For the moment the best measure of the cost of capital is gold. For years gold fell as fiat money was printed and this unsustainable ponzi scheme established, however as that ponzi scheme now unravels, gold must go up. The scale of both the ponzi scheme collapse and gold appreciation will be huge.gold as cost of capital, as a asset class
-
08/09/2011 - 17:37
-
08/09/2011 - 13:56
-
08/09/2011 - 00:57
Must Read: UBS' Andy Lees On Why The US Economy Is, All Else Equal, Doomed
"With all the mess going on at the moment, I thought it was worth while stepping back a little and trying to look at the bigger picture." So begins Andy Lees' latest must read letter to clients whch explains succinctly virtually the entire story of where we were, how we got to where are now, how the current trajectory is unsustainable, why due to decades of capital misallocation anything that the Fed does now is essentially irrelevant, why our untenable debt pile does nothing but perpetuate an unsustainable ponzi scheme which will result in an unseen explosion in the true cost of capital: gold, and why the bond market will eventually, and inevitably, force an epic repricing in the cost of non-gold capital absent the arrival of the deux ex machina of real, actionable innovation that the Fed, and all global central planners, keep hoping for. Because the longer we keep plugging away with that worthless substitute, financial innovation, which is anything but, the greater the final collapse. Andy's conclusion: "Until the debt is cleared and capital starts to be properly allocated, economic growth per unit of additional debt will continue to sour. Until we get some real breakthrough technology, requiring large amounts of capital to both innovate and then roll out, we have no chance of supporting the economy." Too bad than that this absolutely spot on observation reflect precisely the opposite of what the Fed is pursuing. Which is why, all else equal, and it will be unless the Fed is finally eliminated from existence, America, and the entire western way of life, is doomed... But don't take our word for it. Here is Andy.
Why are we here: simple - years of central planning resulting in the greatest experiment in capital misallocation in history.
We are in this mess because of excessive leverage and excessive consumption, financed by excessively cheap real capital – (not just Bernanke & Greenspan but further back to the end of the gold standard, and in fact even before that as it was this misallocation of capital that forced us off the gold standard in the first place). If capital had been allocated productively, then by definition debt would fall as a percentage of GDP. Total debt may rise, but efficient allocation of capital would always mean the economy would grow faster than the debt as it means you are making a positive rather than negative real return on that capital.
Whichever way you look at it, capital has been massively misallocated for years.
Corporate profits... or massive debt-funded ponzi scheme?
How can that be when corporates report massive profits? The profits are based on paying their workers a salary that meant they could only buy the goods they made by borrowing; in other words, a massive unsustainable ponzi scheme that could only ever end up with default. Without the household debt accumulation, there would be no market to sell their products to, and without paying the workers sufficient, the debt would always have to default.
This required a massive increase in financial innovation to keep the illusion of corporate profitability alive – (household debt was a way of delaying putting the true costs through the corporate P&L account and recognising the costs). Financial sector innovation is itself another form of capital misallocation, taxing people away from real innovation – (to keep the illusion alive, an ever greater percentage of economic output had to be allocated to this illusion machine) - helping add to the resource constraint we are in today.
If financial innovation, which we have so much of is not needed, what is the right kind? And why is it so sorely missing.
A lot of what are described as efficiency gains have been just the removal of levels of safety and the removal of innovation in the system. Innovation and ongoing operations are always and inevitably in conflict, with the most readily apparent conflict between short and long term priorities. A second handicap to innovation is the way efficiency is achieved by breaking down things into small repeatable tasks. This specialisation and repeatability is a company’s greatest strength, but it is also its greatest weakness. Innovation is neither repeatable nor predictable. It is non-routine and uncertain. (Book: The Other Side of Innovation).
The culprit: none other than the great moderation, and, now, ZIRP4EVA:
Low real interest rates support excessive consumption, taking money away from innovation and balance sheets. When the US started suffering from its peak oil in 1970, rather than innovation it turned to globalisation to tax the broader global resource balance sheet, just as Britain and Europe had done 100 years earlier through colonialism, and recently accelerated that with the WTO. Globalisation has always been about accessing resources.
Which bring us to topic #1 here, and everywhere else where economics is involved: cash flows.
This has been a factor mobilisation story on unprecedented proportions, but appears to have reached its conclusion as resource constraint has meant the “cash flow” to grease the wheels has started to become more expensive and constrained. Profit without productivity can only carry on for a finite period; we are now clearly consuming down our balance sheet or putting it through the P&L account.
So we are left with a massive amount of debt, a massive amount of capital and labour that is unprofitable in the world we face, and a balance sheet of insufficient resources to keep the illusion alive. The only thing that will get us out of this in the long run is innovation which will expand the balance sheet, expand the pie and create the jobs that people want.
How do we get rid of the debt? Are we in a debt trap whereby any interest rate hike will kill the recovery? Clearly it is going to be incredibly difficult, but low real rates are the cause of the problem, not the solution. I don’t personally see a zero rate trap, but we need to allocate capital far more productively than we are doing.
The cost of money itself is hugely important. How negative were real rates? When people talk of borrowing from the future, surely the same logic applies to the cost of capital. If we have had low or negative rates that supported excessive consumption, we now need to have high real rates to direct capital back to innovation and gradually repair the balance sheet. The real cost of capital has to go up. No matter how much fighting the Fed and Treasury do, the real cost of capital will rise. The bond markets have to be allowed to clear some of the debt and thereby remove some of this misallocation of capital.
It's not "debt trap", it is "Fed trap"
Does that mean we are trapped in a position whereby the Fed cannot raise rates? Quite frankly it doesn’t really matter what the Fed does; real rates have to go up, are going up and will go up. The more the Fed and the government misallocate capital, the more the real cost of capital will have to rise higher to compensate. The only thing that will get real rates down is either a massive new discovery of incredibly cheap fossil fuels or the innovation that delivers cheap fusion. Otherwise it is a case of the cost of capital rising and causing demand destruction.
Getting the central banks monetary policy inline with the real cost of capital in the market must be the first step to rectifying the misallocation of capital. One obvious thing would be for economists to stop ignoring CPI of food and energy as irrelevant as it is the fastest growing part of the economy. By ignoring it, they are turning what should be a smooth and relatively painless transfer of capital into an occasional out-of control collapse and transfer. Getting both a proper monetary and fiscal policy framework in place, based off genuine data rather than smoke and mirrors and fiddles must be the first priority.
Which brings us to where we are now: a massive, unsustainable ponzi scheme:
Whilst politicians and investors acknowledge that excessive leverage created the asset and debt bubble, they do everything they can to prevent a rational deleveraging or efficient allocation of capital. For the moment the best measure of the cost of capital is gold. For years gold fell as fiat money was printed and this unsustainable ponzi scheme established, however as that ponzi scheme now unravels, gold must go up. The scale of both the ponzi scheme collapse and gold appreciation will be huge.
The problem is total credit market debt is still increasing.
As Fitch recently highlighted, Chinese on & off balance sheet debt has expanded by nearly 40% GDP in each of the last 3 years. In other words, the misallocation of capital is continuing making the ultimate problem that much worse. China is now getting almost no growth per unit of additional debt.
With each additional unit of debt, we are digging ourselves a deeper hole to get ourselves out of. Surely it is better to at least slow the digging? If we can allocate capital productively at the margin – (we know where we need to start making real returns) – then once we can start making a positive return on that marginal debt, then it becomes easier to support the residual debt we have.
If Andy is right, the framework of the next great class class conflict is set: it will be between the productive private economy and the "unproductive economy." Yes: Marxist tensions are about to make a repeat appearance:
Private sector annuity rates will be tumbling and yet the unproductive public sector are still being given great pensions. We are taxing the productive private economy to give to the unproductive economy. This has to end. The idea of a European fiscal union fills me with dread as that would be locking this unproductive transfer into stone. Rather than keep kicking the can down the road, lets own up to our excesses and start putting the economy back on track. Don’t reward the rioters in London with yet another handout; force them to pay for the damage they have caused and the police time they have consumed.
Is Greenspan to blame for this dead end? Yes... but only so far. One can just as readily blame the traditional duel between short and long-termism, or what is known better as "it will be the other administration's/generation's issue." In other words, Washington is just as guilty as Wall Street, and that infamous private bank.
Why have we misallocated capital for so long? We can blame it on democracy, but bigger than democracy is the culture that forces politicians to favour the immediate status quo over the longer term good of the country. That culture then presumably comes down to poor understanding which comes back to low levels of education. We need to address these route courses.
His conclusion:
The real cost of capital has to rise. That will happen through default in one way or another. Debt has to be cleared. Multiple contraction is inevitable.
Financial sector innovation has to be squeezed by engineering and scientific innovation. Until the debt is cleared and capital starts to be properly allocated, economic growth per unit of additional debt will continue to sour.
Energy is the cash flow in this story. Until we get some real breakthrough technology, requiring large amounts of capital to both innovate and then roll out, we have no chance of supporting the economy.
Nothing can be added to this.
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on Tue, 08/09/2011 - 17:34
#1544099
The minutes from the FOMC release say something along the lines of "inflation moderating later this year". Let's assume for a minute that Ben & Co. know that QE caused food and energy to rise....would anyone else assume that maybe they don't want to QE anymore? Just a thought that came to mind.
on Tue, 08/09/2011 - 17:51
#1544174
Posted this yesterday or the day before.
http://seekingalpha.com/article/248003-the-end-of-america-not-quite
Looks like someone didn't see it. ;-O
And there's more out there for the objective journalist who wants to find it.
And no I'm not Obama in disguise.
on Tue, 08/09/2011 - 18:04
#1544228
I am absolutely at a loss at why anyone actually thinks this administration (or any other) actually wants any innovation. There have been quite a few really good ideas that came out over the last few years and ZERO came of them. Anyone remember T Boone Pickens idea to build massive wind farms across the US with all the needed cabling? That would employ millions of Americans. How about Purdue's yeast that makes ethanol from cellulose (wood fiber). The entire automotive industry could run on all the alcohol that that microbe could produce.
America does not want innovation. It wants the status quo.
on Tue, 08/09/2011 - 18:16
#1544270
Yeah, what could be better than going further into debt to subsidize unprofitable windfarms while T Boone lines his pockets and people are employed to destroy wealth. Swell idea.
How about just getting the regulators and the tax collectors out of people's effing way? There are tons of people who have lots of great ideas that the government prevents from coming to fruition by pouring sand in the gears of anyone stupid enough to be productive. Risk requires reward and the politicians' sole purpose in life is to rob people of it so they can line their own pockets and the pockets of rent seeking cronies like T Boone.
America wants innovation, Gone Bad. But, innovation requires leaving people be and not threatening them with Dudd-Frank, Obamacare, EPA, SEC, etc. etc. The politicians want the status quo because it's easier to consolidate and monetize their power. Politics is just a futures market in stolen goods and the politicians love the goods they steal from you.
on Tue, 08/09/2011 - 17:35
#1544103
All that to say buy gold blah blah ..
on Tue, 08/09/2011 - 17:37
#1544109
Oh yeah, I forgot. The article is crap.
on Tue, 08/09/2011 - 18:03
#1544223
I agree. what good does it do any of us to read such rubbish?
on Tue, 08/09/2011 - 18:13
#1544258
Wow, I wish there was a junk-1000 for HPD and ratso. The fact that you can't comprehend the simple yet profound truth of this article just shows how your reasoning skills have degenerated due to gubmint skoolin.
on Tue, 08/09/2011 - 18:15
#1544265
Nothing, but I seriously doubt, considering many of your other comments, that you are capable of understanding it.
on Tue, 08/09/2011 - 17:36
#1544106
"Nothing can be added to this."
on Tue, 08/09/2011 - 17:42
#1544136
Some of the most brilliant people in the world work for General Electric, tax avoidance division.
Go Immelt, help us discover the wonders of Planet O!
on Tue, 08/09/2011 - 18:15
#1544264
You're right- it lays out, in simple terms, the problem and solution to our current fiscal cancer.
on Tue, 08/09/2011 - 17:38
#1544112
Was just watching Sir James Goldsmiths interview with Charlie Rose regarding the efficiency we call labor arbitrage... er GATT.
Glad to see someone had it right almost 2 decades ago...
How about we undo this bullshit.
http://www.youtube.com/watch?v=4PQrz8F0dBI
on Tue, 08/09/2011 - 18:04
#1544230
http://www.youtube.com/watch?v=mOwZwkhFemQ
&.
http://www.youtube.com/watch?v=wYuLjGQQ-jg
Enjoy!
on Tue, 08/09/2011 - 17:39
#1544121
The tide is finally turning. Some peoplel are actually trying to tell the truth.
on Tue, 08/09/2011 - 18:06
#1544238
ok, tell me what truth did he tell me, so that i may know the truth..........
on Tue, 08/09/2011 - 17:39
#1544125
Just got back from the eye doc so the reading is limited for a couple more housr
WTF happened I see a cliff dive followed by Mt Everest
on Tue, 08/09/2011 - 17:40
#1544128
DOOMED, BITCHEZ!!!!
on Tue, 08/09/2011 - 17:41
#1544129
Why have we misallocated capital for so long?
Because we could, that's why.
Truly an "Exorbitant Privilege", *****ezzzz!
on Tue, 08/09/2011 - 17:51
#1544175
That, and we designed our entire educational system around the concept of extracting value from the economy rather than adding value to it.
on Tue, 08/09/2011 - 17:41
#1544133
Why innovate when the Wrecking Ball in Chief has made it clear he will fight to the death to confiscate your wealth if you're successful? Either he'll use the IRS or the Fed to wrench it from you.
Don't take risks and don't bother being productive (unless you're working on your subsistence garden).
on Tue, 08/09/2011 - 17:46
#1544152
Go Galt on their ass, baby.
on Tue, 08/09/2011 - 17:42
#1544137
"unless the Fed is finally eliminated from existance."
Tear down the buildings, crush the stone and concrete to dust, burn the wood, cover the footprint with 6" of salt, seize all assets of all Fed employees, convict all Fed employees of terrorism, imprison them and their families three generations removed for life.
Thats how you freakin' do it. Anything short of above actions and you will see the beast rise from the ashes in a single generation.
on Tue, 08/09/2011 - 17:44
#1544146
Lest I forget, then go after the CFR, ICG, Monsanto and Brookings among others. Same treatment.
on Tue, 08/09/2011 - 18:09
#1544244
The FED!
The Lobby!
The Lobby Whores!
The Owners of the FED!
Anyone who supported these scumbags!
as well the immigration crowd who allowed America to be truned into a FAILED experiment of multi-culturalism!
anyone who doesnt like it can GET THE FUCK OUT TOO!
on Tue, 08/09/2011 - 17:46
#1544140
Eliminate the FED Now!!!!!!!!
Don't wait. These banker buffoons have taken the World especially the USA hostage to their 'Plan'.
And it is a planned attack.
Everyone needs to get the FED Clean Up kit.
1. Shovel
2. Bag of lime
on Tue, 08/09/2011 - 17:44
#1544143
and this is just the stock market shedding some extra pork around the waist! Can't wait for the bond market implosion! WHOPPEEEE!
Keep stackin 'em hi!
on Tue, 08/09/2011 - 17:48
#1544158
There is no magic technological or energy innovation on the horizon. Economic principles, both Keynesian and Austrian, violate the laws of thermodynamics and this, in large part, is why things are collapsing (throw in all the ensuing corruption as a symptom, not a cause, it is merely gasoline poured on the fire). No innovation can violate the laws of physics. Innovators work their "magic" by understanding and USING the laws of physics, not violating them. Economic growth will stop, and permanently. Prepare for it.
on Tue, 08/09/2011 - 17:55
#1544194
You need to substantiate that to the Chinese.
on Tue, 08/09/2011 - 18:09
#1544233
Man it's screwballs like you that put those little nagging doubts in my mind about owning gold, spurting those gems such as "Economic growth will stop, and permanently", man i feel sorry for your family, i feel sorry for you, millions of years of human evolution and innovation and here's you calling the top of all tops. Who the fuck do you think you are buddy? Is this what you push down peoples throats when you get a chance to speak every now and then? Don’t invite me round for tea and biscuits. Jesus, you're really praying for the world to stop because you got gold, OMG! What a bitter old twat you’ve become.
on Tue, 08/09/2011 - 17:48
#1544160
Money is a human invention.
So virtual, that most of it only exists as a dipole in a magnet platter or electronic bits in a computer.
It evolves in ways that those changes actually benefit the ones that can change the rules, no wonder.
Money will continue its evolution. Either ponzi, debt, gold, ETF, carbon credits... someone still has to sweat the hard jobs.
"Mother" Earth will certainly bite us in the ass. We are consuming at a faster pace than what nature can replenish.
Enjoy while you can.
on Tue, 08/09/2011 - 18:02
#1544216
That was the one thing missing from the article: The impossibility of "sustainable growth" regardless of what enonomic system we're under, and how to manage decreasing net energy returns on our energy investments (the next, and last, "growth industry").
on Tue, 08/09/2011 - 17:51
#1544173
Money will be made in/from BRIC, and they really don't care about the developed world now.
on Tue, 08/09/2011 - 17:53
#1544180
"...it puts the lotion in the basket....IT PUTS THE LOTION IN THE BASKET!!!..."
The guys holding the string are gonna have to yell louder to get the results they want.
Time to tie a chicken bone to the string and pull the dog down
on Tue, 08/09/2011 - 17:53
#1544181
On Friday morning, October 25, after Charlton had gone to the office, Adele MacVeigh settled down to read the Times. When she had finished, she flt a sense of wifely pride. The newspaper reports confirmed what Charlton had told her: Things were going to be all right.
Hutton-Miler sensed a similar mood of optimism when he returned to Wall Street after a short rest in a nearby hotel. Despite his clean shirt and collar, his appearance was somewhat spoiled by the stubble on his chin; he had forgotten to pack his razor and there were long queues outside the barber shops.
Michael Levine examined, and rejected as impractical, several ideas for cashing in on the sudden tonsorial need. It was a sideline the ingenious self-made millionaire was unable to exploit. Yet during the night some of his messengers had successfully delivered booze and supplies in the district, easily avoiding patrolling policemen. Their employer was, nevertheless, relieved to see that the police presence had been reduced by daylight; it was another sign the crisis was over.
Levine fell asleep in his office, totally ignoring the ringing telephones.
Since early morning, they had also been busy in the surrounding brokerage houses. Customers, some as far away as Alaska and California, having spent a sleepless night figuring out their financial position, were coming back into the market with a vengeance.
Pat Bologna saw there were again lines forming outside the customers' rooms. Rumors ran rife among them as before, but today the shoeblack detected one difference: The people were in much better humor. The first jokes began to do the rounds; there were gags about brokers buying stock in gas companies and bankers investing in those manufacturing red ink.
Sustained cheers greeted Thomas Lamont and the other Morgan partners when they arrived at 23 Wall. They appeared embarrassed by their sudden popularity.
Charles Mitchell took it as his due. Dogged by his faithful chauffeur toting his valise, the banker strode down Wall Street radiating confidence and good cheer.
By nine-thirty the crowd had formed an avenue outside the Stock Exchange entrance, down which the last of the brokers hurried.
One of the many newsmen present saw the traders as "newly seasoned combat troops going back up the line, knowing that some of them could be wiped out, but all determined to survive. It's the mentality which wins wars--and overcomes financial panics."
William Crawford detected a similar fierce determination when he opened the market at ten.
Minutes later the tension gave way to visible relief as the first prices for many stocks showed immediate, if modest, gains. They set the standard for the day's trading....
...Workers emerged from the Exchange with the feeling that the crisis had been successfully weathered.
The Day the Bubble Burst
Gordon Thomas and Max Morgan-Witts
pp375-6
on Tue, 08/09/2011 - 17:53
#1544182
Andy, All we need is FREEGOLD (A la FOFOA) and a Resouced Based Economy (a la Venus Project).
on Tue, 08/09/2011 - 17:53
#1544185
I think he's mostly right but too opptimistic if he assumes there is a store of capital waiting to be invested if the right real innovation comes along.
Our capital is all trapped in houses no one needs and student loans for college degrees that serve no economic purpose, and any economic surplus the economy creates gets sucked down the ratholes of deleveraging all that debt, of over-regulation and wasteful government programs, and going overseas for imported oil and (mostly) Chinese consumer products. Unwinding the debt would threaten the banking system; unwinding the government, well, dream on; and unwinding imported oil and consumer goods...??? Yeah, that'll happen.
Any new innovative technology would have to have predictable rates of return sufficient to overcome all of that headwind in order to find financing. Lotsa luck with that.
on Tue, 08/09/2011 - 17:54
#1544189
The key thing now is banks are more likely to "invest" in casinos, whore houses, and illicit drugs- because they get an instantaneous return rather than new technologies (think fusion, solar, clean coal, medical breakthroughs, new materials, fuel cells, etc.). I think this is the relevant message. Oh, yea, and BUY GOLD!
www.gold-silver.us/forums
on Tue, 08/09/2011 - 17:54
#1544190
On Saturday, before the market opened, newspaper readers received further words of comfort from many leading financial figures in the country.
Charles Schwab, chairman of Bethlehem Steel, friend of Henry Ford and and client of [astrologer] Evangeline Adams, said he saw no reason in principle why prosperity should not continue "indefinitely."
James Farrell, president of U.S. Steel, concurred.
Alfred sloan, chairman of General Motors, reportedly declared Thursday's crash was "healthy," a diagnosis that startled not only GM shareholders who had seen their stock drop but also Charles Stewart Mott, who, for the past two days, had remained virtually full-time at his office.
Walter Teagle, president of Standard Oil, announced: "There has been no fundamental change in the petroleum industry."
Samuel Vauclain of Baldwin Locomotive believed that America was back on track, on time and steaming along at full speed.
Even Doc Giannini [Bank of America] was ready with a word of comfort--to add to the thousands already dispensed by his fellow luminaries. But Doc, in contrast with other bankers, was quietly revising downward the estimates of the lending value of stocks.
And out-of-town banks and corporations continued to call back their deposits from Wall Street. New York Banks were plugging the gaping hole left by these "summer financiers." So far, $1 billion had been used for this purpose.
John J. Raskob [builder of the Empire State Building] saw this bank support as a bold stroke. The banks were ensuring there would be no shortage of money for investors, that stocks would not have to be dumped because their owners could not borrow money at any price to keep them.
Raskob, like many other bulls, also drew comfort from call money being freely available this Saturday at an attractive 6 percent.
The two-hour trading period, in spite of this, was reported "uneventful," average prices falling very slightly.
The Day the Bubble Burst
Gordon Thomas and Max Morgan-Witts
pg 377
on Tue, 08/09/2011 - 17:54
#1544192
Monday, October 28, dawned in a swirl of optimism which enveloped many people in the financial district. Thousands of newcomers--rubbernecks, some with money to invest--converged on the area. Many were drawn by reports that "a mountain" of buy orders had accumulated in brokers' offices over the weekend.
Mike Meehan did not share this enthusiasm. He was nervous. Radio had slumped badly from those halcyon days of six months before when it had been over 100; on Thursday it dropped to only 44, but had recovered since then and was now just under 60.
The astute Meehan was concerned about another aspect, one that had no direct link with Radio but could have a strong indirect bearing on the performance of the stock. It was the erroneous, and growing conviction among the speculating public that the purpose of Lamont's bankers' pool was to push up prices. Meehan knew this was not so. The bankers' fund was intended only to stabilize the market--to "stop the bottom falling out entirely"--and to prepare the way for an orderly liquidation if that should be necessary.
Meehan did not know how long the bankers intended to provide money to buy the stock; he did know that when they stopped, it would be dangerous. He could only do what he had done since Thursday, "attempt to maintain an orderly and fair market in radio."
The Day the Bubble Burst
Gordon Thomas and Max Morgan-Witts
pg 378
on Tue, 08/09/2011 - 17:56
#1544195
Thank you Capt Obvious. You are finally getting around to explaining/commenting about issues well known to most of the ZH community for years.
IMO you will see this as a recurring meme, smart/respected folks finally admitting or feeling free to talk about this subject as if it just happened. They speak now of subjects they didn't dare raise a year or two ago.
As this repression is lifted expect a quickening of ramifications. It will be an interesting 4q.
on Tue, 08/09/2011 - 17:56
#1544196
William Crawford hardly had time to step from his podium before trouble erupted.
At Post Two U.S. Steel opened at $202.25, a full $1.25 off its closing price Saturday.
At Post Seventeen there was a greater dip as International Tel and Tel started $3 down on Saturday's price.
The biggest drop of all in these opening moments was at Post Six: General Electric fell $7.50.
The ticker started to lag behind. Everywhere the panic of "Black Thursday" seemed destined to be repeated.
By 10:30 Steel had crashed through the mythical 200 barrier; other blue chips followed in a wave of selling which successively knocked prices down from one level to another.
By 1 P.M. the ticker was ninety minutes late.
The news agency tapes were up to the minute: Within seconds of each other, AP and UPI reported that Charles Mitchell [National City Bank] had entered 23 Wall.
The rumor was born and nurtured that Mitchell was placing his bank's vast reserves behind a new move to stop the rot, reminiscent of the day in late March when he had bucked the Federal Reserve and saved the bull market virtually single-handedly. But this time the shoe was on the other foot; it is almost certain that Mitchell went there to borrow the $12 million he wanted to support his own bank stock. He spent less than twenty minutes inside J.P. Morgan and Company. He walked out smiling--Morgan's would loan him $10 million this week.
The market steadied when news of Mitchell's smile reached the trading floor.
Soon after, a broker acting for Morgan's began bidding for Steel. It quickly rose from 193.5 to 198. The broker was not Whitney, and his effort did not have the effect Whitney's had had on Thursday. Steel soon slipped back to 190.
As the afternoon wore on, the selling became even more urgent. In the final hour, nearly 3 million shares changed hands-- a figure that in other, calmer times would have been a good day.
When Crawford sounded the closing gong, 9,212,800 shares had been traded. It was less than on Black Thursday. But the fall in prices was more severe; The Times general average of stocks was down 29 points. This was the largest drop in prices during any day in the entire history of the New York Stock Exchange.
All told, securities had fallen in value an estimated $14 billion.
The Day the Bubble Burst
Gordon Thomas and Max Morgan-Witts
pp 379-80
on Tue, 08/09/2011 - 17:59
#1544206
Wrong headed reasoning, wrong conclusions.
on Tue, 08/09/2011 - 17:59
#1544208
Yes but what about the zombie problem in the UK ?
www.youtube.com/watch?v=XWw9vE39IGc
on Tue, 08/09/2011 - 18:00
#1544210
Some things to consider...campaign finance reform, term limits...maybe if these poor bastards weren't required to pander to special interest and did not make a career out of being a politician, they might get this back on track...over a generation or two. Lacking any serious changes to these two most basic issues, we have no hope at all. Off to Costa Rica.
on Tue, 08/09/2011 - 18:01
#1544212
Traveling into Wall Street, Pat Bologna was assailed on all sides by market talk. He was astonished to hear how good-natured were his fellow passengers. Bologna put it down to the surprisingly optimistic tone of the morning papers; apart from the Times, most of the papers predicted that the situation would today be retrieved by "banking support." Bologna felt the subway train was "like the Titanic," with his fellow passengers putting on the same brave face as those on the great liner had reportedly done as she was sinking.
One of the subway passengers, a night manager in a Manhattan hotel, had a captive audience for his tale about a wealthy Midwest industrialist who had checked in the night before. The guest was a regular, with a standing order for a magnum of champagne and a call girl. As soon as he'd settled into his suite, the champagne was delivered--but the girl failed to materialize. The man rang up the night manager, who promised to send up a girl. Moments later there as a knock on the suite door--and, when he opened it, the guest was confronted by a beautiful blonde. The impatient industrialist yanked her inside and told her to undress. The girl icily told him she was his broker's secretary. She handed the dumbfounded man a margin call for $400,000 and departed. Minutes later, the desolate guest checked out, his sexual appetite, like his fortune, suddenly diminished.
The Day the Bubble Burst
Gordon Thomas and Max Morgan-Witts
pg 384
on Tue, 08/09/2011 - 18:01
#1544215
THE UNITED STATES FEDERAL ZIMMER SUPPORT SYSTEM: The Central 'Market Maker', AND, 'Market Manipulator' has replaced the Free Market not just with Central Planning, but with a Market and Economy which cannot stand on it's two feet anymore without the support of the Fed Zimmer Frame.
Just the knowledge that the Fed is there to kiss the elbows and knees of the economy and market should they fall and scuff, is without doubt the most pathetic thing I have ever seen.
This level of dependence impacts upon the psyche of businesses in that the entire US Economy is now utterly dependent upon the Fed's Zimmer...and if you don't believe me, well, watch the news, it will be all about will the Fed do this, or, will the Fed do that, or, is the Fed ready to dump trillions of dollars underneath us if we fall because I couldn't possibly take another step without protection and a solid promis to catch my fall.
It is at this time I am convinced that collapse is near.
on Tue, 08/09/2011 - 18:07
#1544217
I love the technophrasing of this post : misallocation of capital. Its like "collateral damage" or "irrational exuberance" or "exorbitant privilege"; all diplomatically put circumlocutory terms which mean "we the elected and our oligarchical masters are into thuggery in a massive way for reasons of state, that you must support as true patriots". Cheats, liars and scoundrels, uber-elite dregs of the earth, you hide your hubristic collective rape pulsations, your egocentric gene, hereditary impulse, in the terminology of fatal destiny syndrome of nation states under siege... "Its our collective destiny to suffer this, stiff upper lips fellas and take your medicine, tough times ahead, nothing we can do about it, it the price to pay for 'king and country'..." Thats fine in 'auld lang syne' but not in a modern republic. All this hog wash to wash away basic corrupt human greed in private sector economia gone mad...I don't buy it. What we need to restore people's confidence is a complete accountability of those who brought us into this mess; open book examination of 'offshore shadow banking and all derivative plays clearly accounted for and all illegal money hoardings in off shore accounts exposed for all transnational corporates and uber personal accounts. That the people's money be used to ensure the people's rape is a travesty of the republic that is intolerable. Bring the chickens home to roost and let the drums beat the people's wrath, in state of law implemented not by corrupt judges but by true representatives of republic. And don't say its not people's money as without the republic these shills would not have the leverage that "reserve currency" and "masters of the world economy" gave them thanks to that 'great generation' that sacrificed all for freedom; not for imperial corruption at a scale never before encountered.
on Tue, 08/09/2011 - 18:03
#1544219
Before I read it let me guess....
...because UBS fucked it in its ass!
Am I right? Am I right?
on Tue, 08/09/2011 - 18:03
#1544220
Maybe I'm stupid, but I don't get his conclusion...
How can cheap energy be the solution to it all...
Then he says the technology needs large amounts of cash,
which means it isn't cheap
I'm gonna read it again...in the meantime, if someone can explain it better...feel free
on Tue, 08/09/2011 - 18:04
#1544224
Is there a link? I'd like to send it to collegues
on Tue, 08/09/2011 - 18:04
#1544225
In the past five days--except for brief forays to some showgirl's apartment--Livermore had barely left the office. The sequence of events that had caused countless thousands of "minnows" to be ruined and billions of dollars lost excited him more than anything, or anybody, could. He relished having to call into play his unsurpassed market skills.
Livermore had been driven at times to the very edge of disaster; on each occasion, using brilliant financial ringcraft, he had fought his way out of trouble. When others predicted prices would rise, he kept his nerve and remained on the short side of the market: Prices fell, and Livermore collected. On other occasions he had been long, buying through a large number of brokers, to avoid arousing suspicion, blocks of shares in anticipation of a rally. He had been more often right than wrong, and managed to maintain his financial equilibrium while lesser operators had seen their fortunes virtually vanish.
The Day the Bubble Burst
Gordon Thomas and Max Morgan-Witts
pg 385
on Tue, 08/09/2011 - 18:04
#1544229
"Endless money forms the sinews of war."
- Cicero -
on Tue, 08/09/2011 - 18:06
#1544235
"If Andy is right, the framework of the next great class class conflict is set: it will be between the productive private economy and the "unproductive economy." Yes: Marxist tensions are about to make a repeat appearance:"
This is just totally wrong and more Austrian-thought-experiment-psycho-babble. It's not that the private sector is productive and the government isn't. If real wealth comes from the natural world, then anything that protects and enhances the natural world's ability to provide that wealth is what is "productive". There are some things that the private sector is better at doing and others that only the government can do efficiently. They are both needed.
The private sector is taxed nowhere near enough. It is pure fantasy that the government overspends.
on Tue, 08/09/2011 - 18:19
#1544280
Ha, ha, ha, ha sock puppet! negative to infinity! Let's badmouth Austrian economics now that Keynesians have done so well! Government does nothing efficiently except steal!
Tuco Benedicto Pacifico Juan Maria Ramirez
on Tue, 08/09/2011 - 18:08
#1544241
Crawford's eyes swept the Exchange. Instinctively, he glanced toward the visitors' gallery. It was empty; it had not been reopened since its closure midday on Thursday. The superintendent was relieved reporters were unable to peer down on the bedlam already developing on the floor. Veteran traders, clerks and page boys were running wildly around the perimeter before darting into the jostling mass in the center. The floor was littered with discarded pieces of paper.
And even as Crawford raised his gavel, the din from below increased to a "baying roar." The sound of the gong was lost.
"Twenty thousand at the market!"
"Thirty thousand at the market!"
"Fifty thousand! Sell at the market!"
General Oliver Bridgeman, U.S. Steel's battle-scarred specialist, flinched at the hammer blows. Steel plunged through yesterday's ruinous close of $186 a share with girderlike force.
The rest of the market tumbled with it, sucked swiftly down by the uncontrollable crowd besieging Post Two.
During the first three minutes of trading 650,000 Steel shares were dumped on the market. At the end of those three minutes, few buyers were interested in the stock at $179. It seemed a lifetime since Whitney had bid $205.
Steel's collapse created ugly panic. Men swore, shoved, and mauled, clawing at Bridgeman, forcing him to take refuge inside Post Two.
A messenger struggling through the crowd suddenly found himself yanked by his hair off his feet. The man who held him kept screaming he had been ruined. He would not let the boy go. The terrified youth at last broke free, leaving the man holding tufts of his hair. Crying in pain, the messenger fled the exchange. His hair never regrew.
Behind, he left a scene of increasing pandemonium. As huge blocks of shares continued to be dumped at all seventeen trading posts, 1,000 brokers and a support army of 2,000 page boys, clerks, telephonists, operators of pneumatic message tubes, and official recorders could sense this was going to be the "day of the millionaires slaughter."
The Day the Bubble Burst
Gordon Thomas and Max Morgan-Witts
pg 388
on Tue, 08/09/2011 - 18:09
#1544245
Devaluation and financial repression is the almost certain US path. The 50% decline in purchasing power between 1970 and 1980 is a guide. A 75% decline in purchasing power should resolve the debt levels.
The issue beyond devaluation are the significant inefficiencies including government, medical, military, unfunded entitlements, etc. The readjustments are likely to be painful for most having to adjust to a lower living standard.
The macroeconomic realities have yet to be comprehended and the politicians are so far avoiding the issues. Various considerations aside, the path at this point is to realize steady devaluation providing time for economic readjustment.
The question of the decade is can they pull it off. The answer is maybe. Perhaps the main variable is whether the US trading partners continue to provide vendor financing and accept a devalued reserve currency. We do know that the 50% devaluation in the '70s was accepted. A lack of robust, practical currency alternatives is supportive.
on Tue, 08/09/2011 - 18:09
#1544246
Check out Collapsenet. They have been providing great coverage to add to Zero Hedge's great insight:
http://www.collapsenet.com/154.html
on Tue, 08/09/2011 - 18:10
#1544249
"Owners of capital will stimulate the working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism.
- Das Kapital, 1867
on Tue, 08/09/2011 - 18:11
#1544251
Yawn. As if ANYone at the shadow institution of UBS (the operative letters in that acronym being the last two) deserves to be seriously read. As Buffett once said, "a prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting."
on Tue, 08/09/2011 - 18:12
#1544255
Can I ask a question? Where did the search function go? I have to keep up with CPL when he posts! C'mon bring back the search function! Please!
on Tue, 08/09/2011 - 18:14
#1544256
ENJOY !
Corporate Taxes:
http://www.ritholtz.com/blog/2011/04/corporate-tax-rates-then-and-now/
http://economix.blogs.nytimes.com/2009/11/24/the-tax-burden-around-the-developed-world/
Republican Scam:
http://www.economicpolicyjournal.com/2011/04/budget-cuts-turn-out-to-be-total-scam.html
This one takes the cake:
http://visualecon.wpengine.netdna-cdn.com/wp-content/uploads/Income_Corp_CapitalGains_Rates.png
On the charts below notice how extreme incomes and low cap gains tax coincides perfectly with 1929 and present day.
Chart of top 1% income:
http://www.cbpp.org/cms/index.cfm?fa=archivePage&id=3-29-07inc.htm
Cap Gains Tax Rates:
http://www.ctj.org/pdf/regcg.pdf
The 90% Tax bracket:
http://www.creditwritedowns.com/2011/01/reasoning-behind-ninety-percent-marginal-taxes.html
on Tue, 08/09/2011 - 18:14
#1544260
A few feet away, at Post Twelve, Crawford could see Mike Meehan's mouth moving, but he could not hear what the broker was saying because of the noise.
Radio had fallen dizzily. In the first frantic moments of trading, its value had depreciated $10.25 a share. The stock was selling now for $30.
At the far end of the hall, at Post Seventeen, men were literally charging into the crowd in an effort to get to the specialist in International Telephone and Telegraph, whose stock had fallen $17 and showed no sign of stopping....
...At Post Twelve--Ed Schnell's Alamo--the defenses were breached as sell orders for Radio poured into the post. It seemed to Schnell, "the heavens had opened up, and the stock was being pounded, down, down, right down to $26."...
...Many of the brokers who had seen Steel smashed to smithereens moved across to Post Twelve, there to witness the onslaught against that equally sacred stock, the pride of the House of Morgan, Allegheny. It was a knockout blow. Allegheny had been one of the investment trusts that optimists claimed would give the market strength.
At Post Six, a fight broke out as a scramble developed to sell American Can. Two clerks, possibly rendered momentarily senseless by the noise, lashed out at each other. The specialist in General Electric swiftly separated them, and returned to the fray. His stock had dropped at the rate of a dollar every ten seconds during the first six minutes of trading.
Post Fifteen--the home of some of the most prestigious stocks--found Westinghouse wilting under the bombardment. It dropped $2 a minute between the time the market opened and $10:15 A.M. At its present rate of decline it would be worthless by noon. Another of the post's stocks, Timken Roller Bearing, was skeetering toward oblivion even sooner, driven there by a 25,000-sell order which lopped $19.75 off its value.
William Crawford, pushing ruthlessly to get to the edge of the floor, reached Post Four in time to hear a strangled shout to sell 50,000 shares of General Motors, again "at the market." The order was executed for a drop of $2.25 below its previous price.
The Day the Bubble Burst
Gordon Thomas and Max Morgan-Witts
pp 389-90
on Tue, 08/09/2011 - 18:14
#1544263
Another "economist" that completely misses the elephant in the room...
oil
oh well
on Tue, 08/09/2011 - 18:15
#1544267
Now Crawford heard a new sound. High and wailing, the words were indistinguishable at first, their source somewhere inside that same mob around Post Four, where Anaconda Copper was toppling even faster than Southern Pacific--the railroad stock whose collapse had led the 1907 panic.
Then Crawford saw him; middle-aged, collarless, a rent in his jacket--"he looked more like a Bowery bum than a broker." The man struck out blindly from the melee, moaning, "I'm sold out! Sold out! Out!"
Before Crawford could reach him, the broker was swept along in the huge overspill surging around Post Eight, where shares in Montgomery Ward were "falling quicker than cans off a supermarket shelf."
The superintendent reached the comparative safety of the New Street side of the Exchange. One of the guides who normally would have been on duty in the visitors' gallery pointed toward a Translux screen. The figures sliding across continued to tell a story of total disaster.
Blue Ridge, yet another investment trust, was on the floor. It had opened at $10. Now it was $3. Not long ago it had traded at $24; there was confident talk then it would go higher.
A sale of 50,000 shares of United Corporation saw the stock slither drunkenly from its opening price of $26 to $19.30.
Crawford knew Blue Ridge and United had been favorites among small investors.
The "dream stocks"--Paramount, Fox, and Warner Bros.--were also taking a trouncing.
Ed Schnell felt as if he had been working for hours. His throat ached, his hands were grubby from handling so much paper. And all the time sell orders streamed to Post Twelve; he began to fear every share ever issue in Radio was going to be dumped.
At the adjoining Post Eleven--where the Bouviers could not stop American Smelting from melting away as fast as Kennecot Copper--suddenly, for no discernible reason, the crowd turned their fury against Woolworth shares. The chain-store stock had held firm since the opening; now, against a great, sustained roar of "sell, sell, sell," it too gave way.
The Day the Bubble Burst
Gordon Thomas and Max Morgan-Witts
pp390-91
on Tue, 08/09/2011 - 18:17
#1544274
Dotted around the trading floor were some forty governors of the Stock Exchange. On heavy selling days in the past, it was said they had sometimes joined forces to create the basis for a rally by using the tens of millions of dollars they controlled to force some stability into the situation.
In today's selling maelstrom they were flotsam; out of touch with each other, separated by groups of near-demented men, the governors could do nothing to stem the ferocious waves of liquidation.
Richard Whitney was also on the floor. Pushed and shoved, like everyone else, the acting president was being almost totally ignored.
His appearance had at first raised the hope he had arrived to again make the saving gesture by bidding for a big block of U.S. Steel. But Whitney made no such move, and it was assumed the bankers' consortium had been di*****anded. It had not, but the injection of funds it sent into the market for the purchase of shares was insufficient to make any noticeable difference. Whitney could only stand to the side and watch as the institution for which he was temporarily responsible transformed itself into a madhouse.
Superintendent Crawford eased himself down to the vicinity of Post Sixteen. There, Warner Bros' zigzag downward was being overhauled by the plunge in Safeway Stores and Simmons--the mattress company stock which had taken Winston Churchill's fancy.
A man, a complete stranger to Crawford, broke out of the crowd and lunged at another stranger--who sidestepped. The man careened on out of the main entrance into Wall Street, "screaming like a lunatic."
Shaken, feeling he was in the presence of "hunted things"--a phrase Whitney would also use later--William Crawford backed toward the staircase leading down to the basement.
He looked at his watch.
It was ten-thirty.
In all, 3,259,800 shares had been sold for a combined loss of over $2 billion in just thirty minutes.
The Day the Bubble Burst
Gordon Thomas and Max Morgan-Witts
pp391-2
on Tue, 08/09/2011 - 18:18
#1544277
Andy Lees one of the few strategists who really gets the wide angle picture. (Richard Koo another).
In the intro Tyler left out the key part of Andy's conclusion
"Energy is the cash flow in this story"
Yup.
on Tue, 08/09/2011 - 18:18
#1544278
Does anyone happen to have a download link to this UBS letter? Would love to get a .pdf of it.