculate backwards and estimate there are large chunks that are marked to market only once a year. This also explains from the market psychology point of view why the DOW rallied so much; some DOW folks knew what was coming without the PFAF.

And when you think a bit longer on this; it makes sense to valuate those difficult Level 3 assets only once a year.   

Don't get me wrong: I don't have any kind of problem with this fraudulent scheme, I am glad the obese US taxpayers are on the hook for this. They fully deserve this because they voted for Dubya, not once but twice...

And mark my words:

The first PFAF is always the smallest.  

Once you start doing stuff like that you cannot stop, this is Enronomics big time. Once you go down such a lane there is no turning back...

I want to close this days preaching with a beautiful piece of propaganda as I found it on the Wall Street advertising firm the Wall Street Journal (source) quote:

Why Has the Credit Crunch Been so Bad? Blame Washington.
Posted by Heidi N. Moore 

(cut)  

So if you were holding a mortgage security and another investment bank sells a similar mortgage security at, say, 22 cents on the dollar, you must value your mortgage securities at 22 cents on the dollar, too. Imagine that you are trying to sell a 2006 BMW. Your neighbor sells his ‘87 Taurus for $1,000. Under the mark-to-market rules, that 2006 BMW would be on your books at $1,000, too. As bank holding companies, though, Morgan Stanley and Goldman can account for their assets on a “held to maturity” basis. 

Comment: What the Heidi Wall Street slut forgets to mention; When you sell your 2008 Rolls Royce for 50,000 US$ all cars in all scrap yards are suddenly worth 50,000 US$. Do you see how dumb the logic of folks like this is?

Till updates. 

(24 Sept 2008) Oh oh those poor American tax payers... Remember back in 2004 when I moved heaven and earth to get enemy combatant Dubya reelected?
And every body helped, the swift boat teams did their best, the Iraqis killed a lot extra military slime, the dirt throwers inside US politics did their stinking best and even Osama made a fundamental contribution.
And now after a long time waiting, we have these American obese fatbags where we want them...;)
After the preaching, lets go to work:    

Item 1) WSJ has more on the 700 billion bailout plan.
Item 2) Barry had some good remarks about Warren Buffet in the GS thing.
Item 3) Funny vids at immobilienblasen.
Item 4) A new US dollar note.
Item 5) The game of ping pong.    

Item 1) WSJ has more on the 700 billion US$ bailout plan.

In these months and years financial journalists are often very careful as to avoid further turmoil. This is logical; when for example it became publicly know that the US financial sector picked up over 1500 billion US$ in new debt and that this new debt will grow toxic in the future, the whole thing would blow apart much faster.

So they are all a bit careful. Therefore I was pleased when I found that the 700 billion will be used to make 'good price' for the banks (source), quote:  

Uncertainty in housing markets and the economy are forcing financial institutions to mark mortgage securities at fire-sale prices, rather than their value if held to maturity, effectively creating a vicious circle of more write-downs that further depress asset values, Mr. Bernanke explained. 

Mr. Bernanke said the Treasury plan should have taxpayers buy the assets and hold them at close to their maturity value. Removing the assets, he said, would bring liquidity back to markets, unfreeze credit markets, reduce uncertainty and allow banks to attract private capital. 

Comment: A lot of that stuff comes from the banking books of the banks, more often than not it is priced far to high compared to the market value. If the US Treasury would offer only 50% of the book value, automatically large losses have to be reported by the banks.
It was not for nothing I joked this was the Pandora Fund for America's Future (the PFAF). 

 
Item 2) Barry had some good remarks about Warren Buffet in the GS thing.

Rich guy Warren Buffet has taken a five billion stake in US investment bank Goldman Sachs; he has five billion in preferred stocks (also known as fixed equity). I know almost nothing about preferred stocks but Barry has put it nicely together.

Conclusion: It has indeed nothing to do with trust in the US financial sector because monsieur Buffet can walk away any time he likes. 

Link: 

http://bigpicture.typepad.com/comments/2008/09/i-got-75b-but-i.html  

Later there was a bit more said on this 5 billion cash deal; the warrants Buffet got for free are worth 2.8 billion US$ so in theory Buffet still makes over 20% a year on his investments...  (Source) Quote:

Doug Kass goes last night's analysis one better, and notes that using a Black Scholes produces a valuation of $2.8 billion dollars for the warrants. That makes the effective yield over 20% on the preferred purchase. 

Comment: Of course many years ago I just had to study the Black Scholes equation because it is just one of the stochastic differential equations. I grabbed how Mr. Black and Mr. Scholes did it, my compliments!
Needless to say: Monsieur Buffet did a nice 5 - 2.8 billion = 2.3 billion US$ purchase...

Here is the basic BS model:

I will not explain how this works but in the end the parameter r is ruled by Bernanke because the r stands for rates, V stands for value while sigma is one of the measures for volatility and why not ask US prez Dubya what S means? 

Item 3) Funny vids at immobilienblasen.

Since at Comedy Central daily show they also report on financial news and not only political news, they are suddenly a lot more funny. An alternative explanation would be they now have other script writers... 

http://immobilienblasen.blogspot.com/2008/09/debt-to-america-daily-show.html  

Item 4) A new US dollar note. 

Comics from bank notes are very old, in some sense jokes like that are ragged like a retired whore. But in relation with the 700 billion bailout PFAF it was pleasant to observe (I found it on RTL7, a local Dutch website).

Item 5) The limit item.     

Above in item 2 you observe the basic model for pricing derivates. It might be of interest to observe the BS guys use only partial derivates. As usual the partial derivates are linear in nature.

But I Reinko Venema have a hobby of destroying the US military might in the long run. And of course the USA academic faculties think they understand 'non linear derivatives'. I only puke on these fake academics and put forward a proposal of how to make math.

Therefore the Black Scholes equation is 'ping'

And I just 'pong' with:

And this 'pong' is easy to understand; the obese US university professors will refuse to understand how this limit is taken. I have no problem with that; the entire US academics are down the drain anyway a long long time ago. 

Till updates. 

(23 Sept 2008) Dear reader; may be you have one of those experiences yourself, but today I found out that I can be so stupid! Just so horribly missing at least two genes stupid!

Since, in my little fantasy world, the stupid ones always get a rough punishment; I have decided to punish myself and give some good insight to both US prez candidates Barack Obama and John McCain!

What is the case?

Look again at that boring picture that gives some totals of public traded financial debt in the USA (they also have a so called shadow bank system of similar size but lets forget that for the moment): 

Any fool can see that just before this credit crisis broke out that at the end of 2007 Q2 total US fin sector debt was only 14998.1 billion.

And now we have the latest figures we have 16507.5 billion US bucks.

So in the first credit crisis year this expanded like

16507.5 - 14998.1 = 1509.4 billion US$   

That is a year to year speed of 10.1% and that is above the yearly growth in this entire new millennium! John and Barack must skip the stupid scenario's as explained in update 22 Sept from the Nightmare files! And since I love those candidates for just one day I proudly present the future development for their new job:

My dear US prez hopefuls; this 700 billion US$ 'mother of all bailouts' is just peanuts! There are plenty of sucker investors out there that would like to pick up more US debt! These suckers can be found in China, India, Vietnam and even in Europe!

Don't forget: America's best days are still to come, every time you speak those words you always get big big applause from the audience...  

__________________________ 

And now for real:

This day we had US Congress testimonial stuff from US Treasury Secretary H. Paulson and from the US Federal Reserve chairman Bernanke. The idiots did what they were paid for but 700 billion US$ for stopping the facts from the above table?

Till updates.  

(22 Sept 2008) Today I placed a relatively important update in the nightmare files where I explain that in the next two years we will have about 900 billion US$ a year of more toxic debt inside the US financial sector only.

That is without future mortgage, car loans, etc etc toxic debt.

The update is so simple that about 95% of university economical/financial people could understand it if they would. But they won't; today we had another flurry of so called 'analysts' on the television channels explaining that this 700 billion US$ bailout is 'very significant'.

But this 700 billion bailout stuff is only old debt from years ago; why are there no scientists that study the amount of toxic debt that emerges in this year?

My dear fellow scientists, I fall down on my knees and I am begging you:

Can you stop telling all that crap, stop telling all this nonsense, free your mind from beliefs that worked in the past & can you finally study for some time the next file please? Just please, I am begging you:

http://www.federalreserve.gov/releases/z1/current/accessible/d3.htm 

__________________________ 

In other developments:

The €/$ pair climbed about 400 pips or 4 cents in the last 24 hours, as far as I know reality this is an all time record.

Oil climbed 25$, another all time record. (This once more proofs the future markets have nothing to do with supply and demand in these years.)

Gold rose 40.90 US$ to 905.60 US$. 

The DOW closed above 11,000 points; it is evident they insult me.
I will store this in my memory and deliver a fitting punishment in the future. (May be if the rumors about that Plunge protection team are true; they did this evil deed...;)

All in all: The 700 billion US$ is about the size of one year military spending so life could be worse on my side of the story. 

Till updates. 

(19 Sept 2008, updated 21 Sept: I changed 500 to 700 billion US$ as that emerged over the weekend and in item 5 I placed an extra link.) 

As usual in the longer updates, we do the itemizing thing:

Item 1: More on the US bad bank loans rescue package.
Item 2: Total US financial sector debt: 16507.5 billion US$.
Item 3: Barry says: Terrorist short selling observed.
Item 4: What a lousy DOW rally today.
Item 5: The empty item.   

 Item 1: More on the US bad bank loans rescue package.

Worldwide stock markets are locking in multi decade record climbs on news of the US bad bank loan rescue package. And today a few details came out, to my amazement this is only a 700 billion rescue package.

Yes you read this right: Only 700 billion US$!!!

Please can anyone explain to me why a small slab of just over half a trillion US bucks will make much of a difference? If your house is on fire, the flames are already leaking through the roof and you are only allowed 700 liter water to put the fire out, will that help or is your house gone anyway?

Let me give you a quote from the US Treasury clown named Henry Paulson (Bloomberg source):

``We're talking hundreds of billions,'' Treasury Secretary Henry Paulson said in a press conference. ``This needs to be big enough to make a real difference and get to the heart of the problem.''  

Item 2: Total US financial sector debt: 16507.5 billion US$.

Because all stock markets in the world do not understand that 700 billion US$ is far too less money, I am obliged to go nuclear:

Yesterday's Federal Reserve Z1 release indicated that the US financial sector has 16507.5 billion US$ of publicly traded debt on herself. This is far above the US Gross Domestic Product while the US financial sector is about 20% of the US economy. The funny thing is that in Q2 2008 the total debt grew at an annual speed of 6.6%, that is up from 5.4% in the first quarter.

Conclusion: The financial sector debt is already above one GDP size and still grows exponentially at multi times speed than this GDP. So the entire sector is still doomed (do you now understand why the 700 billion are only peanuts and will not help?). 

Have a nice trading day (likely the Wall Street traders will climb over one another to pump up the financials and the rest).

Item 3: Barry says: Terrorist short selling observed.    

Lately I did some strange updates (see the paranoia updates from below) about the Plunge protection team that is supposed to protect the US markets from plunging.
To my amazement today Barry did the same (source article). The quote is very funny:

Last night, we discussed the absurdity of banning all short sales. The details of the SEC action have been released (see below). The specifics are a "temporary halt in short selling in 799 financial institutions" until October 2nd. 

I have been trying to contextualize this, and I keep coming back to what seemed like a wild theory yesterday that seems a whole lot less wild today. During the day, I had an interesting phone conversation with Joe Besecker of Emerald Asset Management. (We used to do schtick together on Power Lunch, and made for an amusing financial comedy team). 

But Joe is a good money manager, a great stock picker, and a thoughtful guy. He raised an intriguing issue: None of the many hedgies he knew were pressing their bets recently. The bear raids on the banks and brokers were NOT a case of piling on by US based hedge funds. And from what he was seeing and hearing about in terms of order flow, the vast majority of the financial short selling the past week or so were being done overseas. It appears that the lion's share of shorting was coming out of overseas bourses such as London and Dubai. It may not be a coincidence that the financial short selling ban is both here and in London.

Then there is another coincidence: The huge increase in shorting of the financials occurred on the anniversary of 9/11. And on top of that, the same institutions attacked on 9/11/01 were the ones suffering in recent days.  

Comment: Barry, wise as he is, says he only passes the theory on. In my mind popped up an old email that I send to some major Stephen in some public affairs center US military, Baghdad, Iraq. Due to repeated cyber attacks (I always have lots of them, for example within one second I have lost all my files five directory layers deep on all hard disks) I do not have the email anymore.
But I emailed those US military slimebags that from now on military attacks were over and I would only stage financial attacks...

My dear reader, please don't think I have some mental thing! I am doing nothing illegal, all I do is at times is give some battlefield advices. No one is obliged to follow these advices, but if people do you cannot hold me accountable by law...   

Do you know what the name Reinko actually means?

It means adviser on the battlefield... 

 Title: I cannot help it when on some days more US soldiers die,
in local courthouses that is always a 'statistical coincidence'.

Item 4: What a lousy DOW rally today. 

It is five minutes before market closing time, the DOW is now only at 11,364 points and did not breach 11,500... What a bunch of suckers!

In the meantime we can only wonder why no main stream journalist brings up the easy to understand detail that the US financial sector has over one US Gross Domestic Product of debt on herself. Also no academic brings it up; they are all coward conformists. Scientists always looking for the 'truth'?
Don't make me laugh.

(Ok ok, every now and then some guy brings up that on all levels of US society stuff is drown in debt. But these are below 'one time a month' events.) 

Item 5: The empty item.

Fill this item with something from your own brain please.

Update from 21 Sept: Gossip Media outlet NY Post says:

MARKETS WERE 500 TRADES FROM A MELTDOWN 

Till updates. 

(18 Sept 2008) Today the DOW surged 428.29 points (above 11,000 again) on the next two rather insignificant news facts:

Insignificant news fact 1: In a combined action about six central banks can now auction to a ceiling of 247 billion US$ around the world. So the Central Banks are forced to take more garbage on their balance sheets; we will have 247 billion of garbage in exchange for US$. Don't believe me it is garbage but AAA rated or 'investment grade' stuff?
The goal is to provide liquidity; this goal can only be achieved when illiquid collateral is taken. It is about as simple as 5 square equals 25. (Bloomberg source file.)

Insignificant news fact 2: US Treasury clown Henry Paulson is considering setting up a fund for 'bad bank credit' just like the Resolution Trust Corp. that was set up during the savings and loan crisis of the late 1980s and early 1990s.
Actually this news is so funny that I would like to propose a name for this fund:
The Pandora Fund for America's Future (The PFAF.)
It makes me wonder how many trillions will flow in this PFAF and who will pay for this: the American tax payer or one more of these fake funds filled with US Treasuries? (Like the Social Security funds or the FDIC bank saving fund.) (Ass Press source file.) 

No, the above is all utterly insignificant and nothing but the product of mental dwarfs. As far as I know the financial news of today; significant is the merger between the UK HBOS bank and insurer Lloyds.

We have seen a lot of banks going away suddenly and after my humble opinion this is only the beginning. You know my dear reader, I can proof that I understood the present conditions as far back as 14 Dec 2007. Please read the funny update from 14 Dec 2007 and remark: You can only write a funny text when you understand the serious things before that.

In the meantime mental dwarfs still rule, let them rule... It makes my life easier!

Till updates.

(17 Sept 2008) I only posted an update in the NightmareOnWallStreet files; it is about that strange organization the International Monetary Fund. Their director general Dominique Strauss Kahn is still telling fairy tales like he did on 15 May.

So in four months time the IMF has learned nothing from this crisis, just absolutely nothing. And, now I think about it, how did Dominique get his job? Is it just like NATO political leader Jaap de Hoop Scheffer by hanging out the conformist?
Everything points in that direction, but in the end conformist people make stuff only worse. We need independent leaders but we get fat crap telling fairy tales.

__________________________ 

Cost of insuring a 1000 US$ of ten year US government bonds (the Treasuries) rose to 3US$ a year. So it costs only 30 bucks to protect your value for the entire 10 year period. Any European pension fund that still has not done this: act fast now we are still in the realm of such bargain prices! And spread your risk because a lot of those idiots that sell this stuff could go under (followed the story of AIG lately?)

Bloomberg source & quote:  

Benchmark 10-year credit-default swaps on Treasuries increased 4 basis points to 30 today, according to BNP Paribas SA prices. The contracts have risen from below 2 basis points at the start of the credit crisis in July 2007 and are more than double those on government bonds sold by Austria, Finland or Sweden.

Comment: These are absolutely bargain prices because after my humble opinion the lunatics that sell this kind of insurance lack a lot of insight in future developments.  

Till updates. 

(16 Sept 2008) Just two things for today:

Item 1) A American female named Meredith Whitney.
Item 2) More on derivates now Lehman Brothers has crashed. 

Item 1) A American female named Meredith Whitney.

Via Barry's blog I came across a video with Meredith Whitney, I have read about her a few more times and a lot of Americans think she tells some good truth. As a matter of fact she does, to be honest she is a very strange female. Let me sum it up, it is a highly unlikely combination:

1) She is American &
2) She is smart &
3) She is not obese!

This all is a so unlikely; the likelihood of hitting a multi million jackpot are much much greater!

Lets get serious: Meredith is right about future US family home price declines (although she only mentions a percentage and does not quantify the 7 trillion of wiped out family home equity that comes along with it). Further more she points out that now the balances of US investment bank Lehman get liquidated, this will bring more and more downward pressure in already illiquid markets.

Isn't it strange: A non obese American female that can actually think...
In the video there are all kinds of strange sound effects; the Americans need that because their average attention span is so short. Here is the video:

Item 2) More on derivates now Lehman Brothers has crashed.  

The Financial Times has a good article: Foundations of CDS industry shaken that explains that the Credit Default Swap market will need a long time digesting the Lehman stuff. The CDS market is only 62,000 US$ billion in size (that is the amount of insured credit), it is a so called OTC (over the counter) market so it is not regulated at all and nobody understands the risks.
In different countries the laws are different so thousands and thousands of lawyers will have millions of hours extra work at too high hourly tarifs. (Most lawyers are dumb, with only an IQ of 110 you can easily get a university law degree.)

Funny quote from the article:

Others were not so sanguine. “This is a big threat to the CDS markets as a whole, which is truly scary because that was the last liquid market,” said one hedge fund trader. “Here, we’re all wondering whether Lehman might have blown up the market.”  

Comment: This once more proofs that the price of risk has been far too low for too many years; from the bottom of my heart I have to thank the genius Alan Greenspan! 

On Friday the 11th of Sept the Financial Times posted another funny article about the consequences of Freddie Mac & Fannie mae:

The adventure never ends in the derivatives Wonderland  

Quote: