In a thing like this, you have to make your calls and stick by them, although this is just for credibility's sake. I have no financial positions whatsoever.
Once again, I think that all the trends I've identified pause here then accelerate. I see no systemic intervention to save the day.
Therefore:
Oil is headed down fast (easy, it already started).
Gold, which will follow oil, is a great short here - or scale in if you think it you can go short at $800.
[Oooh, that one is a little embarrassing now. Ah well. I'll have to invoke that old Wall Street crutch that "in the medium-term" I think gold is a massive short - but what will be the peak of panic buying? Who knows.]
The euro is up, will be up again and then has to crack. Once again, I am not making a call on the fundamentals because I don't think the fundamentals are the major influence here, but I do think the fear of a Fed easing will put the euro to back on the anti-bubble rollercoaster sooner than later.
The Japanese yen has not strengthened here as much as it should have - I think. Maybe there is more bubble/anti-bubble action here than I thought.
This would be a great time to go long the dollar index, which is UP today if only because the basket of currencies against which it trades is such a basket-case.
China and India are really worrisome. Big crashes in equity markets, inflation, the whole works.
So the financial turmoil really only adds to the thesis, I'm afraid.
I think the government is acting with surprising creativity, but we have to wonder if it's too late.
This is just a greater blow than anyone could have imagined and it's a truly terrible sign that we see bidders stepping away from these distress situations in financial stocks. I'm sure they are all telling themselves that the stocks don't matter and it's all about the bonds now, but that is a thin reed.
I've never been more confident in my thesis, and sadder for my country.
But, again, REALLY GOOD developments can come of this if we pursue the right policies.
May you live in slightly less interesting times than these
It Is Not Just Lehman Brothers - or Lehman and WaMu.
Apparently, bankers involved in the enormous talks to save Lehman Brothers are saying that the internal work of at least one firm indicates a non-zero probability that Washington Mutual, AIG Insurance and Merrill Lynch could fold WITHIN THE WEEK - individually or separately. As for the dependability of this work, I can only say that the same firm, analyzing the effect of Bear Stearns, reportedly concluded that if that investment bank had not been rescued, Lehman Brothers would follow Bear into bankruptcy within a short time, followed by Merrill. This was considered too dour a forecast by many at the time. Apparently it wasn't gloomy enough.
The problem with going further into a story like this is that - for the moment - the internal finances of these institutions and the operations of the markets in which their assets are valued are too murky to make analyses - unless you have proprietary knowledge, which I sure don't.
As for my own little thesis, this is probably going to be a negative both for oil and the dollar, but it's not good for the euro or yen in the long term, either, I think. But certainly in the short-term the euro is soaring. I expected it, see my previous post "It Begins".
And that bubble full of dollars is sure emptying out pretty fast. I think all trends pause and then accelerate.
On a positive note, I just want to say that this is a very predictable result of laissez-faire policies, but it CAN BE REVERSED.
First, the U.S. government has enormous power to re-capitalize markets because the government's capital efficiency is so strong.
While under-regulation in trading markets always - ALWAYS - leads to collapse [start with this mess, then go backwards in time through Enron, LTCM, Asian Bubble, etc., etc. - you'll see what I mean], those markets usually get properly regulated and start to function again - with some significant help.
As a citizen, you just need to support policies that put money out to more regular people in a well-organized, well-regulated way with the most democratic input.
Anyway, Jim Cramer may get the answer to the question he poses here:
I was talking on the phone with a Republican friend of mine - we've been arguing for about 20 years, often every day - and he suddenly stopped me and said:
"Pal, a tear just came to my eye."
"Huh?" I said, "What the hell are you talking about?"
"I just realized it.....you're an inflation hawk. I've never been so proud."
I denied it of course because, well, he's a Republican. That's not my friend, there, at right, that's Indian Central Bank Governor Duvvuri Subbarao. But he looks like a nice fellow.
But, you know, I am an inflation hawk - of a sort. And you know what else? This is even worse, but the IMF was kinda right - well at least half-right. Developing economies really do have to focus on currency stability. And some of them have, but maybe not in the way people think. That's not me, at left, that's my Republican friend.
Okay, it's Karl Marx. But something old Karl would take note of these days is the growth in global dollar reserves - by which I mean the insanely large amount of dollars and dollar-denominated credit flowing from the U.S. to the rest of the world. It's immense. This guy Brad Setser from the Council on Foreign Relations wrote an important paper on it - got him onto CNBC. He seems like a nice fellow, too.
Woops! Sorry, that was rockabilly guitar genius Brian Setzer, not Geo-Economics Genius BradSetser. Brad Setser's video may be have a smaller picture, but it has a hot woman and hotter economics in it. See below.
The video is an interesting debate. I find it a well-traveled path, but I would travel any path with her... Anyway...the point is that the numbers are enormous. Here is a nice highlight from Setser's paper that's getting him such press(.pdf):
"As Figure 7 demonstrates, the financing that emerging economy governments have provided to the United States dwarfs the emergency financing that the IMF provided to the emerging world in the 1990s. Indeed, in 2007 alone, the estimated increase in the dollar reserves of emerging economies was roughly thirty times larger than the financing that the IMF provided to the emerging world in 1997–98.14 Table 1 illustrates this astonishing imbalance in a slightly different way: The $30 billion in new capital that U.S. banks and broker-dealers raised from sovereign funds in China, Singapore, and the Gulf states in December 2007 and January 2008 is equal to the largest loan the IMF extended to any emerging economy."
It's excellent, readable and informative stuff and I recommend it highly
Still this is the Internet, and here we quibble. It's just what we do. Note the implicit assumption of "outgunned". The idea is that not only have emerging markets done without IMF financing (net), but that these much-poorer countries have actually financed the United States to the tune of 30 times such financing. I'll spare you the table and give you the highlight that the emerging economies put more money into the Citigroup refinancing alone ($17.5 billion) than the nation of Turkey got from the IMF in the three years of its inflationary/financial crisis 1999-2001
So here's the question to Mr. Setser and to all of you: Does it really make sense that the emerging economies can spare 30x the the financing the IMF offers? Could these fast-growing, but poor, countries possibly afford to, in effect, give the United States of America more than $1.6 TRILLION dollars in financing out of the goodness of their hearts?
I believe their hearts are good, but India alone has accumulated over $300 billion in dollar reserves. Indians are generous people and some are quite ascetic and frugal, but that is just a lotta money.
Or did India - and these other countries - get something in return for their apparent largesse? From Reuters India:
India cbank sold $9.9 bln in currency market in July
Fri Sep 12, 2008 6:19pm IST
MUMBAI, Sept 12 (Reuters India) - India's central bank sold a gross $9.9 billion in currency market intervention in July, the highest on record, in a volatile month when the rupee hit a 15-month low but then later rose 1.1 percent on the dollar.
The central bank's monthly bulletin showed on Friday the monetary authority sold $6.32 billion on a net basis in July, trimming its net dollar purchases in 2008 to $13.24 billion.
The $9.9 billion gross is the most sold in a month by the Reserve Bank of India (RBI) since it began publishing its currency intervention figures in April 1995. It surpasses record dollar sales of almost $7 billion gross in June.
The rupee fell 7.4 percent in the first seven months of 2008, ending July at 42.57/58 per dollar , in a reversal of its fortunes in 2007 when strong foreign investment inflows drove it to 39.16, its highest in nearly a decade.
This year's fall accelerated sharply in July as crude touched a record above $147 a barrel, the trade deficit widened, and investment outflows weighed.
Traders say that in recent months and days the central bank has continued to support the rupee, which is now at its lowest in two years, has shed nearly 4 percent this month alone and lost 13.9 percent this year.
(Reporting by Anurag Joshi; Editing by Charlotte Cooper)
What this suggests about the relationship between the dollar and the rupee (or any emerging-markets currency) is not Gresham's Law: "bad coin drives out good" or the reverse (as is perhaps more often observed) but a situation where the "good coin" of the dollar and...if you'll excuse me...the "bad coin" of the rupee are made to be one in the same. With a positive flow of dollars behind it, the rupees is as good a coin as any. Everyone wants to be part of that unique dollar situation if they can be. Everyone wants the liquidity that comes from adding that unquestionable "goodness" to their currency.
Do government's decide this consciously? I don't think so. It's simply an evolutionary process. The world needs a standard of credit which is "risk free" and in buying what they perceive to be the closest thing to the thing they want, they make it so.
A virtuous cycle, but as we see with India, the dollars are now flowing out - quickly - and Gresham's Law may be reasserting itself to the disadvantage of the people of India. The learned at Harvard and The Economist proposed all sorts of wonderful solutions Indian inflation in April and I'm sure the large amount of empirical wrongness contained in their proposals will not dissuade them from making them again. But India needs better answers.
We may yet have to dig up Mr. Gresham and get him sorted. May you live in interesting times
A very interesting additional information point is provided by the behavior of the main currencies against the US dollar. We have found unmistakable LPPL signatures of a speculative bubble which is presently developing on the Euro. Specifically, Specifically, the Euro in US$ exhibits a typical accelerating LPPL bubble pattern, which is suggestive of a speculative herding buying of Euros using US$. Similarly, the Euro in Yen also exhibits a typical accelerating LPPL bubble pattern, leading to a similar conclusion. In contrast, the Yen in US$ does not have any acceleration (nor has the US$ in Yen), even if a marginally significant log-periodicity may be observed. These three analyses provide a remarkable message: the depreciation of the US$ is not just the undirected flight-for- safety of a herd fleeing from a looming catastrophe; it seems to be associated with a speculative bubble directed to what is felt (at least on the short- and medium-term) to be the new haven currency, the Euro.
Here's the bubble he's talking about, which is the Euro versus the dollar:
And here's the reverse of that bubble, that I've been talking about, which is the Dollar versus everything:
The euro is a part of that "everything" but there are other big parts - like the Japanse yen and thereupon hangs a tale. This gets a little tricky, but follow me here, because the most-fascinating thing about an LPPL bubble is that you can actually watch people's thinking change as they go through the phases of the bubble.
So back in March, you can see that the dollar was about to make a turnaround. Of wise and prescient Japanese, the Financial Times wrote this:
Japanese savers convert yen into dollars
By Lindsay Whipp in Tokyo
Published: March 18 2008 20:13 | Last updated: March 18 2008 20:13
Not everybody is shunning the dollar, it seems. Since the US currency started its descent against the yen last summer, some Japanese people have been trying to gauge when the currency is cheap enough to start buying back.
During the past few months Japanese banks have seen an increase in the value of deposits in dollars in foreign currency deposit accounts.
At some banks an increasing number of customers have opened such accounts in anticipation of buying dollars at what they consider to be the right time
Wow, were those Japanese ever right on the money!...here's the yen versus the dollar:
By June, the huge bubble of dollars (more dollars = lower price, so it's sort of a "down bubble") had popped. The price of the greenback was roaring back to life, so the Financial Times wrote this:
Risk-hungry investors shun a weakening yen
By Peter Garnham in London and Andrew Wood in Hong Kong
Published: June 16 2008 18:37 | Last updated: June 16 2008 18:37
The yen has weakened 10 per cent to the dollar in the past three months as improving risk appetite and a widening yield disadvantage have led investors to abandon the Japanese currency.
The yen appreciated rapidly in the first quarter of the year as the US Federal Reserve slashed interest rates and the financial crisis intensified.
Here's that Yen again:
Once again, the yen - although it went up really fast - was not *in* a bubble itself when it made that big spike on the left of the chart. But it was *part of* the bubble of everything versus the dollar. Therefore that slope down you see on the right was not an anti-bubble in the yen, but it represents the yen being caught up as a large element of an anti-bubble.
One of the amazing things about anti-bubbles is the predictable, roller-coaster oscillations they go through. We're starting to go through an oscillation in the price of the dollar, and it's starting with the yen. So now - referring to that little upwards hook on the far right of the chart - the Financial Times writes this:
Reversal of carry trade makes a star of the yen
Published: September 12 2008 17:19 | Last updated: September 12 2008 17:19
The yen has been the star performer on the currency markets over the past month as investors have sought refuge from the recent upheaval.
Japan’s economic fundamentals have not changed. Indeed, the authorities are warning of a recession and there is little prospect of the Bank of Japan raising interest rates, which currently stand at just 0.5 per cent.
However, it was the low-yielding yen’s part in feeding the rise in asset prices – which have reversed so dramatically recently – that has boosted the currency.
Carry trade investors sold the yen heavily to fund the purchase of riskier, higher-yielding assets elsewhere.
Now those positions are being reversed as investments are liquidated across a range of asset classes and regions across the globe.
This article represents something so interesting: the kind of argument traders will use to justify their bubble/anti-bubble psychology in "truth" and "objectivity". It's not that these things may not be true, it's just that they don't matter right now. What matters is the psychology of the traders. Right now, the trade of buying the dollar and selling everything else has become too easy. The market was moving too fast. Suddenly the conviction is gone. We have that moment of rest in the roller-coaster the train goes up. There's a break from fear and you can catch your breath. People like this break from fear so the "dollar-down, everything-else-up" psychology will get stronger. Remember, the traders are people who only months ago believed that the dollar would go down forever. The yen will be one of the "explanations" for things "getting back to normal". You can also see it starting in the euro. I don't know what the "explanation" for strength in the euro will be yet, but it doesn't matter. The important thing is that it's coming.
The bewildered panic will reverse for a while. Oil, gold, everything will eventually go up at least a little and the dollar will go down. Everyone will feel comfortable for a moment......
..... and just when they do: whoosh, hands up in the air and everybody yell!
JPMorgan Chase in Advanced Talks to Buy Wamu: Sources American Banker | Friday, September 12, 2008
By Cheyenne Hopkins and Joe Adler
WASHINGTON - JPMorgan Chase & Co. is in advanced discussions to buy Washington Mutual, sources said Friday.
While a deal has not been struck, and could fall apart, sources said negotiations are ongoing at the highest levels of both companies, including James Dimon, the chairman and chief executive of JPMorgan, and Alan Fishman, the newly-installed CEO of Wamu.
A spokesman for JPMorgan Chase declined to comment. A spokesman for Wamu was not immediately available for comment.
If a deal is struck, it would remove a potentially huge problem facing the government. Regulators have already intervened to save Fannie Mae, Freddie Mac, and Bear Stearns Cos., and are reportedly aiding the sale of Lehman Brothers Holdings Inc.
The talks between JPMorgan Chase and Wamu do not involve the government, sources said. Observers had said earlier this week that a government-assisted transaction may be necessary if Wamu did not recover or find a buyer soon.
Sources cautioned the situation remains in flux and other bidders for the Seattle-based thrift company could emerge. But knowledgeable sources were optimistic the deal would come together.
"It's quite plausible," said one source. "It's a possibility this weekend."
JPMorgan Chase pursued a deal with Wamu in March, but talks fell apart after the thrift received a $7 billion capital infusion from TPG Inc. in April. Sources said JPMorgan Chase has remained interested in buying Wamu since that time.
Wamu holds $309 billion in assets, and roughly $190 billion in deposits. A collapse of the thrift company would have a severe impact on the Deposit Insurance Fund.
Well, he's almost there. He doesn't acknowledge that there was a bubble, but he'll come around. It's too obvious. From the blog "Bubble Hunter":
Oil Bubble:
But people should watch and read Cramer. Yeah, you have to take him with a grain of salt, but he's a trader. He's a manic nut but he is as smart as they come. The great thing about him is that he reads and reads and reads and reads and reads and then for relaxation he looks at charts. He's also extremely intellectually flexible and nimble. He has to be. He is constantly analyzing markets made up of billions of irrational humans.
As I wrote before, we saw peak $70 oil, and a peak oil price, certainly, but not peak petroleum.
Diesel, as Cramer points out, is a problem and will remain so - or at least fall slower than other distillates. I like using words like "distillates". "Distillates" is a great-sounding word. Say it with me, won't you?
Distillates.
If all these changes seem stymieing and unlikely to you, you're not alone. I saw celebrated economist Nouriel Roubini on the "Charlie Rose" program slipping into talk about $120 oil and the falling dollar.
Apparently he doesn't get out much.
It's a confusing time for everyone. I just happen to like times like these. May you live in interesting times, Cramer
When I look around at blogs, I see a lot of people either making sweeping statements in the style of their favorite pundit - which is fun.
I also see people saying a lot of personal things. I've been told that's important because it shows you have a stake in what you're writing. I can definitely see the validity of that, but I just wasn't brought up that way. I'm not ready for that yet, but I'll try. I see people putting out a lot of charts and graphs - which are cool ways to visualize ideas and I'll do more of that. I also see people who are link-happy, which can be very useful - but so few people are saying anything like what I'm saying. And occasionally I see people trying to use a lot of extraneous detail - dates, names - to make themselves appear credible - which is lame.
I want to do all the stuff that's useful to people, but I also feel it's an unusual time where some strong statements are warranted and some explanations are really simple. And, again, it's fun.
Here's how I know that there is a huge global financial bubble: almost every major U.S.-dollar-traded commodity and currency future is down huge and at the same time. Everything from Australian dollar to Zinc - is down enormously.
The notion that nickel...
...and oats...
...could have the same economics is silly, and yet they are falling down together. Why? Because of course in a very real sense they do have the same economics, as the whole world does: The U.S. dollar binds them together.
This is the overwhelming argument for the bubble: When markets that are supposed to be unrelated move together, something is moving them together. That thing - in my view - is the U.S. dollar. The conclusion we have to reach is that through speculation and bubble finance, a huge number of dollars were created and made a bubble. The bubble popped and now those dollars are disappearing, with predictable results.
The evidence is now massive and undeniable, although it is still regularly denied in the financial pages. I started to come to the conclusion a few months ago. On a whim, I wrote a note to Dr. Didier Sornette, out of the blue, asking him about the trend in the euro currency versus the dollar. I was just so curious what he thought I couldn't resist. He more than surprised me by not only replying but kind giving me a look at an analysis he'd done. Long-short, he saw a mathematical signal which *could* be associated with a bubble and concluded that a "change of regime" was coming soon, based on a preliminary look. That was in May and that piece of analysis - preliminary as it was - led me to believe I really was looking at the huge change I suspected.
Professor Sornette has created a theory of bubbles - what they are and how one might distinguish a bubble from a fast or strong rise in price related to chance or fundamentals. This theory is nothing like the magic formulas on stock sites. It uses very complex math to peer into the new field of behavioral economics. Personally, I think it re-connect economics to common sense, but I am definitely extrapolating from Dr. Sornette's writings and my opinions should not be ascribed to him in any way.
The "common sense," unsophisticated , conclusion I take from Dr. Sornette's work is that bubbles happen when, through a natural, evolutionary sort of process, market participants start to entrain each other to respond to themselves rather than outside data. The process reinforces itself until the system acts very much like a natural system headed towards a critical failure - like a volcano on the way towards eruption. It's not that fundamentals aren't still at work, it's that traders are giving each other the ability to ignore them for a period of time.
This is not "technical analysis" - the things "chartists" typically do - at least not when Dr. Sornette does it. Dr. Sornette uses the math that now helps scientists predict critical failures in natural systems - like volcanoes - and has written that in special situations only he feels he can use this method of analysis to find the mathematical "signature" of a financial bubble and give a rough estimate of when it will burst and what will happen after it does.
Dr. Sornette's ideas are precise and scientific, but they also inspire intuitive searching, like all good ideas. So when I read his take on the euro, I started to look around. I saw chart after chart that looked so similar I was stunned. I did *not* do a mathematical analysis on them, but when I searched and searched and could find no cause for the synchronization, I had to make the conclusion that it was a bubble - traders were making the economics, rather than economics guiding the trades.
Now we have come to a place where the synchrony is so large, so universal, that even if there isn't a chart for it that Dr. Sornette can tell us fits his rigorous standards, we know that something is going on that ties these markets together.
Flip over all the charts and what do you get a chart of? The U.S. dollar versus....well, everything.
