The Year In Review And a Look Ahead for 2008

This is a guest post by Karl Denninger. It originally appeared on Karl's Market Ticker site, part of We find it an excellent discussion piece, with a lot of valuable information on what goes on behind-the-money-scenes. Karl can be reached at karl at denninger dot net.

This year saw “subprime” become the buzzword in the mainstream media, as people crowed about how horrible it was that banks and others made loans to “poor despondent people who could never pay them back”, and harping on the “predatory” nature of 2/28s and other similar death-by-debt traps.

The market saw three major swoons, the first in February, the second in August, and the last in November. It also saw multiple “Hindenburg” crash omens, all of which (on a technical basis) confirmed with the predicted plunges (a 5% move off the first observation downward qualifies as “confirmation”.)

Finally, in November, we got a primary bear market indicator according to Dow Theory.

There are many who argue that The Bear Market, however, not only did not arrive but that we will rocket to new highs, and have a solid market in 2008.

It is my view that they are sorely mistaken, and soon are to be not only dead wrong but dead broke.

Let us first look at what led us to where we are today.

The common wisdom – and one that I, until relatively recently, accepted, was that Alan Greenspan was partly (or even entirely) to blame for this debacle as a consequence of the rate cuts put into place in 2001 after 9/11 in an attempt to stave off a recession. This view holds that “too cheap” money caused the inflation of an asset bubble in a place it had not been in the American Experience – Residential Real Estate.

The effect – that residential real estate bubble – is real.

But the cause is not so simple.

Critical investigation leads one to the inescapable conclusion that The Federal Reserve does not actually set interest rates – long or short – at all. In fact, they don’t even claim to. Their official language is that The Fed sets the “Fed funds Target rate”. Note carefully that you cannot borrow at a “target” rate….

So what does The Fed actually do?

The target is indeed a lending rate – their “intended” overnight lending rate between banks. They “defend” this target by either injecting liquidity (cash) into the banking system, or withdrawing it from the banking system. To inject “cash” they temporarily take in various debt securities (Treasuries and others) from banks, and issue them cash – much like you’d pawn your Rolex, diamond ring or handgun. These “repos” have a relatively short term (typically from one to 30 days) and when they expire, you are required to give The Fed back the cash, with, of course, interest. These “TOMOs” (or “Temporary Open Market Operations”) are conducted daily in the normal course of operation of the banking system. If the actual “trading rate” of overnight money between banks is too low, The Fed will either refuse to “roll over” some of the expiring TOMOs (thereby reducing the amount of “sloshing”, or free cash, in the system) or, if necessary, will actually do a reverse TOMO, effectively “putting” some of its Treasuries (that it holds itself) out into the marketplace.

When the manipulations of this sort become overly burdensome to maintain the target rate, because the demand for overnight money has either fallen or risen too strongly to be defended, the target is changed.

That’s it.

There is also a second sort of operation called a “POMO”, or Permanent Open Market Operation. These are far more rare; they are literally outright purchases (or sales, if a reverse) of these securities. Typically The Fed will do a handful of these per year to cover the increase in the actual demand for hard currency that accrues in the system over a year. These are very small, usually in the neighborhood of $10 or 20 billion in total in a given year, and really ARE “printing” of money, in that The Treasury is the source of the T-bills, and when they are “permanently” taken off the market and exchanged for dollars, those dollars are, effectively, “printed”. The Fed did not do the printing – Treasury did – The Fed was merely the conduit.

Let’s be absolutely clear here folks – “Liquidity” is not “printing money”. It is not “inflationary”. In addition, the actual monetary inflation conducted by injections of real, hard, CASH into the system has been miniscule all through 2007 (and prior years as well.)

Liquidity is a loan!

Let’s apply it to a typical individual’s situation and it should become clear.

Let us say that you have some diamonds, a Rolex, and a couple of handguns.

Let’s also say that you have a job, and that job pays you $5,000 a month, after taxes. You spend basically all of this, having only a few hundred dollars in the bank in cash. After all, you’re a good little consumer, right?

Now let us assume that your car has no collision or comprehensive insurance. That is, you maintain only the legally-required liability insurance.

Ok, so late one night while you are sleeping Joe Thugg shows up and steals your car. You wake up in the morning and find that your car is gone! This is, of course, a disaster. You need to get to work, or you will soon not have that $5,000 a month in income.

Well now you have a problem, don’t you?

You could go to the bank, but the bank is likely to look askance at your request for a loan. After all, you don’t have a house, and they’re not all that interested in your Rolex.

So you go down the street to the local pawn shop. Here you find “liquidity.” You execute the equivalent of a personal TOMO with the pawnshop owner. He gives you cash, and you give him your Rolex, your diamonds, and all but one of your handguns (you need the last one in case Joe Thugg shows up again!)

Note that once you walk out of the Pawn Shop you are actually in a worse financial situation than you were before! Yes, you’re “liquid”, but you now have an interest payment monkey on your back to go along with the cash.

When The Fed “injects liquidity” they have not created money; in fact, they have made the bank’s balance sheets more encumbered because the interest has to be paid too!

But of course, just like the bank, you use that $2,000 to buy yourself a car. This allows you to go to work and keep your job. A month passes, you tighten your belt, and the “TOMO” matures – you pay the Pawnshop owner back (with interest) and retrieve your Rolex, guns and diamonds.

When you hear that The Fed has injected “liquidity” into the system, this is what has happened. Further, what is almost always not reported in the media is that amount of maturing TOMOs on the same day or those bordering the action. So you will hear reported that “The Fed (or ECB) has injected a record amount of liquidity into the system” as if this is some “bullish” thing, but what they fail to mention is that the same – or even more, in many cases, TOMOs have matured on the same day, making the net injection zero!

Just remember folks – “liquidity” isn’t hard cash. It’s a loan, it carries interest, and it has to be paid back – on a short term basis.

Ok, so we’ve dispensed with this foolishness that “The Fed can save us.”

In fact, they cannot.

They want people to believe they can, however, because from that belief derives literally all of their power. Should people actually come to understand the above paragraphs – the fact that “liquidity” is just really a loan much like a pawnshop gives you, and that The Fed is powerless to impact what is going on in this fashion in the end, as loans always have to be paid back, they would lose the only real weapon they have: The power of the mouth.

You’ve seen it. Some Fed Governor speaks and the market moves, often dramatically. The public and investors believe that The Fed is omnipotent, and that results in the market moving when they talk.

The power is, in fact, illusory, just as was The Wizard of Oz’s.

Understand the above and you’re ahead of 99% of all investors on Wall Street – including so-called professionals.

And oh, by the way, if questions I’m getting from a couple of college student friends of mine are any guide (who are in business-oriented majors), they’re not teaching this in “higher education” either!

Ok, now, on to inflation and deflation.

Inflation is always a monetary phenomenon, as is deflation. The effects of inflation or deflation are usually found in prices for goods and services, but they may show up in various items in different ways.

The event, however, is simply a change in monetary base.


The monetary supply, to maintain balance, must grow at a rate which approximates the growth in productive output, otherwise the money system will eventually starve itself of liquidity. An example will make this clear.

Let’s assume the world has only two people in it, you and your neighbor, and $100 in total.

You have some farmland, and some corn. You plant the corn and it grows. You now have more corn than you started with; you began with some kernels as seeds, they grew through the input of your labor, rainfall and the sun’s radiation, and now you have more corn kernels than you started with.

You and your neighbor, however, have been eating some of the corn during the year. This “essential consumption” must be subtracted out from the whole. (Clearly, if you planted no corn, eventually you would eat it all and you’d both starve to death.)

So let’s say that at the end of the year there is 10% more “stuff” in the world than there was at the beginning, where the only “stuff” that we’re counting is, in fact, corn.

If the amount of cash (money) remained at $100, you would suffer deflation. The monetary base has not grown, but the amount of “stuff” has. Each dollar buys more “stuff”, but that’s an effect – not the cause. The cause is that the monetary base has not expanded.

To maintain parity you would have to issue $10 more in money. This money was “printed”, in that you just literally fired up your printing press and made it. But because it exactly matched the increase in “stuff”, there is no inflationary or deflationary change.

Price for corn would remain stable, all other things being equal.

But let’s say you printed another $100. Now the price for corn would likely rise, because the total amount of money has increased by more than the amount of “stuff”. Therefore, the balance on prices shifts to the right, and the price-per-kernel (or bushel) for that corn rises.

This is “how money and inflation really works”, but it’s not what you are taught.

In reality, of course, there are all sorts of different kinds of “stuff”. Oil, gasoline, diesel fuel, corn, wheat, pork, beef, houses, TVs, computers, cars, haircuts, lawn mowing services, electricity and more. The system is thus very complex, but it still works the same way – in total.

So when you hear that “inflation” is rampant because oil has gotten more expensive, that’s not necessarily true. Oil is more expensive, perhaps, because oil is scarce while people who wish to buy oil are not. That is, the supply and demand component on any particular item in the economy may change while the total monetary base compared to the increase in global output may or may not.

One must look in the right place to find the truth.

The media doesn’t help you in this regard.

Ok, so how about what’s been going on since 2001?

Well, now here it gets sticky.

See, money isn’t just cash. We think of “money” as Federal Reserve Notes – or what I like to call “Dead Presidents”. In point of fact that’s true – hard money, or cash, is indeed these “FRN”s and deposits denoted in them. That is, if you have $2,000 in your bank, even though that $2,000 is just an entry in a book somewhere (electronic these days) you can show up at your bank and demand it, and they will give you $2,000 in dead presidents with which you can then walk around.


But what about that pawn shop up above?

Ah, now we’re getting to where the problem is.

See, The Pawn Shop doesn’t start with much, other than the building the owner is sitting in.

He is, however, in fact a debt merchant. That is, his job is to siphon off some of your productive output and keep it for himself. He does this by giving you FRNs – cash – for things that currently aren’t cash but represent some past productive output of yours. In your case these things are diamonds, handguns and your Rolex.

But in doing this he takes some of your hard-earned future output, because when you go to redeem those items you must pay him more than he gave you.

Is he “manufacturing money” when he does this?


He in fact borrowed the actual money he gave you himself! He went to his bank (or someone else) and pledged his business assets in exchange for some money. They charged him interest!

So he must charge you more than he pays; if he manages to do this, he can pocket the difference and make a profit. If not, he eventually goes bust.

But what happens if you can’t pay him?

He seizes your collateral and sells it.

Now what?

Well, if he manages to get more for the collateral than he gave you, he has turned a profit.

But what if he gets less?

Then money is effectively destroyed – and this, my friends, is deflation!

Let’s say that he gave you $1,000 for that Rolex. You spend it and can’t pay him back. He goes to sell the Rolex and discovers that either nobody will pay HIM $1,000 for it, or worse, it’s not a real Rolex! Let’s say he can get only $500 for the watch when he sells it.

What happened to the other $500? It has been destroyed, along with the interest that he paid to the bank to borrow the $1,000 in the first place when he loaned it to you!

To keep this sort of thing from getting out of control the banking regulators are supposed to enforce reserve requirements, and the markets are supposed to enforce margin requirements. This is done because although there are deflationary pressures in any market, if they ever get out of control asset prices will fall and quite rapidly this becomes a self-fulfilling spiral.

See, if you wish to buy a car (or house), but see that the prices for cars are going down rather than up or remaining stable, assuming you do not immediately need the car (your old one still runs) and you have the cash you are well ahead of the game to wait! After all, if cars will be cheaper in six months, why buy now? This destroys demand, which in turn means that the guy who makes cars can’t pay his suppliers because he hasn’t sold his stock of vehicles. That results in more defaults on debt which further deflates the money supply. This, in turn, causes prices to fall further, and on it goes!

So why are house prices deflating?

Well, the short version is “because they overly inflated in the first place.”

The long version is a bit more complicated.

After 9/11 Greenspan not only followed the demand for credit down but he also “winked and nodded” at banks and others, especially those on Wall Street, who were in effect cheating the system.

Let’s say that you have 1,000 mortgages that you’ve written to all sorts of people. Their actual risk if defaulting on their mortgages is reasonably low, especially when you look at all 1,000 of them as a pool, instead of each individual mortgage. Let’s say for the sake of argument that the actual “risk premium” – that is, the reasonable cost of the money compared to a “risk free” investment such as US Treasury bonds, is 200 basis points – that is, a 2% higher interest rate “fairly” compensates for the risk you won’t pay.


So I have a pool of mortgages that was made when the 10 year Treasury bond was yielding 5%, and the “fair” return on that pool is 7%. All is good.

Or is it?

Well, no. See, everyone who touches that pool wants a piece of the action. If I’m an investment bank I can’t possibly do this work for free, so I want 25 basis points of that 200 for my profit in “putting all these together and managing them.”

Then there is the company that services the loans. They take the payments from each homeowner and make sure that they’re correctly accounted for. This requires staff, phones, computers, etc. They too want to be paid – let’s call that another 25 basis points.

So now we have 150 basis points left of “margin” over the 10 year Treasury rate. If we sold “slices” of this debt off, at best we could “allow” a coupon that reflected that 150 basis points.

Unfortunately greed got into the equation.

The banks figured out that they could structure these 1,000 mortgages into different “tranches” with different characteristics. If you take all the money coming in and look at this as one big pool, that gives everyone only one thing to buy. But if we take that pool and split it up into a bunch of different levels of risk, we can now offer slices that have different levels of return.

For instance, we could draft some documents that say that if the total amount of money due isn’t paid (by everyone) that the first risk of people not paying would fall on a certain class of the buyers. These buyers would get a much higher coupon payment, but they’d take much higher risk, because no matter which “Joe” doesn’t pay their mortgage, these people would eat it preferentially, while those above them with a “lower” grade of risk would keep getting their payments.

This is the essence of the “Mortgage-backed security”, or MBS.

But remember – no matter how you slice this whole deal up only 200 basis points of profit is in there over treasuries to make. You can change who eats the losses and how much the various “fingers in the pie” get to siphon off, but you can’t change the total amount of profit available.


Wall Street figured out that YOU CAN IF YOU ARE WILLING TO CHEAT.

All you have to do is find someone who will run your “deal” through a computer program and “grade” the quality of its debt. If you can find someone who will claim that the total risk of the deal is lower than it actually is, you make out like a bandit, because instead of 200 basis points of actual profit you suddenly “find” another 50 or 100!

The problem is that the real risk DID NOT CHANGE.

So how do you go about trying to “massage” the deal?

One of the ways is that you find someone who will write you what is called a “Credit Default Swap.” In its simplest form this is an insurance policy; you pay someone a small amount of money and they issue a contract that says that if the bond defaults you give them the bond and they give you the face value. They then have the defaulted bond and can try to recover whatever is still there (remember that the house that was pledged didn’t go to zero – it has some value, so the “defaulted” mortgage money is not entirely lost.) Now, with this “CDS”, the ratings agency “sees” that your risk of actually losing money has gone down, and they issue you a better grade – after all, if the bond does default, the swap-writer will pay you.

Didn’t we just find a free lunch?

NO – We found a scam!


Because nobody gives money away; everyone always expects to make a profit.

If the CDS writer has charged you an amount of money necessary to actually cover the risk of a default, plus their profit, the total amount of money available off that 200 basis points decreases. That is, the total profit available in the deal must decrease for each component that is added to the complexity of the transaction and for each person who has some “finger in the pie.”

The common law of business balance prohibits it from being otherwise in fact, no matter what you are told.


But by intimating that there is, which can be as simple as finding someone who will “misprice” risk, either out of their own stupidity (in other words, greed) or outright intentional deception, we make money “cheap”, and suddenly, people can buy houses they could otherwise not afford.


Because the person who writes that swap at a lower-than-actual-risk premium has effectively "created" money. They have made a promise to pay they cannot keep at the actual price of risk; in effect, they have "grown" the monetary base via cheating!

A person who is a hairdresser and makes $8/hour ($16,000 a year @ 2,000 hours annually) cannot possibly afford a $500,000 house. But a lot of $8/hour hairdressers bought $500,000 houses! If those loans were properly priced to reflect the odds of default the interest rates on those loans would have been astronomical. But they were not, and in fact they were priced in many cases with “teaser” and “negative amortization” rates that were as low as 1 or 2%, with the rest of the interest and principal being “capitalized” – or put back into the loan balance!

This was all justified by the belief that house prices would never go down and so if the Hairdresser could not pay, the bondholder would not really take any loss. Yes, they’d default, but the recovery would be near perfect, since the house would be worth more than the mortgage outstanding.

The problem is that house prices cannot increase forever at a rate which exceeds the rate of productive output increase in the economy as a whole! Eventually you run out of suckers - and the scheme collapses.

So why did the banks do this if they knew that eventually they’d run out of suckers?

Primarily because their biggest source of income was the fees from making all these deals! That is, that 25 or 50 basis points that they extracted from passing the money through their hands.

Clearly, the original intent was not to keep any of this risk on their own books – they intended to pass it off to others just like the pumpers did in the 90s with the hundreds of Internet Companies who never had a prayer in Hell of turning a profit.

Unfortunately in their zeal they started to eat their own cooking, and kept some of these deals on their own balance sheets! Some of them got even more clever and set up “off balance sheet” conduits and “Special Investment Vehicles” to buy this paper, which allegedly were not “responsibilities” of the bank. But the “wink-wink-nod-nod” reality was that they were, because without that responsibility the ratings agencies would never give them the credit rating they NEEDED to be able to sell it.

Let’s take just one example of “eating your own cooking” – Washington Mutual (WaMu).

Back in April I noted that their first quarter 10Q showed that they had less cash income than their dividend payout. That is, they had less than their 50 cents/share dividend in actual cash earnings. The rest of their “earnings” were in fact “capitalized interest.” That is, these negative amortization loans which are increasing in outstanding balance were actually being booked as profit as the face values went up! The two obvious problems with this (although its legal under US accounting rules) are that (1) you can’t spend “capitalized interest” as it is not cash you have received and (2) if the “increased balance” is not paid because it results in a default you wind up taking a monstrous write-down and restatement in the future. And oh, by the way, this trend has continued in both the 2nd and 3rd quarters for WaMu.

The stock market thought this was great in the first, second and third quarters, and their stock price hovered around $30, making people like me who had bought PUTs very unhappy.

But eventually, “Mr. Market” figured it out, and now they trade at under $20 – a more than 30% “haircut” – as people have come to realize that you can’t spend negative amortization “income” and that collecting it might be doubtful as well!

What about the monoline insurers? They are at ground zero of this mess because they wrote “swaps” for which there is no prayer in hell of being able to actually pay.

All of this “credit” was in fact extremely inflationary. The monetary basis did not grow much in terms of actual cash, but the rub here is that cash, credit and debt are called “fungible” – that is, you can exchange one for the other, almost without limit. You can spend credit as if it was cash, essentially without limit!

When you go into a store and swipe your credit card you are in fact taking on debt. When you pay it off at the end of the month you swap cash for debt. If you pay it off at the end of the money there is no “discount” charged to you – that is, from your perspective, credit, debt and money (actual cash) are all the same thing. Of course the truth is that there was a discount charge – the merchant ate it in his “discount rate” for credit card purchases – but its invisible to you as a consumer to maintain the illusion that cash = credit = debt.

In reality they are not, because credit and debt have interest (either owed or paid) while cash does not, but in the economy they are essentially the same thing from a standpoint of purchasing power and the impact on prices that come with it.

Remember that bit above about “deflation” when you can’t pay the pawnbroker?

Well now we are seeing it on a global scale as people can’t pay their mortgages!

As this debt defaults, the money that it represents is destroyed.

As money is destroyed it becomes scarce while goods and services (especially the goods that were being bought with defaulted debt like houses) get much less expensive, because there are too many of them compared to the dollars available. This is the effect of deflation – prices on those items tend to go down.

How much money is going to be destroyed, in total?

It is not possible to know exactly how far down the rabbit hole this goes, but we do have some information to base a reasonable guess upon.

One of these facts is that about $6.5 trillion has been “withdrawn” from home equity over the last four years and spent. Most of that was spent not on home improvements (which at least have some residual value) but on things like computers, plasma TVs, cars and exotic vacations (directly or indirectly by paying off credit card debt accumulated purchasing those things.)

Of this $6.5 trillion perhaps one third of it is now “underwater”, in that it is represented by “Home Equity” loans (HELOCS) on houses that are now worth less than the total of the mortgage and HELOC outstanding. This debt will almost certainly eventually default in large part if not in total.

This is somewhere between $1 and $2 trillion dollars.

Nor is this stupidity limited to mortgages.

It reaches through essentially all of consumer finance; auto loans and credit cards are the other two biggies.

In auto finance dealers have, for years, allowed you to drive up in your “old” car which has a note on it, and roll the remaining balance of the loan (less the radically-depreciated “trade in” value) into the new car loan. This results in you being instantaneously “upside down” by thousands of dollars – plus the instant 10-20% hit on a new car when driven off the lot! This has been a tremendously profitable business for dealers, but remains one only until you can’t make the payments. Oh, and car loans have been securitized just like mortgages.

In the credit card space the flood of “0% balance transfer” deals has allowed consumers to stay just ahead of default by rolling balances from one company to another. The problem with all of these is that the fine print says that as soon as you charge $1 on that new card your payment goes first against your “0% transfer”, and the $1 charge accrues interest until the entirety of the transfer is paid off. Almost nobody sticks the card in the drawer, and this is how the card companies make money on you, the sheep. When the payments start to get tight you do it again.

Unfortunately there is a limit to this, and it happens when your creditworthiness is exceeded by the balance outstanding or worse, you lose your job. This is now occurring and the default rate is spiking north. Credit card deals have also been “syndicated” like mortgages and car loans; there are “asset-backed securities” for them as well, and even CDOs!

As the debt defaults deflationary pressure will build precipitously. We have seen only $100 billion or so thus far in actual write-downs by banks and other institutions worldwide. This is 10% or less of the actual damage that has been already suffered, and we haven’t even gotten to the knock-on effects that come from people waiting for cheaper prices – that is, the effect of deflation instead of the cause!

What’s worse is that I haven’t even begun to examine if, or to what degree, this has impacted lenders and the economies of other nations – like, for example, Spain, which is known to have a huge property bubble, or England, which has also seen insane residential price appreciation. Have the same games been played there? I would not take a bet that they haven’t!

Why has only $100 billion been recognized and written down when far more than that has already blown up?

Simple – these banks and others are keeping their “marks”, or present value, of their holdings at artificially high levels because they hold these CDS “insurance policies” which claim to insulate them from the effects of the damage.

But as noted above, there is no chance that these companies can actually PAY the face values of these polices.

These firms typically have 0.1% or less of the “face” value of these written policies in available cash to pay claims.

In short the CDS policies are WORTHLESS TOILET PAPER.

The proof of this is found in the balance sheets of ANY of these “monoline” companies. Look at them yourself. Look at their cash position and then the total amount of underwritten business (the “face value” of the bonds they have written policies on.) Now tell me how these firms can possibly pay more than a tiny fraction of one percent in claims against these notes.

They cannot.

Yet the “ratings agencies” have, for the most part, maintained these firms’ “AAA” ratings! It was just in the last week that ACA, which had been delisted from the NY Stock Exchange, was cut to “junk” status! The deterioration in the credit markets, including the CDOs and mortgage-backed paper, has been known since February, yet the ratings agencies SAT ON ACA’S RATING UNTIL THEY WERE DELISTED BY THE NYSE!

While the others have been threatened with downgrades, at this point those downgrades have not been made, even though these other firms are said by these agencies to be in violation of the capital requirements for their ratings!

This entire charade is one of regulatory failure after regulatory failure. The Federal Reserve, the SEC, prosecutors everywhere (both State and Federal) and the bank regulators, including the OTS and OCC, should have been all over this back in the first quarter of this year when it became apparent that the credit qualify claimed for these instruments was blatantly inflated.

WHEN (not if), in the fullness of time, this becomes apparent there will be massive restatements of earnings by the financials in the S&P 500 and beyond. We will find that the S&P didn’t have 10% profit growth over the last two years; they in fact had flat to negative profit growth. We will find that the S&P is not trading at “14 times trailing earnings” it is trading at 30 and has been! We will find that many of these firms are well below regulatory capital minimums and some may be outright bankrupt.

This damage has already reached into investment pools run by the states such as Florida and California. It will in fact be found to have polluted pension funds and other supposedly “safe” investments all over the world.

This is arguably the worst financial scandal of all time. It has reached into the American Household in ways that no scandal has before it. During the Tech Boom the pumpers were out there with their conflicts of interest telling you to buy tech stocks, ignoring the fact that the claimed “30% monthly expansion in the Internet” was a total fraud. Those who were actually in that space and could see the internals of the network – thousands of us – knew. A few (myself included) wrote about it. This does not mean that there were no viable businesses in the space – there most certainly were. But those who depended on “never-ending exponential growth” were doomed to failure, and fail they did, taking trillions of investor’s money with them.

This time it is far worse because these debt instruments were sold almost literally to every corner of the market. The underlying “assets” are American homes which have been inflated to twice their “true value”. As these values contract back to reality the damage this collapse will spawn will spare nobody who is exposed to this toxic waste, and our economy will contract to meet the new reality of actual earnings power, production, and shrinkage of the homeowner’s “house” line on his balance sheet by an average of 30-50% from 2005 values.

Now let’s add the 2007 Christmas Season to the mix. The "money quote" is right here:

"Total U.S. retail sales, excluding automobile sales, rose 3.6% for the holiday season spanning the day after Thanksgiving to midnight Monday, according to MasterCard SpendingPulse, a unit of MasterCard Advisors. That result landed on the low end of the retail-industry's forecasts for a gain of 3.5% to 4.5%. However, without skyrocketing gas prices, which have risen by more than 30% since last year's holiday season, the retail-sales increase amounted to a far more paltry 2.4% gain." (Ref: Wall Street Journal, December 25th)

Here’s the problem. 2.4% is below the rate of headline inflation and damn close to "core" on a 12-month weighted basis. In other words, spending is actually DOWN when measured in constant dollars.

ICSC reported on the 26th that Holiday Spending was down 2.5% for November and December. This is well below expectations, and looks like the holiday season was, in fact, a bust.

S&P’s "Case-Schiller" housing numbers for October (released on December 26th) showed a record 6.7% year-over-year decline in price, with a 1.4% decline on the month. Those who tell you that the housing crisis is “bottoming”, or that the market is “now turning”, are simply wrong. There is absolutely nothing, given the history of these market cycles, to suggest that we will see the “bottom” before 2009/2010 at the earliest. The impact of declining home prices, given that consumers are typically “levered” at least 5:1 (assuming they put down 20% at purchase), is immediate, severe and extreme. Since the “average” homeowner moves every 6-7 years, this means that more than half of all homeowners will be forced to sell into this market decline, taking huge capital losses. This is the bug-a-boo that is being roundly ignored by nearly all of the media, and it WILL impact consumer spending behavior.

Durable goods are repeatedly coming in weaker than forecast, with the latest numbers (on the 27th) a whopper – forecasts were for up 2%, we got up 0.1%, ex-transportation they were down 0.7%. Unemployment claims continue to deteriorate, with negative revisions to previous weeks.

These indicators tend to lead what happens in the “consumer” economy, and trouble arrives when input price increase cannot be offset by productivity gains. This inevitably results in pass-through to the consumer in the form of increased prices yet at the same time applies increasing downward pressure on wages as companies struggle to remain profitable. This, of course, feeds into consumer sentiment.

Labor is weakening significantly. The issue is not the “headline” layoff number but continuing claims, which gives you a good handle on not just how many people are being laid off but how hard it is for them to find replacement jobs. This number is awfully close to “recession” territory, and what is particularly troubling about labor market indicators is that they lag the economic situation, so by the time you get a clean “recession” indication from this series you’re already in one!

In short, consumer spending is tracking consumer sentiment and the housing market, which is in the ditch. In addition the deterioration in the business environment has arrived quite sharply and markedly. Simply put, high energy and food prices, along with a shrinking consumer balance sheet as a consequence of the housing market downturn, are forcing people to stop spending beyond their means, while at the same time input price pressure from expanding demand in developing nations exerts fundamental pressures into the manufacturing space that tend to push affordability of finished products the wrong way.

Historically-speaking there is a very strong correlation with consumer sentiment and consumer behavior and, when both decline like this, recession.

During recessions equities typically lose 30% of their value.

On the Geopolitical front we got a “Post-Christmas Surprise” of the nasty sort on the 27th with the assassination of Pakistani opposition candidate Bhutto. While the threats against her had been the stuff of legend, the fact that she was actually hit and killed throws yet more uncertainty into the mix.

For those who are unaware, Pakistan is a nuclear nation, and has a significant number of nuclear weapons in a ‘standoff” sort of pair-trade if you will with India. Serious political instability there is for obvious reasons bad news, as one or more of those that falls into “unofficial” hands could lead to an inappropriate mushroom sighting. Oh, and Al-Qaida has claimed responsibility for the killing. You don’t think they might be interested in one of those “devices”, do you? The risk of a serious nuclear incident has now risen precipitously, and until some sort of clear indication on stability – or lack thereof – emerges, one must assume that “risk premium” will be added across the board in the markets.

None of this sounds good, does it? Worthless derivatives, pumped valuations very similar to what was done during the tech bubble years, and now, a collapsing consumer balance sheet along with businesses responding to all of these pressures by cutting back – all of this is visible to anyone who looks with a critical eye.

So why are we trading 5% off all-time highs in the indices?

Because the media is not reporting the truth and you are not hearing it from your “trusted sources.”

None of this is hidden nor does it require any grand conspiracy.

You can (and should) verify ALL OF IT FOR YOURSELF from public data sources such as filed 10K and 10Q reports.

What would be amusing (if it wasn’t so sad) is that you can tune into CNBS every single day and hear them tell you that “The Market is saying we’re not going into recession” (because the stock market is sitting right near all-time highs.)

Are we not putting the cart and horse in the wrong order? Are the markets near all-time highs because the economy is good, or are the markets near all-time highs because the media is in fact lying and therefore retail investors, including those entrusting their retirement assets to the financial markets, are not allocating their funds in a way that takes down risk?

Are some people “in the know” and preparing for this?

You bet your bottom dollar.

Chief among them are banks and The Federal Reserve itself. If you look at the Fed’s most recent balance sheet and the Fed’s most recent bank report you will find that The Fed has been de-leveraging its own balance sheet, and banks are hoarding “vault cash” (that is, actual MONEY!) while their regulatory reserve are below minimums.



Why has Goldman Sachs been shorting the very mortgage securities that another part of their firm packages and sells?


Why aren’t the folks on CNBS telling YOU what is coming, and giving you an honest appraisal of the effects of several trillion dollars worth of direct impact to the financial markets in the United States alone, along with the deflationary pressure that cannot be avoided or overcome?

That’s a damn good question.

Remember that back in 1999 and the first months of 2000, the news was overwhelmingly bullish, and people were buying stocks with both fists, in no small part because the “financial media” said that there would be no recession, there was no economic problem and stocks were “reasonably priced.”

In fact stocks were, as we found out in the coming months, horribly overvalued, there was a recession, and those who listened to these “analysts” were crushed, with many investors losing EVERYTHING.

Does anyone remember Jim Cramer's infamous rant on February 29th of 2000, in which he listed 10 stocks "you must buy today for his 'New World'"? They were SNVX, ARBA, ISLD, EXDS, INSP, INKT, MERQ, SNRA, VRSN and VRTS.

Of those SNVX, ISLD, EXDS, INKT, SNRA and VRTS no longer are listed under their original ticker symbols. Some were outright business failures, others bought or merged in the collapse that followed.

Of the "survivors", ARBA traded for $800 back then. It now trades for $11. INSP traded for $1150. It now trades for $18.90. MERQ traded for about $90; it now is $51 (and has the ignobility of being the "best of the bad" on a total return basis!) VRSN traded for $238; it now sells for $37.88.

If you listened to Jim on 2/29/2000, you lost more than 90% of your money.


Nor was he alone in his "less-than-correct" calls. In fact, the list of people who were calling for a meaningful decline in the markets in the major media could be counted on your fingers.

Yet almost without exception these people went unpunished for the hundreds of billions of dollars of investor losses that resulted DIRECTLY FROM THEIR SLANTED, BIASED, WILLFULLY-BLIND AND JUST PLAIN WRONG “ANALYSIS”!

Such it will be again, I’m sure.

Are these shows, newspapers, and others reporters on the financial markets, entertainers, or worse, puppets of those who know and who need someone – anyone – to unload their shares to before the markets take a huge plunge, lest they get stuck with them?

Now there’s something to think about.

Ok, so there’s the background, but I promised “A Look Ahead” too.

Here’s my view on what you can expect in 2008:

  • The US will enter a recession, if it has not already done so. It will be consumer spending driven, with its genesis found in the Housing market. The slowdown will become evident once the “real” holiday sales data is posted, and accelerate into the first quarter.
  • Unemployment will increase significantly, rising to north of 5% by the middle of next year. This will of course cascade back into consumer default rates (mortgages, credit cards, auto loans, etc) and cause yet more layoffs. The “virtuous cycle” will turn vicious.
  • Housing will not turn in 2008. The total damage to prices will exceed a cumulative 15% from 2005-2008, and it will not be over. At least one, and probably several, national home builders will be cut to the single digits on their stock price or go bankrupt and be reorganized. Residential Real Estate will NOT be a buy in 2008; you’re still at least one and probably two years too early.
  • The story in the housing space in ’08 will be the defaults on “prime” mortgages – which in reality were nothing of the kind (e.g. “Option ARMs”), and on the piggyback seconds and HELOCs behind them. “Jingle Mail” will become common as homeowners that are deeply – 20% or more – underwater simply mail in the keys and say “screw the credit rating.” This will result in a near-total overhaul of the “FICO” system in the next couple of years, as these people will have defaulted on mortgages but nothing else, essentially forcing risk premiums higher for consumer credit and decoupling FICO from actual consumer credit (other than mortgage) behavior. I expect there will emerge a “shadow” FICO system which ignores mortgages but rates everything else.
  • The stupidity in the rest of the consumer lending space (rollovers in auto loans and 0% balance transfer hell for plastic, primarily) will come crashing down on these companies and bring a crushing wave of defaults there as well, along with yet more downgrades in the asset-backed paper market.
  • Recreational sectors (e.g. boats, RVs, etc) will get smashed. If you’re in the market for high-dollar recreational assets and have cash, late ’08 and into ’09 will present some incredible buying opportunities.
  • Government will, as is usual, try to meddle in the market’s adjustment of risk and price. The depth of this meddling will be the determinant on whether this is a deep but sharp and reasonably-short recession or whether it morphs into something far more serious. With 08 being an election year the temptation to engage in SEVERE tampering will be significant, and if they do, the risks rise materially. There is a serious risk of an all-out deflationary depression, and if we get one, it will almost certainly be the government’s fault. Whoever wins the Presidency may wish they had lost come ’09 and ’10.
  • Buffett just announced he is setting up a Municipal Bond insurance company. This will put a stake into the Monolines’ hearts, taking all their business away that is profitable, and leaving them with structured finance which has huge embedded – and unrecognized – losses. The announcement, which showed up on the 28th, didn’t send shockwaves through the market – but it should have. Effectively, Warren threw a grenade (minus pin) into the magazine of structured finance. This is the death knell for the few trillion in CDSs that are out there can’t be paid; there is no longer any reason to believe that the companies writing these things will be able to be recapitalized off “profitable” sides of their business! This is how fortunes are made (for Warren) and lost (for everyone who did imprudent things.) The “big story” in the financial markets for 2008, and the likely trigger for major turmoil, will be the implosion of the CDS marketplace and how Buffett profited from it. This will stabilize the municipal bond marketplace which has been positively hammered.
  • Equity prices will be choppy in the first couple of months and will experience a peak to trough swing of at least 20% during the year in total. I expect the S&P 500 to at least touch 1220 in 2008 and my current downside target is 1070. Note that should we get a “parabolic” sort of move in the first quarter, which is possible, the potential for an even louder “boom” (collapse) goes up dramatically; in that case I would not be surprised to see a three-digit handle on the S&P 500 sometime during the 2008-2010 time period.
  • Return OF capital will be far more important in 2008 than return ON capital.
  • I do not expect the central banks to “hyperinflate” anything. Metals, in a protracted, serious deflationary selloff will get smashed. (If you're a "Gold Bug", read below for why I think you're nutty to hold metals - there's a better play if you believe in hyperinflation.)
  • Debt will be paid down when possible and when not, defaulted. This, of course, prevents deploying capital towards consumption and production. Expect this to show up in the first quarter in ways that cannot be refuted, and for the market to “get it” some time before the end of the second quarter.
  • Commercial Real Estate will collapse. The leverage in these deals has actually exceeded that in residential, if you can believe it. This will prove to have been totally insane and the losses taken there will be immense. It will also put a fork into the “this is contained” thesis, and validate the fact that generally, commercial R/E lags residential by 12-18 months. Guess what – time’s up!
  • Business CapEx will slow precipitously and may go negative. This will be “spun” for the first quarter or so, but by the middle of the second quarter it won’t be able to be spun any more, and the truth will have to be faced. That “truth time” will likely mark the start of the second big leg down in the equity markets.
  • The Dollar will bounce all over before starting to take off when it becomes apparently that the rest of the world is going to get it worse than we will.
  • The “market callers” who are (almost to a man!) calling for big moves northward in 2008 will be coming to the public “hat in hand” as we get into the latter part of the year. These people will be roundly discredited and yet another wave of so-called “analysts” will disappear from the scene, along with all the money the chumps who listened to them lost.

So what CAN you do to make "Return OF Capital" your goal?

For 95% of long-term investors, this is a time to be in cash or close to it.

There is nothing wrong with insured CDs. Nothing at all. In fact, you can find them yielding close to 5% or even a little above. Six month CDs, with no more than $100,000 in any one bank, are not a bad idea.

Next up would be the short end of the US Treasury curve. Emphasis again - SHORT END! What's "short"? 2 years or less. You can buy these through Treasury Direct. Yield is lower, but they're even safer in that the US Federal Government would have to go under for them to be worthless. For an ETF that holds these, look at "SHY".

Finally, quality municipals look interesting here. Note that municipal bond income is federal tax exempt and in many cases AMT-exempt as well (doesn't count towards AMT income.) Be careful with municipals however as if this really gets bad defaults in the municipal sector are likely.

What do you stay away from?

  • Equities, and especially momentum stocks! This means nothing in the tech space of any sort. No banks, no broker-dealers, no consumer discretionary. At all. If you must buy equities for some reason, utilities might be reasonably safe, but even there the losses may be significant.
  • UNSECURED or UNSUBORDINATED debt of ANY KIND. Especially dangerous are "demand notes" from various institutions. These have been pushed hard to many seniors and others; don't be a sucker! They have no insurance and if the company defaults, you just plain eat it.
  • Any sort of corporate debt is dangerous, and the junkier it is, the more dangerous it is. EXCEPTION: If you're really good at picking through the fundamentals of the issuuing company, you can make some great buys in this space. For nearly everyone, however, you're playing Roulette here. DON'T!
  • Any bank account that has more than $100,000 in it. Don't do it. Just don't. Yes, I know there are exceptions (you can have $200k in a joint account.) If you're absolutely certain you can keep an eye on this to the degree required to insure you're covered by the exceptions, have at it. Just don't cry if you're wrong.
  • Any money market which holds any sort of asset-backed commercial paper or SIV assets of any sort. These funds are extremely dangerous if there is a blowup in that your principal is potentially at risk.

There will be many who say "oh, that's way, way too conservative."

To which I answer - "so what?" If there is no meltdown and no sign of one in six months, what have you missed out on? 5, maybe 10% appreciation?

But what if this really is as bad as it appears to me, and you miss out on 40% of decline instead?

There are also a number of people who believe, despite all the evidence above, that the government (or "The Fed") will "hyperinflate" to "save the economy" (or at least try.) Typically these people also believe that the rest of the world will fare better than we will, and will come in to snap up assets in America that are "dirt cheap" as our dollar is debased.

This is the central thesis of the "Gold Bug" paradigm; these folks all believe Gold is going to go to $1500 (or more) in the next year, and they urge you to buy some as a result.

The problem is that if their thesis is correct they're total idiots to buy Gold!

Here's why.

Let's say that the dollar is debased by 50% from here and Gold doubles in price (in dollars.) You make 100%, right? Wrong - you are subject to a 28% collectables tax on the appreciation, so you in fact lose compared to inflation. Congratulations - you lost real purchasing power!

That isn't so good.

Well, what could you do if you believe that the government will "hyperinflate" that would stay ahead of it?

In a hyperinflation paradigm where the rest of the world "does better than we do" stock markets will do a moonshot as foreign money comes in to buy all the "cheap" assets. The Dow will likely double if the dollar gets cut in half. But let's say it doesn't double - it only goes up by 30%, to 20,000 by the end of the year in 2008.

Why would you not buy Index CALLs instead of Gold?

A LEAP January 2009 DIA $160 CALL was selling for $2.00 Friday (Bid x Ask at $1.94/$2.10).

Let's say you buy 100 of those contracts for $20,000 (each contract is 100 shares, so 100 x 100 x $2.00 = $20,000, plus commission of course)

If the Dow goes to 20,000 by the end of next year, your CALLs are worth $40 each! That is a 20x profit on your original investment; that $20,000 turns into $400,000!

Further, if the DOW DID double (ala China's Shanghai Market) your little $20,000 wager would turn into a staggering $1,400,000 in one year's time!

So tell me again - if you believe in "hyperinflation" - why do you want to buy the clear LOSER of an asset that metals represent, when you can buy index CALLs and, if your thesis is correct, you will make an absolute stinking FORTUNE!

(Of course if you're wrong and the DOW is under 16,000 by the end of the year, that $20,000 is totally flushed. That's the price of poker - but again - just how sure are you that "The Fed" is going to "hyperinflate"? And by the way, no, I don't think they are - in fact, I don't think they CAN.)

To those who go even further and are in “It’s the end of the world as we know it” camp, I will humbly suggest that you remove the tin from your hat. It not only isn’t now but also won’t be tomorrow.

America has faced Depressions in the past, and our nation has survived. Yes, I used the plural form of the word. Most think the 1930s was “Our Time”. Wrong. There is a long cycle in credit (typically 50-80 years) that is well-understood among those who study this stuff called the “Kondratiev Wave.” This economic theory posits that credit moves in long cycles, with the evils of “overexpansion” being repeated once the previous generation that experienced its effects are all (or mostly all) dead. America has gone through three of these cycles previously, and we are likely in “winter” of the fourth now.

The “winter” periods tend to be deflationary credit collapses.

Alan Greenspan is rumored to have been aware of the impending implosion of the current cycle in the 2000/01 timeframe, and he allegedly knew that what he was doing at the time with his “willful blindness” was an attempt to stave it off by looking the other way – that is, change a long-cycle behavior that had played out three times previously in American history.

The problem with tampering with things like this, of course, is that the odds of success are not high, and the damage if you fail tends to be quite severe.

Nonetheless, we, along with the rest of the world, will get through this. There will be opportunity for those who are prudent and not leveraged in their personal and corporate life.

And for those who are over-leveraged?

They will get their comeuppance.

It’s about time.

An interesting economic assessment that is totally devoid of awareness of the ecological impacts going on around us. If this credit cycle was occurring outside of the ecological catastrophe now unfolding around us, I'd agree with him completely. Instead I only agree about 80%. I'm sorry, Mr. Denninger, but I am not going to remove my tinfoil hat nor my Kevlar body armor. Humanity is in a position that it has never before experienced and the results may make the Great Depression look like a walk in the park.

If this credit cycle was occurring outside of the ecological catastrophe now unfolding around us, I'd agree with him completely.

And Greyzone you make no mention of peak oil in your critique, "them is fighting lack of words" on this site.

BTW I enjoy your blog but what is with this 20/20 hindsight business in your lead caption? Ask 6 guys about history and you'll get at least 6 different versions. We are effed going forward effed in the present and most assuredly effed from the rear. Try maybe something about history repeating itself and maybe you got a fix there. Our hindsight is worth not much so we will have that much of an idea how the future will unfold, ie. effed:)

Peak oil is just another tree. It's a big tree, but it's still just another tree. You need to see the forest.

Those trees in the forest seem to be getting as plentiful as fish used to be in the sea, what does poor Johnathan Seagull do now? I guess he dumpster dives for awful made of papaburger residue derived from grain left over from sincohol production...

Forest much too scary, too many bears whooping it up, I am going to the seaside and maybe start a deuterium mine in some lovely lock.

Howdy, Genesis.

While there is much here of substance, particularly with respect to the deflationary effect of cascading debt defaults in the private/consumer sectors, Mr. Denninger presumes the Govt. and Federal Reserve will not and can not do much of anything to inflate it off.

I am of the opinion, despite the financial mess all around us, that TPTB will mostly manage to keep a lid on things, and that their will be a lot of debt monetization (even of large private party debt) where it is deemed necessary by the Fed/Govt. To suppose otherwise is to bet against the bank and the elected house managers of this casino we are locked in as well as a grand apple cart upset of the phony issues election year process underway. I'll believe in a crash when it happens but I don't see it happening this year.

Also, foreign controlled $ is coming home to buy into and/or buy up worthwhile (or prop up system critical) assets of ours. I expect this to continue/accelerate this year.

So, for 2008, I'm betting on neither outright deflation or hyperinflation, but rather a volatile mixture of both that TPTB (both here and abroad) will do their utmost to paper over. I think they will just barely manage to succeed.

WRT the refrain, "Return OF capital will be far more imporatnt than return ON capital", that is precisely why Gold is a worthwhile spare capital hedge! In this funny money regime it is incorruptable store of worth even if its value fluctuates. And here at the start of 2008 its nominal value has vaulted out of the starting block. Go figure.

... for 2008, I'm betting on neither outright deflation or hyperinflation, but rather a volatile mixture of both...

No can do.

A Whole Lotta Flation

Before we address specific ideas, let's tackle a common misconception that somehow we are going to have both inflation and deflation at the same time. The idea behind this faulty premise is that prices of things we need (food and energy) are going to rise and prices of things we want but do not need (manufactured goods from China) are going to fall.

While that is possible in regards to prices, the idea that we can have inflation and deflation at the same time is impossible. Inflation is an expansion of money and credit and deflation is the opposite. It is fundamentally impossible in the context of a correct definition to have inflation and deflation at the same time.

While I do understand and agree with the inflation/deflation definition being a monetary increase/decrease phenomenon, what I still believe will happen is that despite the debt deflation (and monetary/velocity contraction) the Fed will keep lowering their rates as needed (which if nothing else will allow for some debt restructuring at a lower level), and otherwise take on bad debts (monetizing it) in order to try and grease the wheels of liquidity and reinvigorate credit/loans.

Furthermore, the government isn't about to stop spending money or fighting terror (all of which which buys a lot of stuff) and many other PTB foreign governments and their CB's will try and coordinate their efforts to ease the deflationary spiral. We'll see how well they manage it but I think they will do so better than a lot seem to imagine.

I also don't buy into the idea that the BRIC world along with Russia and the Middle East will just seize up and stop functioning either. At least not this year. So while things will get hairy here in the US I do think there is a lot of economic momentum still going forward elsewhere in the world to tide us all over this year.

Deflation may well get the better of us all and a real hard core depression besets us later on, due to climate choas, a real peak oil constriction, a striking geo-political event, or all together, but in the meantime the recent energy price increases have yet to work their way thru the system in ways that will be considered "inflationary" even if they aren't due to a strict monetary inflation definition. Even Mish concedes this point.

Thus my bet as stated, in which I clearly stated "a volatile mixture of both", without at all meaning to imply both at the same time as a clearly defined monetary event.

In any case, the next 365 daze will tell what 2008 brings. A lot more whimpering woes but no sudden big bang crash is what I expect, although I wouldn't be surprised either should something give out a real SHTF moment.

I think most people mean rising prices for certain commodities like energy and food, but falling prices otherwise, ilargi. It has been my experience that most people equate rising prices with "inflation" whether that is inflation or not. As many of us believe, however, inflation is simply an increase in the money supply.

My own belief is that we are facing massive deflation but not until the central banks have completely exhausted themselves trying to stave it off. What we're seeing now is the tip of the iceberg. However, despite deflation of the money supply I expect rising commodity prices for energy and food. What this means, since the money supply would also be shrinking, is that the "price" of energy and food would actually have skyrocketed even further if no deflation had occurred. It is entirely possible in a deflationary scenario for a particular commodity to become sufficiently scare that its price rises (or stays stable) in apparent contradiction to the otherwise deflationary trend.

It has been my experience that most people equate rising prices with "inflation" whether that is inflation or not.

Important point.

I believe they have been Conditioned to believe that way. By the constant misuse of the term by the Fed, CBs, etc.

It is not an accident that the people are MISinformed.

Something like 40%+ still believe that Saddam caused 911.
Directed Misdirection, premeditated Misinformation.

Especially since the Fed's JOB is to constantly INFLATE the money supply. It's their role, to their end.

For fun, consider this article in the context of crashing net oil exports. In any case, what do you guys think of Citibank's decision to limit ATM cash withdrawals in the New York area? They are claiming that it is for security reasons.
Published on 21 Aug 2006 by GraphOilogy / Energy Bulletin. Archived on 21 Aug 2006.
Net Oil Exports Revisited
by Jeffrey J. Brown

As I have been relentlessly pointing out, I think that we are looking at a series of bidding cycles for declining net oil export capacity, with the oil going to the high bidders and with the losers having to reduce consumption. Leanan, on The Oil Drum, has documented several case histories of poorer countries having to reduce consumption. Soon, the developed and rapidly developing countries will be bidding against each other, instead of bidding against regions like Africa.

However, we are beginning to see clear signs of stress here in the US, among poorer households and among financially overstretched homeowners. Consider some recent numbers from the 8/21/06 issue of Barron's.

"The No-Money-Down Disaster"
Lon Witter, Guest Column, 8/21/06 Barron's

32.6% of new US mortgages and home equity loans in 2005 were interest only, up from 0.6% in 2000
43% of first-time home buyers in 2005 put no money down
15.2% of 2005 buyers owe at least 10% more than their home is worth
10% of all home owners with mortgages have no equity in their homes
$2.7 trillion dollars in loans will adjust to higher rates in 2006 and 2007

At the end of 2003, 1% of Washington Mutual's (WaMu's) option ARM (adjustable rate mortgage) loans were in negative amortization (the borrowers were borrowing more money each month, not even paying enough to pay the monthly interest charge in full). At the end of 2005, 47% of WaMu's option ARM's were in negative amortization (55% by value of the loans).

WaMu is booking these negative amortization payments as earnings. In prior times, loans where borrowers were making less than the interest payments would be classified as non-performing loans. In January-March, 2005, WaMu booked $25 million in earnings from negative amortization payments. In the same period in 2006, WaMu booked $203 million in earnings from these payments. These borrowers are increasing their mortgage balances as property values have started falling, so the default risk on these loans is extremely high.

Mr. Witter estimates that a simple revision to the mean suggests a 30% drop in residential property values in the US over the next three years. This is without considering in the effect of further increases in energy prices.

Sure they are hoarding cash, but why in only one market if that were the driving reason in this case?

Citibank limits ATM cash in city

A jump in ATM fraud led Citibank to slash the maximum amount of cash available to customers from their accounts - a security move greeted warily Wednesday by its patrons. The new cap on cash kicked out by the company's ATMs began in mid-December after what Citibank called "isolated fraudulent activity" around the city.

The bank, with 134 branches around town, would not say how many customers were affected or how much money was involved. One Brooklyn woman said she went to her bank branch on Christmas Eve and was unable to take out her normal cash limit, so she called customer assistance.

"She told me customer accounts had been hacked into through cash machines around the city," the woman said. "As a result, the bank had decided to slash how much customers could withdraw from their own accounts. They cut my amount in half. "She said most New York customers were affected and she suggested I change my password."

There's no mention of card theft anywhere in the report, or coming from Citi. Also, no mention of anyone whose account was plundered. To justify such draconian measures, you'd think large scale crime would need to be perpetrated. Did someone print thousands of cards? How practical is that? You'd need an army of people to go to ATM's and get the cash, one would think. Hard to keep quiet. Luckily, help is on its way when most needed:

SmartMetric Biometric Card Will Make Passwords a Thing of the Past and Provide a Level of Security That Will Thwart the Modern Day Electronic Thieves

SmartMetric, responding to media reports of the problem of ATM fraud faced by the country's largest Banks, said the SmartMetric finger print activated Biometric ATM / Credit Card is a technology that will better defend against the modern day electronic thieves and fraudsters.

The New York-based Daily News reported today that Citibank has limited the cash amount its customers can take out of ATM machines. It is being reported that the security of Citibank's ATM machines in New York have been seriously compromised by fraud. According to media reports, a spokesperson for Citibank has stated that "Though we can't provide details of ongoing security investigations, we are working closely with law enforcement on this matter." Citibank declined to specify the amount of the new withdrawal cap.

SmartMetric has created a card that doesn't use passwords that can be hacked or stolen but rather uses the person's fingerprint to turn the card on. The ATM customer places his or her finger on the card and in less than a second the card scans the person's fingerprint and if it is them the card will be activated. If it is not the owner of the card then the card will not work.

I had seen the claim and it sounds sort of fishy.

Perhaps it is some other sort of security issue.

Without getting into detail, everyone knows that Citi (and one other NY bank) is the way to get funds in and out of the country without being "excessively inconvenienced". Maybe they were trying to keep funds from going to specific people in the general area to the extent they could without raising questions.

Just FYI, I went and made all the first of the year tax related transactions today and there is no limit whatsoever at Chase and BofA.
Not even the slightest perception of reluctance to execute the transactions.

..why in only one market...

Look at it as a "TEST" market. Test reactions.

BELIEVE me the Fed and CB's have studied, and are preparing for Bank Runs. This is only one small step.

People with hundreds of thousands of dollars in electronic reality(Banks accounts, 401k's pensions...) will learn soon enough that just because you have some piece of paper saying you own xxxx amount somewhere...... Well, lets just say that POSSESSION is 9/10ths...

You can have what we say you can have of "Your Money"

Did you see the TV Commercial of people in line using Credit Cards(Debt Cards) and the place is running smoothly, then someone in line throws a monkey wrench into the works and uses cash. Did you see that commercial?

Imagine in the future, when the only people using cash were "Terrorists" by definition? Or as the bumber sticker would say, "Only Terrorists and Drug Dealers use Cash"

People in Argentina could only have about 1000 pesos per month from their bank account regardless of how much they had in the bank.

Learn from their lession.

Future Customer at bank window:

Why did you say you wanted your money Mr. Jones? We are authorized to let you have $3,000 a month. We reviewed your monthly auto deposit history, then balanced it against the data bank of how many payments you make per month and determined you only require $3,000 a month. Why on earth would ANYONE want to close their account out to CASH Mr. Jones? A transfer to another subsidiary, I mean bank, would be ok. But Cash?

BTW, Mr. Jones we really appreciate you looking the other way a few years back when you were told that all your electronic transactions were being monitored and shared by the Gov and Corporations on your behalf, you made this more efficient system possible.

Many many "Thin Man"s

Because something is happening here
But you don't know what it is
Do you, Mister Jones?


This post from George Ure, part of a Finance Round-Up, came to mind immediately"

Trouble Indicator? Limits on Savings Bond Purchases
Dec 17 2007

Continuing yesterday's report, where I suggested that the Fed is getting ready for some serious financial problems, another example of how the 'wagons are being circled' has come up. This was in an email from a "C-level" (ceo, coo, cfo etc) type of a national bank which shall remain unnamed:

"I wasn’t sure where people were getting info about bank restrictions. Then today I got notice that, starting 1/08, savings bonds purchases will be limited to $5000/yr per SSN.

We haven’t heard anything about restrictions on wires.

While I don’t disagree with your conclusion about where these things are headed, I gotta tell you that the initiative for monitoring and restrictions is coming from government, not the banks. Believe me, I wouldn’t be doing half the things I have to if it weren’t for regulatory mandate."

Not to take this fellows word for it without checking, I clicked over to the TreasuryDirect web site and sure enough:

Annual Purchase Limit For Savings Bonds Set at $5,000

December 3, 2007

The annual limitation on purchases of United States Savings Bonds will be set at $5,000 per Social Security Number, effective January 1, 2008. The limit applies separately to Series EE and Series I savings bonds, and separately to bonds issued in paper or electronic form. Under the new rules, an individual can buy a maximum of $5,000 worth of electronic and paper bonds of each series in a single calendar year, or a total of $20,000, in single ownership form. If paper bonds are issued in co-ownership form, the limit applies to the first-named co-owner. All limits are based on the issue price of the securities.


Thanks. It seems you and I went to different schools together :-)

I read George every morning. I read that one too.

Here's from today's UrbanSurvival.

Getting Tactical

This weekend, as if you wouldn't expect it given the market's butt kicking on Friday, I'm working on some 'lines in the sand' for Peoplenomics subscribers.

The reason? Next week, there's a chance one, or both, of these threshold levels could be tested and we appear to be only two technical lines away from the possibility of complete financial collapse.

and about the cash that I was mentioning...

Cashless Coming

Another move toward a cashless society as the Treasury plans social security debit card. Ah, remember a month or two back in Peoplenomics when I told you this would be the game? Mark of the what?

Here's the extent of the article.

Treasury plans social security debit card: report

NEW YORK (Reuters) - The U.S. Treasury Department is set to offer a prepaid debit card for Social Security recipients, and has chosen Dallas-based Comerica Bank as the card issuer, The Wall Street Journal reported on Friday.

The report said the card is targeted at Social Security and Supplemental Security Income recipients who don't have bank accounts, and is also aimed at providing cheaper and more secure payments by shifting away from paper checks.

Comerica Bank is a subsidiary of Comerica Inc.

Now go back everyone and read my post above starting with...

"Only Terrorists and Drug Dealers use Cash"
(By the NEW definition coming your way)

And reread the imaginary conversation or is that a Future conversation?

Future Customer at bank window:......

It is a possibility and I make allowances for it, but there is more then one agenda out there.

We see how the cookie crumbles, no question in my mind that the system is evil, but incompetence is their Achilles heel.

Not that they have to be incompetent, but the huge incompetent masses they used to advance their agenda is also what will make implementation of anything on the surface either way, slow. Getting anything done that involves more then a handful of private citizens these days is like swimming in molasses.

WT--The one piece in your export puzzle that I doubted would fall into place soon, this year, was Russia. Ooops. Oil slick. Looks like Russia too is falling into place as well. This is serious stuff.

Well done.


I'm not particularly happy about apparently being right about the export model. It is serious stuff. At least I tried--via ELP--to warn those who would listen.

Mish's comments this morning:

What if the monetary printing manifests itself in $200 oil, $6 bread, and $2000 gold instead of reinflating real estate? Does that help anyone or does it bankrupt independent truck drivers, those on fixed incomes, and those who did not get the government jobs? Is the next step for the government to actually buy houses from banks that are stuck with them, to force real estate prices up? What does that do to those who cannot afford higher property taxes?

Consider commercial real estate. Building owners need higher rent prices but what happens to those who can barely afford their commercial real estate lease right now? Perhaps Keynesian economists wants the government to pay the leases of failed commercial real estate business. This is now getting extremely messy.

There is no polite way to say what's on my mind so here is the unvarnished truth: These simplistic academic solutions are complete nonsense in the real world. If monetary printing accomplished anything useful, Zimbabwe would be the wealthiest nation in the world.

Comments from ROBERTS


With word of the White House thinking of a relief package, the word of the day should be BOHICA. 

Just remember folks – “liquidity” isn’t hard cash. It’s a loan, it carries interest, and it has to be paid back – on a short term basis.

In our modern fiat currency, virually all cash IS debt. Whenever the Fed makes a loan, it is creating cash that did not exist before. The banks do the same thing when you take out a loan to buy a house. They "print up" some money and give it to you to buy your house. The bank doesn't have that money. It doesn't get it from the Fed or anywhere else. It just makes it up.

It absolutely can be inflationary. Imagine everyone in the world took out a 3-year $15,000 loan. In year 1 of the loan, there is a huge amount of cash sloshing around the world, and no corresponding increase in goods & services. It will be hugely inflationary. In year 2 and (especially) in year 3, it will be hugely deflationary (and depressionary) because the money to pay back all that interest doesn't exist and won't exist until enough people take out new loans to be able to pay back the interest on the old loans.

Now, it is true that the Fed loans are of very short duration, but that doesn't mean you can't play a game of rolling over your debts. The rollovers just get cycled through more quickly.

However, I believe it is true that the Fed is not directly responsible for most of the new money creation. Banks are. However, the Fed can influence how much the banks can or will loan both by setting the rates it charges banks for short-term loans and by setting reserve requirements. Banks want to have 0 reserves, so they can make infinite loans. By not doing anything to tighten reserve requirements (as well as by setting target & discount rates too low), the Fed has basically allowed the banks to get out of control. The Communist Chinese, good capitalists that they are, are raising reserve requirements even as I type this, because they know they need to slow down their banks, and they are willing to do it.

In short, while the Fed is not directly responsible for printing up the large majority of the money (a.k.a. debt) that is sloshing around the world, they are perhaps the single biggest factor that influences how much debt (money) the banks can create.

In short, while the Fed is not directly responsible for printing up the large majority of the money (a.k.a. debt) that is sloshing around the world, they are perhaps the single biggest factor that influences how much debt (money) the banks can create.

Again, it may be good remember that the FED is OWNED by Goldman, JPM, BOE, etc.

All those dollars that the Fed creates via Tresurey bonds the interest is in the end paid to David Rockefeller, Rothchilds, and others that OWN the Fed.

There is NO daylight between the Fed and the CB's They are one and the same entity.


“But if you wish to remain slaves of bankers and pay the cost of your own slavery, let them create money.”
- Joshua Stamp, Director, Bank of England, 1928

Various international private banks, several of which are headquartered in Europe, own the “United States” Fed. Moreover, this “United States” Fed leads a Cartel of Central Banks* who collectively intervene in a wide variety of markets, as Deepcaster (see January, 2008 Letter) and others have demonstrated. All this is obviously quite financially incestuous.

These International Bankers, acting through their “U.S.” Fed, make money by creating money out of “thin air” as eloquently described by the Dean of the Newsletter Writers, Richard Russell:

“I still can’t get over the whole Federal Reserve racket.

Consider the following - - let’s take a situation where the U.S. government needs money. The U.S. doesn’t just issue United States Notes, which, of course it could. These notes would be dollars backed by the full faith and credit of the United States. No, the U.S. doesn’t issue dollars straight out of the U.S. Treasury.

This is what the U.S. does - - it issues Treasury Bonds. The U.S. then sells these bonds to the Fed. The Fed buys the bonds. Wait, how does the Fed pay for the bonds? The Fed simply creates money “out of thin air” (book-keeping entry) with which it buys the bonds. The money that the Fed creates from nowhere then goes to the U.S. The Fed holds the U.S. bonds, and the unbelievable irony is that the U.S. then pays interest on the very bonds that the U.S. itself issued. (With great profit to the private owners of The Fed - - Ed. Note) The mind boggles.

The damnable result is that the Fed effectively controls the U.S. money supply. The Fed is …not even a branch of the U.S. government. The Fed is not mentioned in the Constitution of the United States. No Constitutional amendment was ever created or voted on to accept the Fed. The Constitutionality of the Federal Reserve has never come before the Supreme Court. The Fed is a private bank that keeps the U.S. forever in debt - - or I should say in increasing debt along with ever rising interest payments.

How did the Fed get away with this outrage? A tiny secretive group of bankers sneaked through a bill in 1913 at a time when many in Congress were absent. Those who were there and voted for the bill didn’t realize (as so often happens) what they were voting for (shades of the shameful 2002 vote to hand over to President Bush the power to decide on war with Iraq).”

It's interesting that Jim Puplava is increasingly sounding like ilargi and Stoneleigh (check out hour #3 of the webcast).

Thanks, I'll take a listen. Puplava so far has been cheerleading for inflation all the way, hasn't he? I hear he mentions Ron Paul for President, as predicted by Saxo Bank, and laughs off the option, as everybody does.

Several people have noted that the downfall of the US economy could play a far bigger role in the November elections, and the run-up to them, than anyone seems to be willing to acknowledge today. I won't say that it will, but it certainly could. The idea that markets are always quiet in an election year, also suggested by multiple sources, may turn out to be quite naive. If the economy falls to pieces over summer, voters may move in unexpected directions.

As for the Fed, there is one great source for all pertinent information, G. Edward Griffin's The Creature from Jekyll Island (link to Reality Zone, Griffin's operation, to buy the book, Amazon has it too, but they make enough profit).

Financial Sense has an elaborate 2006 interview with Griffin. Go here for the transcript.

I have always found it hard to combine 1/ the fact that the Fed has absolute control over US money, with 2/ the idea that they are losing control through silly mistakes at kindergarten level. They knew what was going on in real estate, they were the ones who lowered interest rates, and had both Greenspan and Bush pushing home ownership in the media. They could have changed course in 2002, 2003 etc., but never did anything. And still, we all keep on believing that they try to save us. They must be real stupid then, right?

In my view, we should at least consider the hypothetical possibility that everything goes as they have planned, and see how events look from that perspective. The general assumption is that the Fed is trying hard to keep the US economy nicely humming along (Puplava does it too, in the podcast). But is that really in their best interest?

The US economy no longer delivers real products, the manufacturing base is totally gone, and it has for the past 10 years relied on consumption alone. That too is now lost. Why keep that skeleton on life-support?

Why not hypothetically assume that Greenspan was brought in in 1987 to liquidate the US economy, because it was then clear at Fed level that peak oil would be with us in 2007, and things needed to change drastically, if the Fed wanted to protect its world dominance? Hypothetically, just to see how it fits. Tell you what, to me the hypothesis makes Greenspan look like a genius. Peak oil would have killed the economy anyway, and power can't afford to wait and react when events start unfolding, power of necessity pre-empts.

Puplava is just plain WRONG.

Look guys, Gold and other commodities have such speculative premium in them now that you have got to be nuts to chase them.

Great trade a year or two ago. Awful one here.

Peak oil? Ok, maybe. Immaterial to the price in the short-to-intermediate term.

In the long term? Very relevant. How long did you say your horizon was on that trade, and what's your margin availability in the short-to-intermediate term if you're wrong?

Friday I bought CALLs on DUG. 2x Inverse on oil and drillers, basically. Why? Because in the short to intermediate term oil is fixin to get smashed.

Longer term? The trend is from the bottom of the left side of the chart to the top of the right. Any questions?

Deflation and inflation can't both happen at the same time, as noted.

We had the inflation - you just didn't "See" it, as it went into the price of your house. Most of this credit creation (as pointed out in the article) was done "off sheet", which is why M3 didn't respond. Now it is, but that's actually the deflation marker, although it doesn't look like it - you're seeing forced repatriation of "assets" (really debt!) now, which is spiking M3 - but in fact its been radically understated for four years!

The Fed would like to "fix this", but it can't. Neither can the other central banks.

And no, they will not hyperinflate even if they could. That will destroy them and their owners; deflation is bad, but hyperinflation is worse, as these folks have fixed term loans out there which will get smashed into the ground under such a scenario. The losses would be ruinous for all of them, where deflation ruins only the imprudent, and not all of them were.

Banks don't create money - they loan money. They're debt merchants. Yes, even The Fed.

Treasury CAN create money, but doing so is true debasement and causes an instantaneous ramp in their debt costs. Therefore, Treasury can only do so with wild abandon if Treasury is not itself in debt to any material degree, or that path ends in its own destruction - and Paulson knows it.

This is why we have not and will not experience mass-"monetization" of the bad paper out there. To do so ramps government borrowing costs and destroys the government. They will no more put a shotgun in their own mouth and pull than you will.

The "hyperinflation" was caused by off-balance-sheet creation of credit which was not reflected in any of the statistics compiled, yet it was real nonetheless. This "printing" was caused by false spread-tampering with the premia between borrowing short and lending long. This is why and how we are in this mess, and it is critical to understand that the whole screaming match about "monetary debasement" is 100% off-base.

In fact the money supply must grow at roughly the rate of GDP or you get deflation. If it grows faster, you get inflation. The idea that you can tie the monetary base to something that has a net increase in "size" of 2% a year (e.g. metals) is fanciful - that either caps off GDP growth at 2% or causes massive monetary deflation - no ifs, ands or buts. This is why the "Gold Bugs" are wrong, and why they will find out the same way they did in 1980.

What's going on now is that the true monetary base (all fungible "money" look-alikes, which include credit/debt) are contracting at a frightening pace as debt is defaulted or paid off. This is a tsunami which has now broken onshore; it is impossible to stop it. The process will continue until the unsustainable debt (that is, debt secured by assets which exceeds their fair market value) has defaulted and been flushed out of the system.

This cycle in the credit market is as old as monetary systems. America has gone through three of these cycles before - not one, as many proclaim. All of them before this one occured on a "hard money" standard. The presence or absence of such is simply immaterial to the cycle; what causes it to happen again and again is that all the people who experienced the last one (and how bad it got) die, leaving only those who have never seen the ugly side left to play in the world. They then repeat the mistakes of those who came 50, 70 or 100 years before them, once again ramping credit in an unsustainable orgy, and ultimately, the collapse comes just as sure as the sun rises in the East.

PS: I'm the author of the above and we have a forum up for this and other investing topics at

The only real quibble I have is declining net oil exports. Our middle case is that the top five net oil exporters--representing about half of current world net oil exports--will approach zero net exports by 2031. In 2006 and 2007, they are on track to show a net export decline of about one mbpd per year.

So, I view it as a horse race.

Will skyrocketing oil prices kill the economy, or will the dying economy kill high oil prices? It's going to be a function of the rate of change in demand versus contracting net oil export capacity.

One point to keep in mind about the US: for our crude oil imports to stay constant, our consumption has to drop at the same volumetric rate, in bpd, that our domestic production declines.

Also, Daniel Yergin has just issued a strong "Buy Signal" for oil, asserting that oil prices should be no higher than $85 next year, absent a geopolitical event. The "Yergin Indicator" suggests that oil prices should trade at about twice Yergin's predicted index price within one to two years of his prediction.

Copy of my Drumbeat Post:

BTW, since I coined the term "Yergin Indicator" and a new price definition (One Yergin = $38/barrel), I feel compelled, as a public service, to issue a new RED ALERT for oil trader types. Consider my last RED ALERT:

June 28, 2007

To: Interested Parties

From: Jeffrey J. Brown


CNBC just quoted Daniel Yergin as saying that, without the "fear premium," oil prices next year should be down to $60.

Most of you probably recall Daniel Yergin's previous predictions for lower oil prices. Based on prior experience, once Yergin issues a prediction for lower prices, one should expect oil prices to be 100% or more higher than his predicted price, within one to two years of his prediction--think $120 or more within one to two years.

Regarding his $38 prediction (do a Google search for Daniel Yergin and click on "Daniel Yergin Day")

Yergin is now asserting that oil prices, absent a geopolitical blowup, should not be higher than $85 next year, so according to the Yergin Indicator the new price target is $170 within one to two years. Stay tuned for further developments. You may now return to scheduled programming.

Thanks for the guest post Karl, and for joining in the discussion. I agree completely with what you say, and have been saying much the same myself for the last two years at TOD. My take on the credit crunch can be found here.

New Mish is up.


The consensus is pretty strong. 

Yes, the consensus certainly grows.

As I've said numerous times now, there cannot possibly be inflation if -make that when- all that capital (or credit, or money, or whatever you call it) disappears into the great abysmal void of nothingness.

As I've also pointed out time and again, and as Karl now says, inflation is not the future; we've already had the inflation, in the past decade. However, because a rising price in bananas is called inflation, but a rising price in housing is called added value, nobody noticed. Neither did anyone question where all that added value came from, or what it was purchased with.

Mish' graphs are a good indicator of what is going on in finance. Someone should add up those numbers. Take the losses in share prices for the banks, financial institutions, brokers, homebuilders and bond insurers, and add them all up. Then take the Wall Street write-downs, $100 billion so far, but according to Barclays rising towards $700 billion, while CalculatedRisk pegs them at over $1 trillion. And then remember that for instance Morgan Stanley gave up 9.9% of itself for just $5 billion, over which they'll pay 9% interest, in reaction to a $9.4 billion write-down, which everyone agrees is only the first step in a much larger total.

Add Roubini's statement that every dollar in bank capital lost means 10 dollars in lending capacity lost. In other words, in the US alone, $10 trillion less will be available for who wants a mortgage, a car loan or a business loan. That is $100.000 or more for every American family. And yeah, by the way, then try to build nuclear reactors or other big energy projects. There won't even be money for proper water-, sewage- or road maintenance.

Nor does it stop at $10 trillion; the issuance of securities has allowed banks and other lenders to issue far more credit than the 10:1 fractional notion would indicate. I would put that number at 5 times more, minimum. That is $50 trillion in available credit that goes poof. $500.000 or more for every American family. In that situation, many banks simply no longer have a reason to exist. And they couldn't pay their debts anyway even if they did stick around: there'll be no more money to make in banking.

Top this off with the $1 trillion that Shiller says has already been topped off US residential real estate "worth", and the $5-$10 trillion or even more that will vanish there, and see what you get. Where I'm from, it's called a bottomless pit.


That's probably one of the best summarizations I have heard. Very succinctly put of exactly what is directly ahead of us financially.

Thanks, John,

Somewhat ironically, it's also the last you'll read from me here. TOD does not want finance, and it certainly doesn't want me. They want to dictate what I do, and that is not going to happen. They refuse to put Finance Round-Ups, as well as the article above, on the frontpage, thereby marginalizing what Stoneleigh and I do. I have been accused in the past few weeks of sensationalism, doomerism and rhetoric. And I haven't even started saying what's on my mind. Jim Kunstler, who'd likely be accused of the same things around here, has done more for peak oil than TOD ever will, and they find it hard to live with that.

Fittingly, I had to hear today indirectly that I am no longer welcome, they can't even say it to my face, and that's not the first time that happens. There are big problems here when it comes to communication, both inside and towards the outside world.

I think finance needs to be covered here, because it's a far bigger issue right now than oil, because of its impact on energy matters, as well as simply because there are a lot of people here who are interested in knowing what goes on. I painted the editors today as a bunch of elderly gentlemen who wet their panties because oil reached $100. Can't say that apparently. No humor either. But where that $100 barrel touches finance is in the devaluation of the USD vs for instance the Euro: 40% since 2000, 25% in just the past two years. That means this $100 is an utterly inconsequential number. I have been the only one who's pointed that out though, everybody's too busy doing what the main media do: staring blindly at big round numbers, excitedly pondering whether oil could ever come back down to maybe even $60. Well, for 470 million Europeans, that's exactly what oil costs today. And that's why finance belongs at TOD.

As you may have seen in my earlier writings, and again in what I said above, I have no doubt that what's happening in finance will shake this world's foundations, and very soon too, way before peak oil. Looking at the numbers, and adding them up, it becomes clear that there is no way to go but very far deep down. Because of the urgency involved, I find it irresponsible not to write about that what I think should be written, and I will not tone down for a group of people who have little clue what goes on and hide behind claims of empiricism and the like.

Alors, I will find another place to do what I think needs to be done. I don't know what my dear friend Stoneleigh -who asked me to be here- will do, she'll make up her own mind.

It's been a privilege talking to the readers here and trying to provide what I think is essential information for everyone in this day and age.

The bright side is that I will now create a space where I can speak freely, without the constant self-righteous scrutiny that haunts this place.

You betcha they got no sense of humour but they do have self importance and that is something to have in the land of Oz.

As well as extremely little financial on the mainframe there is not much there on GW, even viewed within the context of peak oil . On political, nothing much other than some right wing rantings by jeffvail.

Lots of changes since I have been viewing, maybe a posting of the old mission statement would be of interest. I think the old one went something along the line of that old chestnut "We the people..." Seemingly liberal and democratic but in result authoritarian. I guess it is nice to see that pretense is being dropped.

To more of a point, if they don't like what you are saying and if this were really an 'open to all views' site then an opposing voice would be found and included.

Good luck, let me know where you will be writing.

There is someone on Karl's board that now and then posts and goes by the name of "Nothing". When I originally read her posts she sounded a little like Stoneleigh's twin sister. Economically speaking, don't know about politically.

Maybe you guys can put an all star team together somehow?

This ended up as a response here because I apparently clicked on the wrong link. The post was intended for Ilargi.

Okay, so you're clumsy and don't want to talk to me, is that some reason to call me a wrong link, eh Bub?

Wrong. I'm clumsy and talk to you.

Oooh you sweet young thing, why don't you stagger up and see me some time:)

Let us know where you and Stoneleigh go, if and when you do.

They probably do not welcome the economic write ups because other then the technical articles which at times are very good, the forum to a large extent is populated by radical left wingers that use peak oil to promote specific social agendas and to make a buck as wannabe lobbyists.

If you watch it for a while it's funny. Some people post radical psychobabble and then one day after an "e mail me off line" they start very energetically promoting things that they never mentioned before. Time after time. LOL.

Ilargi: Too bad- I like reading your posts (both you and Stoneleigh). Re Inflation, I agree with the consensus that the debt collapse is gigantic and deflationary- where I part ways is in the expected response of the US dollar. The fiscal and current account deficits are inflationary- its a bit of the chicken and egg-in a true deflationary collapse-which looks increasingly likely-the US government is bankrupt (along with many companies-GM is just one example). The US dollar cannot be expected to keep its strength as the US economy implodes-there will be a major freefall in the US dollar (which is inflationary)-so you end up with the $25 gallon of gasoline eventually even in a depression IMO. I have to agree with Puplava re the Amero before 2011.

Thats really sad to hear. I always hit everyone of your's and Stoneleigh's financial posts.

Peak Oil is going to be terrible, but the financial aspect is going to hit harder quicker. The tidal wave of money defaults is going to wash many many structures out to sea.

Please make a post somewhere where you will post in the future.

Bad times are coming and as I said in my response last night you summed it up about exactly as I see it coming.

Fare Thee Well my friends.


John, Ergman, Musashi, Grundy et al,

It doesn't look like Stoneleigh will be back here either. We are talking to Matt Savinar at, LATOC. Hopefully we can work out a good format there, perhaps combined with a proprietary blog. And if that falls into place, it will happen very soon. I'm looking forward to finally being able to say what's on my mind, I can tell you that.

I am (we are) very grateful for all your support and kind words throughout the past year and change, especially to all of you who have expressed their appreciation for finding our work at TOD, and have had their eyes opened, to a degree, by what we have served. I agree, this site will lose a lot of value by turning two blind eyes on what is this world's most urgent problem. Other people will have to do address it for them, though, if they ever wake up.

The reason why finance is important here, if I may quote myself, is that 470 million Europeans, who use 50% less oil per capita, today pay $60 per barrel, while Americans pay $100, once the downfall of the USD in the past two years is made part of the equation. In other words, to live more wealthy than Americans on average, once you look at health care and education, the average European spends less than one-third on oil than the average US citizen.

What we have tried, and will continue to, in another place, is why that is, and where that discrepancy will go from here. I don't know how to make the importance of finance on an energy site any clearer than that. All I see here today is $100 headlines, and they make TOD look like FOX, in my humble eyes. Big numbers make for wet panties. That, I am not interested in.

Kindly, Ilargi

Great, see you there with sack cloth, ashes and mortuary bells on:)


I don't normally post but I did want to pass on how much I appreciate your's and Stoneleigh's financial postings. I have learned much by reading your posts and frankly I did not find them extreme at all. I am somewhat perplexed why you would be asked not to contribute. I understand this is a peak oil site however I dont think a day goes by where these issues don't come up in the drumbeat so obviously there is interest. I was just happy to have a consolidated post available here.

I have no idea how everything is going to play out be it inflation, deflation, stagflation, peak, plateau, crash, powerdown.... but Oil or energy and our economy are intertwined and whether the economy masks the peak or whether the peak causes the economy to crash it matters not to what happens to us. The end result will be that our way of life must change.

Please let us know where you will be posting.

We truly live in interesting times.


Sorry to hear that as your finance round ups were my favorite place for non mainstream financial information. I hope you keep doing what you are doing and let us know where you start posting again.

Let me attempt a brief reply here:

TOD does not want finance, and it certainly doesn't want me. They want to dictate what I do, and that is not going to happen. They refuse to put Finance Round-Ups, as well as the article above, on the frontpage, thereby marginalizing what Stoneleigh and I do. I have been accused in the past few weeks of sensationalism, doomerism and rhetoric.

This is not the place to detail issues between our staff so I will not. We have an amazing band of smart, well intentioned volunteers that are trying to do the right thing. We are an energy site, and the juxtaposition of a world denominated in dollars and a world needing energy is not more keenly seen than in the arena of finance. We certainly intend to do analysis and research on the links between energy and finance going forward as resources and time permits. In fact, that is what my phd thesis is about. But we will never be a go-to finance site. We don't have the credentials.

Jim Kunstler, who'd likely be accused of the same things around here, has done more for peak oil than TOD ever will, and they find it hard to live with that.

Jim is a good friend of mine, and someone I have a great deal of respect for. If he approached me with a post consistent with TOD format and mission statement, I would bump whatever we had in the queue and put his first. And what Jim Kunstler and theoildrum 'do' for peak oil is very different. If we can accelerate change on both the micro and macro level, then we will have created beneficial redundancy for the future, which is what needs to happen.

I think finance needs to be covered here, because it's a far bigger issue right now than oil

I agree. But when bird flu becomes the #1 story impacting demand, the editors are not going to put out help wanted ads for avian/energy experts. Since we are volunteers, we write/post what we can that conforms to the format we try to adhere to.

But where that $100 barrel touches finance is in the devaluation of the USD vs for instance the Euro: 40% since 2000, 25% in just the past two years. That means this $100 is an utterly inconsequential number.

I agree with much of what you write, but on this I disagree. Over 10 years thru last week, the US dollar has sold off 37% in total vs the Euro, which, without using compound growth is a 3.7% average per year. Over the same period, oil has gone from $10 to $97, which is almost 900%. The dollar selloff is relevant, but oil prices are 550% higher denominated in Euros too.

It's been a privilege talking to the readers here and trying to provide what I think is essential information for everyone in this day and age.

Thank you for your efforts and insight here. Im sure I speak for many people, that I have learned and benefited from your writing and contributions here.

TOD does not want finance, and it certainly doesn't want me. They want to dictate what I do, and that is not going to happen. They refuse to put Finance Round-Ups, as well as the article above, on the frontpage, thereby marginalizing what Stoneleigh and I do.

We are an energy site, and the juxtaposition of a world denominated in dollars and a world needing energy is not more keenly seen than in the arena of finance. We certainly intend to do analysis and research on the links between energy and finance going forward as resources and time permits. In fact, that is what my phd thesis is about. But we will never be a go-to finance site. We don't have the credentials.

You have been in the past half year a go-to finance site, and a much appreciated one. You'd know that if you bothered to read the comments. By putting numerous Finance Round-Ups on the frontpage, and from one day to the other doing so no more, despite the positive response, you merely make clear that whatever you call a mission statement is hazy at best, as well as how much you care about your readers. Decisions are made by editors who don't bother to read articles and comments, don't know anything about finance, and don't care about what their readers want. Sounds like a formula for success. There have been dozens of people through the past months who have said they come to TOD, often specifically, for us, but that doesn't seem to have any value. And how could it, if the editors don't care to read what their own readers have to say?

"We don't have the credentials?" What's that supposed to mean? I'm thinking you mean that Alan Greenspan does have those credentials. So many years with Jay, and never applied it to yourself.

Jim Kunstler, who'd likely be accused of the same things around here, has done more for peak oil than TOD ever will, and they find it hard to live with that.

Jim, my dear friend, blah blah....
If we can accelerate change on both the micro and macro level.......

You simply ignore what I said here. Micro/macro, the elephant and the ant, nothing to do with my words. Jim, you're an ant. World made by ant.

I think finance needs to be covered here, because it's a far bigger issue right now than oil.

I agree. But when bird flu becomes the #1 story impacting demand, the editors are not going to put out help wanted ads for avian/energy experts. Since we are volunteers, we write/post what we can that conforms to the format we try to adhere to.

Right, finance is just like bird flu. How could I have been so stupid as not to see that? The real issue is oil, not some passing fad like money or dead chickens. Unless, perhaps, we can muster a thorough analysis of the BTU of a trillion sickly feathers.

But where that $100 barrel touches finance is in the devaluation of the USD vs for instance the Euro: 40% since 2000, 25% in just the past two years. That means this $100 is an utterly inconsequential number.

I agree with much of what you write, but on this I disagree. Over 10 years thru last week, the US dollar has sold off 37% in total vs the Euro, which, without using compound growth is a 3.7% average per year. Over the same period, oil has gone from $10 to $97, which is almost 900%. The dollar selloff is relevant, but oil prices are 550% higher denominated in Euros too.

Oh, want to cherry pick numbers now, do you? OK. For starters, there was no Euro ten years ago. Bummer! In real life, the USD, let me repeat it, lost 25% in the past 2 years, the period that happens to coincide with the real rise in oil prices. Ever since there actually was a Euro, let's go back 5 years, the USD lost 40%. Yeah, real convenient, that 3.7% drop per year in 10 years, but that's just the old talk-to-the-hand trick. Seen it, know it, and Will Ferrell does it way more convincing. It's 8% annually over 5 years, and 12.5% over the last two. Still smirking?

And to finish off this non-topic, even the 10-year 550% price increase in Euro's means humble peasant Maltezers now pay $55 a barrel, while Floridians, who use twice as much, also pay almost twice as much. Total: 4 times as much.

And that is not nearly good enough for wet panties in the US centered pressbox, unless you think you fall off the planet when leaving Florida, or you work for FOX and you need a story.

And amongst all the nincompoopishness that emanates from the MSM, that should be where TOD stands: pointing out that outside the US, $100 oil has an entirely different meaning. But no, you just blubber along with whatever FOX decides is the headline.

What has been the annual rate of increase in oil prices, in Euros, since the Euro was created?

BTW, as I understand the current foreclosure environment, many banks are not even pursuing deficiency judgments against borrowers who default on mortgages. And there is a move to even modify tax laws so that there is no income tax penalty on the forgiven loan balance. My point is that many consumers, post-foreclosure, may actually see an increase in their disposable income if they go from paying half of their income for housing to about 25% of their income in a rental unit--as long as they have their job of course, which may be a temporary situation.

A suggestion for a future post: a careful look at oil consumption in the Thirties, during the Great Depression. If memory serves, the downturn in US consumption was relatively brief.

Let me attempt a brief reply here

Obviously, brevity is not part of your usual style. Better stick with doctoral theses. Why use two words when four words will do, eh?

Anyway, what a waste. Since the Finance Roundup was a part of TOD:Canada was it really necessary to force Stoneleigh and ilargi to move elsewhere? It was TOD:Canada not TOD.

If Rapier can wax lyrical about his daughter's energy profligacy why can't the Finance Roundup continue? I can speak with absolute authority when I say there is no one reading TOD that gives a shit about Rapier's home life. Well, maybe the odd stalker or two. But those one or two aside, nobody cares. As for book requests, doesn't that seem a bit off topic? What is going on here?

You, and "the staff" have truly lost your way. Staniford can regale us with his tales of food prices (after all he's a ag expert, dontcha know) and Heading Out can pen his global warming is thanks to suns spots - you didn't know that? - conclusions, but, good God man, finance, here on TOD? You must be absolutely barking mad.

As for your closing stanza, what more needs to be said? If insincere and condescending needed a definition, that is it.

Actually it's not as simple as whether finance should be at TOD or not, but it wouldn't be appropriate to debate the internal complicating factors in public. All I would say on that topic is that what we do here isn't a one person job, so if only one person were left to do it, the quality of coverage would suffer and the amount of time required would become prohibitive. Because ilargi and I work well together, it makes sense to us to continue our collaboration where we can.

On the issue of finance, which is an appropriate topic for readership debate IMO, it's not that finance has been deemed off topic at TOD per se, but that frequent financial coverage without reference to energy is not what TOD wants to be about. The focus of TOD is on original analytical work, which we have occasionally done here, but relatively infrequently. With a small staff at TOD:C, analytical posts on a wide range of topics would take so much time that posts would be few and far between. Instead we chose to focus on news compilations in order to provide regular, up-to-date coverage of a wide range of issues affecting Canada and the world, believing that to be the best use of our available time and energy.

Over time we came to focus more and more on finance as we watched the credit crunch develop. We both feel that the short term timeframe and potentially enormous impact of the credit crunch is poised to rewrite much of the peak oil debate in the relatively near future, as well as undermine (perhaps fatally) the assumptions upon which people's lives have been based. As such we felt it deserved much of our attention - not to the exclusion of all else, as we're both very much big picture people for whom context is vital - but considerable attention given that we are contemplating a vital life-support system under threat.

We have been attempting shed light on something we feel to be a critical issue, the importance of which is being badly underestimated by almost everyone, largely because its complexity makes it inaccessible to most people. Our intention has been to raise awareness and to make the issue accessible to the TOD readership by gathering the most up to date and informative analysis we could find. In doing so, however, we moved away from the existing TOD model. TOD would like the focus to remain firmly on energy and for the format to be primarily original analytical work. As ilargi and I wish to continue doing what we do now, we need to set up another space in which to do it. When we have done so, we will let our readers know where to find us.

Thanks for your efforts, ilargi. You are bridging a critical gap in understanding.

How I've Changed My Mind on Mortgages

The Edge Annual Question this year asks a group of (mostly) scientists what they have changed their mind about and why. I'm no scientist, but this is as good an opportunity as any to make explicit two things, both mortgage-related, on which I changed my mind in 2007. Both of them fall under the general rubric of "a little knowledge is a dangerous thing": I would have been much better off with a completely naive view than I was with a very basic grounding in mortgage finance.

The first is relatively narrow: it's the question of the effect of default rates on the prices of mortgage-backed securities. At the end of 2006, a lot of people started getting rather alarmed at a spike in mortgage default rates, especially among subprime borrowers. Obviously, if you package up mortgages into securities, and then those mortgages start defaulting at historically unprecedented rates, those securities are going to fall in value.

But I wanted more detail: I was interested in how much mortgage-backed securities would fall in value when default rates rose. So I did some paddling around in the shallow end of the theory of mortgage bonds, and what I found surprised me: no one seemed to be the slightest bit interested in default rates. The prices of mortgage bonds were entirely a function of prepayment rates, and default rates simply didn't enter into the equation.

That fact - and it was a fact, until recently - informed my thinking on mortgages for far longer than it ought to have done. In reality, there were two considerations which trumped the defaults-don't-matter-only-prepayments-do paradigm. The first was that we were at the start of an unprecedentedly nationwide housing slump, which meant that the geographical diversification built into most mortgage portfolios was of little if any help. And the second was that the underlying mortgages were very, very different animals to the kind of things for which there was a lot of price-and-default-rate history. Subprime mortgages of the 2005-6 vintage simply don't behave like other mortages, because the underwriting standards used when they were issued were probably as lax as mortgage underwriting standards have ever been. And the originators didn't care, since they made their money by flipping their mortgages via investment banks to investors in CMOs and CDOs.

My mistake was that I failed to appreciate how much a change in underwriting standards could and would effect the very dynamics of the entire asset class. Default rates had historically been dwarfed by prepayment rates; now, however, when default rates started getting up to the same order of magnitude as prepayment rates, the whole calculus of valuing mortgage-backed securities changed, and I was too blithe to notice for much of the year.

The second thing I changed my mind on is far broader: it relates to the whole concept of homeownership, and who exactly really owns a home which has been mortgaged.

Once again, the naive view is simple: the bank pays for your house, which means that the bank owns your house, unless or until you pay it off. Legally, however, that's not the case at all. The owner of the home is the homeowner, and the bank is just a (secured) lender to the homeowner.

That's why I've been so concerned with the whole issue of recourse vs non-recourse mortgages. People seem to think that they can just walk away from their house - and their mortgage - if they find themselves stuck in a negative-equity situation. In theory, that's not true: the bank gets back whatever it can from the sale of the house, and then the borrower still owes the bank the balance.

In practice, however, as my commenters have pointed out - thanks especially to James Moore, P Jackson, and Uncle Festus - things can be very different, and it turns out that most mortgages are de facto non-recourse no matter what the letter of the contract says, even if the borrower does not declare bankruptcy. In order to chase its borrower for the remainder of what is owed, a lender has to go to court and get something known as a deficiency judgment. And it turns out that lenders, for many reasons*, are decidedly loathe to do that.

How this will affect the ongoing housing slump no one knows. It's possible that it could exacerbate things quite nastily. Many borrowers can go from insolvency to solvency by simply mailing in their house keys to their bank: their assets would decrease by the value of their house, but their liabilities would decrease by the value of their mortgage, which could be substantially greater. People who bought speculatively, hoping to flip at a profit, might find such a course of action especially attractive: they not only have negative financial equity in their house, but they also have very little emotional equity in it. They were playing a game of "heads I win, tails the bank loses", and now Plan B is coming to pass.

The downside to such an action - bad credit - is relatively low, especially if the borrower lines up a nice rental before defaulting on his mortgage. After all, we live in a country where even bankrupts are bombarded with offers of secured and unsecured credit.

The other big downside to "jingle mail" is the tax bill which arrives when a lender forgives a large chunk of your loan. But guess what - the government has now decided to waive those taxes, at least for 2008. So if you think you might find yourself losing your negative-equity home at some point, it really makes quite a bit of sense to walk away from it this year, just as soon as you've found somewhere else to live.

I've changed my mind on this only in the past week or so, and I might change it back if stories start trickling out about individuals who have lost their homes but not their mortgage debts. But for the time being I no longer subscribe believe in this, which I wrote as recently as December 19:

As for the homeowners, of course their houses are assets: it's their mortgages which are liabilities. Losing their houses only means getting out of debt in certain limited circumstances: (a) when the loan is non-recourse -- which is rare in the subprime world, especially since most subprime mortgages were refinances; (b) when the servicer accepts a short sale; (c) when the homeowner declares bankruptcy as part of the foreclosure process.

In reality, and especially in California, I now think that losing one's house to foreclosure does, to all intents and purposes, mean wiping out all your mortgage debt. When a mortgage is hundreds of thousands of dollars greater than the value of one's house, that can be a very attractive bargain indeed.

*Here's four reasons why lenders are loathe to go to court to get a deficiency judgment:

- The borrower hasn't got any money or much in the way of income, and it will cost a lot more to get a court judgment than the lender can reasonably hope to retrieve from the borrower as a result of it.
- There's a wave of foreclosures, and servicers are already overburdened by the number of defaults and delinquencies they're dealing with: they simply don't have the time or the staff to start chasing borrowers in court.
- A deficiency judgment is not a slam-dunk: as commenter PJ says, "judicial foreclosures give the borrower a chance to highlight any fraud, real or imagined, that may have taken place at origination."
- The servicer doesn't own the loan, and I doubt that servicers have any contractual obligation to get deficiency judgments against borrowers. Even if they did, the owners of the loan - the CMOs and CDOs - aren't going to sue the servicers for failing to apply for a deficiency judgment. While securitization hurts borrowers by making loan modification more difficult, it also I think helps borrowers by making lenders less likely to take things to court.

I understand the reasoning about the coming deflationary bust and agree about it.
But there is one thing that puzzles me.

A bank creates money and gives it as credit to a house buyer. The house buyer gives the money to the house seller. Now the seller has money and can spend it at will, and that newly created money expanded the money supply, and can not be destroyed when the borrower pays back the money to the bank, although the credit dissapears.

Can anyone answere to that?

Edit: Isn´t it inflationary in some sense?

If the bank loans $500,000 (say on an interest only loan), and the borrower defaults on the loan, and if the bank sells the property for $300,000 after foreclosing, the bank has lost $200,000, not counting other incidental costs. Since banks are highly leveraged businesses, this has a multiplier effect on available credit. Of course it is much more complicated now since many of these loans have been securitized.

Another way to put it is that debts are always paid--if not by the borrower, then by the creditor.

I wonder if someone might post an essay on the deflating of Tulipomania in Holland?

Yes, but my point was that when a loan is made by creating credit money, the money supply has grown, and can´t be reversed by default or payback of the loan.

In my example above the seller of the house is in the possesion of the created money, and he can use it at will, and it can´t be taken away from him.

That is inflation that can´t be reversed or??

Monetary policy gives me a headache, and I am certainly not an expert at it, but a loan loss has a multiplier effect. I'm not sure what the typical ratio of outstanding loans to bank capital is in the US, but let's assume it's ten to one, i.e., for every dollar of capital, the bank loans out ten dollars (from demand deposits).

In the example cited above, the $200,000 capital loss would cause a loss of $2 million in lending ability.

BTW, Fannie Mae and Freddie Mac have much larger ratios of loans to capital than do banks and thus are far more exposed to rising mortgage default rates.


In your example, there is only one sum of money/credit created, regardless of which hands it ends up in. And when the borrower pays back the lender and/or the lender writes it off, the sum total will still be zero. An X sum created, the same X sum paid back/written off. The seller may have money, but he no longer has his house, which, we presume, was actually worth the money paid for it, and was known to have that worth prior to the transaction. The house represents true value, well, other than the past 10 years. The seller will have to find a place to live, and probably buy another house. It's somewhat simplified, I know, a bit Potterville, but it stands.

We can make it trickier (and boy, have we ever), however, by making a bank the seller of the house as well. That bank can then use the received funds as collateral to create more loans, In fractional banking at 10:1, but in the securitized mortgage reality we live in, at maybe 50:1. And it gets even more tricky when non-bank entities start issuing commercial paper. There the creation of credit starts taking place outside the banking system.

I recommend, as I've done before, Henry Liu's explanation of the effects of the 1998 repeal of the Glass-Steagall Act, Bank deregulation fuels abuse, which allowed banks to move into securities underwriting, investment banking and much more. And that in turn has led to what the same author describes under the title: Banks as vulture investors. Two very good articles to read if you want to know how we got where we are. It's really been just 10 years.

Thanks, complicated stuff this for an layman. Anyway this system sounds to me like a dangerous mess likely to collapse.

And regardless to what Genesis wrote about gold not beeing worth that much, i as a newbee pensionist don´t dare to have my life savings in fiat money or any paper certificates of any kind. If it´s lost in the coming turmoil, i am toast for the rest of my then miserable life. I have bought gold and silver for more than 90% of my savings, and will stick with it, it can´t become worthless like fiat money, can it? What else is there, that could protect your life savings from meltdown?

Like others here, i am also very interested to follow you(and Stoneleigh) to your new forum at LATOC. Could you tell us at what name you will post there, will it be Ilargi or?

Regards Kenneth

Gold and Silver won't become worthless, but they have at least a 50% speculative premium in them right now.

Metals respond PRIMARILY to geopolitical risk. Bhutto being assasinated was responsible for the break out of the triangle in Gold, and its run from there.

The problem is that this speculative premium has a nasty habit of disappearing at some really inopportune times - like overnight when you can't trade it.

Oil also has a huge speculative premium in it right now. Fundamentally, on a longer-term basis, it is certainly going much higher.

But that doesn't make it a good investment.

Investing in things with significant speculative premiums in them are exactly like investing in momentum stocks - they're great and make you lots of money until they don't - then you suffer ruinous losses all at once.

This is especially true in the commodities markets.

I will take that risk, i bought the metals 2005-2006, and have had a nice appreciation sofar, and i rather take 50% loss from todays price level, than risk lose 100% in paper. As you say the metals won´t become worthless.

And gold is not merely a "metal", it´s money. Silver is more speculative and is a smaller part of my holdings.

Beesides, i don´t think the geopolitical risks are going away for a long time, rather they will worsen the years ahead.

Hi Genesis, thanks for the article, also for making it readable doing that is a sign of someone who knows his stuff.

One thing I would alike your opinion on is that, if one can keep it out of the hands of the Government, how do you feel that gold would be valued in a depressed economy like that of the 30's? I keep thinking that in desperate times, gold charged with history and so viewed with sentimental eyes, would not be bad to hold a baggie or two of.

Forgive me, i am not Genesis, but my take on this is like this:

During the depression in Germany in the 1920-1930, with the hyperinflation, i read a story about a family that bought a house with 20 renting apartments for one gold coin(how big the coin was is unknown), and then they made a living out of the rents. The paper money got worthless.

During the depression in USA, it is a little difficult because gold had a fixed price, the currensies were goldbacked and then Roosevelt confiscated privat gold. But when the ordinary stockmarket tanked, the goldmining companys soared in price. Silver dropped in price initially, but soared in price after a while.

I believe that gold PERHAPS could drop temporarily in an allout selling of assets in a mad dash to get cash for paying of debts.

The situation now is unprecedented in that it´s the first time in history we have fiat money worldwide backed by nothing. I sure don´t trust theese paper moneys. The whole monetary system could break down. Gold on the other hand has been money for thousands of years, and can´t be printed by governements. And as i said above i don´t care if(which i don´t believe) the gold price should dip somewhat. But i can´t see how it could dip meaningfully from theese low prices. I believe that the possibility is greater for a MUCH higher gold price(thousands of dollar/oz) in the years ahead.

Like i wrote above, i have most of my savings in PM:s, and i am NOT selling anything of it, before i know that this crisis is overcome and i can believe in an ongoing stable economic/monetary system. Then i could sell some of my holdings, but a part of it i will NEVER sell, that´s my last insurance.

Besides, what else would you save in this crisis? Paper money?
Stocks? Or what? Think about it, now is not the time to gain returns but to preserve what you have, and not end up with nothing.

Mrs Ydnurg

If you would come to the conclusion, that you should buy some gold, i reccomend fore smaller hoardings, that you buy gold coins not bars.

One oz coins like the Krugerrand or Gold Eagle and some pre 1933 world gold coins like the british sovereign.

If you are afraid of a coming confiscation of gold(unlikely) then the seminumismatic pre 1933 world gold coins would propably not be confiscated.

Thank you Swede,

I think you are right, and gold is not only cash but has a mystique that even if a government confiscated or banned it's use might make it even more valuable on a black market. One thing though I do not understand is why coins and not gold bars?

The only things I think I would value more than gold are things like ones own garden and an electrical plant, of course fishing hooks and a good supply of birdshot could be good too;)

Amazing post! I've learned a lot, thanks!

Merci, Samuel.

T'es bien drôle, dans les circonstances. Je sais pas si t'as suivi tout la merde ici, mais pour les prochaines chapitres en finance, il faut nous lire ailleurs. T'as pas le droit d'apprendre rien sur le sujet ici, de toute évidence. Go Habs go.