It Begins.

In July of 2003, Didier Sornette wrote this:

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!

May you live in interesting times

JP Morgan To Buy WaMu???

Thanks to PVD, for this. That was really nice.

Now is JP Morgan being nice - or naughty?

If true, it's great news. We're still on the road, but it won't be quite so bumpy.

From American Banker

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.

May you live in interesting times, WaMu

Why Peak Oil Didn't Really Happen This Summer.

Cramer gets it:


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

So How Do I Know???

So how do I know it's a bubble?

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.




May you live in interesting times

These Things I Know

We are in a rare era, where there are dynamics in the economy that are both highly predictable and contrary to almost all conventional wisdom. They're predictable because they are based on almost timeless human tendencies and/or well-established modes of economic behavior. There is an enormous amount of money to be made that will almost certainly NOT be made - at least not by the right people.

The events will be life-changing, but maybe that's why we can't see them. Maybe we're not supposed to see things that are life-changing. More on that later.

Anyway, let's start big, with the big stuff people always talk about:

Global warming: It's important, but it's not going to happen quickly enough to play a role in this scenario.

Islamic terrorism: Forget it. It's an effect, not a cause of anything.

China, India, the BRIC: Try and remember that these are still developing nations, not super-powers - not for a while. If you're Chinese or Indian and reading this, this isn't an insult. This is a statement of fact meant to put the economic situation of your country into perspective. As huge and fast-developing as your countries are, there are ENORMOUS economic threats to them - so listen up.

Oil/Petroleum: Now we're at something that does matter - just not in the way people think. "Peak Oil" has been reached - at $70 a barrel. We have seen a peak of $70/barrel crude oil. By this I mean that production and transport from all the world's fields that are profitable at or below $70 (and obviously I'm using a rounded figure here), has very likely peaked or will soon. But that doesn't mean the big "Peak Oil" that everyone talks about, by which they mean something more like "Peak Petroleum". Because at, say, $100/barrel, substitute goods come onto the market for crude oil in large amounts. The most important are obviously bitumen - as in the Canadian oil sands - and CNG/LNG - compressed or liquified natural gas. They're not as good as crude for fuel needs, but they work - just at a higher price. And both bitumen and natural gas are arguably even more abundant than crude oil - but then world demand is going up, so they'd better be.

No rational person can do anything but hope devoutly that humans outlive their oil supply. That's going to take significant work, but the medium-term significance of what I'm calling "Peak $70 Oil" is that it solidified the "peak oil" story. That story swept across the investing class of people around the world. It has been used to sell what may be the biggest and most dangerous financial bubble ever. Traders are now the dominant force in world markets - traders themselves - and they are trapped by their own behavior.

Gold: Don't make me laugh. Well, okay, to be fair, it probably does have a role for people in developing countries.

The U.S. Dollar: It's everything.

The Euro: Everything else?

May you live in interesting times