Wednesday, July 16, 2008
Tuesday, July 15, 2008
THIS IS WHAT I'VE BEEN SAYING FOR 30 YEARS!
EVENT HORIZON
by James Howard Kunstler
There’s a particular moment known to all Baby Boomers when Wile E. Coyote, in a rapture of over-reaching, has run past the edge of the mesa and, still licking his chops and rubbing his front paws in anticipation of fricasseed roadrunner, discovers that he is suspended in thin air by nothing more than momentum. Grin becomes chagrin. He turns a nauseating shade of green, and drops, whistling, back to earth thousands of feet below, with a distant, dismal, barely audible thud at the end of his journey. We are Wile E. Coyote Nation.
(GT sez: Damn, Kunstler stole my Wile E. Coyote anecdote I've been using for 6 months now!)
Is there anyone in the known universe who thinks that the U.S. financial system is not fifty feet beyond the edge of the mesa of credibility?
Nothing will avail now. Not even if Sirhan Sirhan were paroled at noon today and transported directly to the West Wing with a .44 magnum in each hand (and a taxi driven by the Devil waiting outside to take him to the U.S. Treasury and the offices of the Federal Reserve).
It’s hard to imagine what kind of melodramas were unspooling on the Hamptons lawns this weekend, while everybody else in America was watching Nascar, or plying the aisles of BJs Discount Warehouse for next week’s supply of mesquite-and-guacamole flavored Doritos, or having flames and chains tattooed on their necks, or lost in a haze of valium and methedrine.
With the death of the IndyMac Bank last week, and the GSEs Fannie Mae and Freddie Mac laying side-by-side in the EMT van on IV drips, headed for the Federal Reserve’s ever more crowded intensive care unit, there was a sense of the American Dream having passed through the event horizon that denotes the opening of a black hole.
What would happen if the U.S. government acted to bail out these feckless enterprises (and what if they don’t)?
Either way, it’s not a pretty picture.
If Mr. Bernanke does start shoveling loans into the GSE black hole, he’ll further undermine the soundness of his own outfit and do nothing, really, to repair Fannie and Freddie’s structural problem of having securitized too many loans that will never be paid back. If instead Fannie and Freddie are flat-out taken over entirely by the U.S. government (and remember the Federal Reserve is not the government), then the national debt will roughly double overnight – which will pound the U.S. dollar down a rat-hole.
Meanwhile, the foreign holders of those decrepitating dollars might not rush to the redemption window, but they certainly would use them to buy up every oil futures contract on God’s not-so-green Earth as fast as possible – they’d be dumb not to – which would leave American Happy Motorists with gasoline prices north of $5 a gallon, and possibly north of $10. (In that case, say goodbye to the airlines. In fact, say goodbye to what passes for the rest of the US economy, including especially the vaunted retail sector that supposedly counts for 70 percent of the action.)
If Fannie and Freddie are left to die out on the desert floor, say goodbye to the housing market, the major investment banks, countless regional banks, the retirement accounts of virtually everyone in America, the viability of all fifty states’ governments, and the day-to-day operating ability of all their municipalities – and very likely the current incarnation of the world banking system.
This process is really out of control now.
The bottom line is the comprehensive bankruptcy of the United States.
The Republican Party under George Bush will be known as the party that wrecked America (release 2.0).
Painful as it is, Americans had better get a new “Dream” and fast. It better be a dream based on the way the universe actually works, which is to say an operating procedure run on earnest effort and truthfulness rather than merely trying to get something for nothing and wishing on stars. We might begin symbolically by evacuating Las Vegas and calling in an air strike on the loathsome place – to register our new reality-based attitude adjustment.
After that, we’ve got to get to work re-tooling all the everyday activities of life, including the way we grow our food, the way we raise and deploy capital, the way we do trade and manufacturing, the way we go from point A to point B, the way we educate children, the way we stay healthy, and the way we occupy the landscape. I know, it sounds like a lot, maybe too much. But grok this: we don’t have any choice if we want a plausible future on this portion of the North American continent.
Of course, none of that is likely to happen.
Instead, and under the worst imaginable economic conditions, we’ll probably embark on a campaign to prop up the un-prop-up-able and sustain the unsustainable – that is, defend every status quo habit and behavior that we’re used to, whether it can be salvaged or not. Of course, this would be a fatal squandering of our dwindling resources, but it tends, historically, to be the last act of the melodrama in any faltering empire.
The result, pretty soon into that process, will be social breakdown and political upheaval.
Every tattoo freak out there who has been prepping for his own starring role in some kind of comic book Armageddon will finally get his chance to shine. Lots of people will get hurt and starve. Property will change hands in a disorderly way.
And at the end of this process an American corn-pone Hitler may be waiting to set everything and everyone straight.
Regards,
James Howard Kunstler
by James Howard Kunstler
There’s a particular moment known to all Baby Boomers when Wile E. Coyote, in a rapture of over-reaching, has run past the edge of the mesa and, still licking his chops and rubbing his front paws in anticipation of fricasseed roadrunner, discovers that he is suspended in thin air by nothing more than momentum. Grin becomes chagrin. He turns a nauseating shade of green, and drops, whistling, back to earth thousands of feet below, with a distant, dismal, barely audible thud at the end of his journey. We are Wile E. Coyote Nation.
(GT sez: Damn, Kunstler stole my Wile E. Coyote anecdote I've been using for 6 months now!)
Is there anyone in the known universe who thinks that the U.S. financial system is not fifty feet beyond the edge of the mesa of credibility?
Nothing will avail now. Not even if Sirhan Sirhan were paroled at noon today and transported directly to the West Wing with a .44 magnum in each hand (and a taxi driven by the Devil waiting outside to take him to the U.S. Treasury and the offices of the Federal Reserve).
It’s hard to imagine what kind of melodramas were unspooling on the Hamptons lawns this weekend, while everybody else in America was watching Nascar, or plying the aisles of BJs Discount Warehouse for next week’s supply of mesquite-and-guacamole flavored Doritos, or having flames and chains tattooed on their necks, or lost in a haze of valium and methedrine.
With the death of the IndyMac Bank last week, and the GSEs Fannie Mae and Freddie Mac laying side-by-side in the EMT van on IV drips, headed for the Federal Reserve’s ever more crowded intensive care unit, there was a sense of the American Dream having passed through the event horizon that denotes the opening of a black hole.
What would happen if the U.S. government acted to bail out these feckless enterprises (and what if they don’t)?
Either way, it’s not a pretty picture.
If Mr. Bernanke does start shoveling loans into the GSE black hole, he’ll further undermine the soundness of his own outfit and do nothing, really, to repair Fannie and Freddie’s structural problem of having securitized too many loans that will never be paid back. If instead Fannie and Freddie are flat-out taken over entirely by the U.S. government (and remember the Federal Reserve is not the government), then the national debt will roughly double overnight – which will pound the U.S. dollar down a rat-hole.
Meanwhile, the foreign holders of those decrepitating dollars might not rush to the redemption window, but they certainly would use them to buy up every oil futures contract on God’s not-so-green Earth as fast as possible – they’d be dumb not to – which would leave American Happy Motorists with gasoline prices north of $5 a gallon, and possibly north of $10. (In that case, say goodbye to the airlines. In fact, say goodbye to what passes for the rest of the US economy, including especially the vaunted retail sector that supposedly counts for 70 percent of the action.)
If Fannie and Freddie are left to die out on the desert floor, say goodbye to the housing market, the major investment banks, countless regional banks, the retirement accounts of virtually everyone in America, the viability of all fifty states’ governments, and the day-to-day operating ability of all their municipalities – and very likely the current incarnation of the world banking system.
This process is really out of control now.
The bottom line is the comprehensive bankruptcy of the United States.
The Republican Party under George Bush will be known as the party that wrecked America (release 2.0).
Painful as it is, Americans had better get a new “Dream” and fast. It better be a dream based on the way the universe actually works, which is to say an operating procedure run on earnest effort and truthfulness rather than merely trying to get something for nothing and wishing on stars. We might begin symbolically by evacuating Las Vegas and calling in an air strike on the loathsome place – to register our new reality-based attitude adjustment.
After that, we’ve got to get to work re-tooling all the everyday activities of life, including the way we grow our food, the way we raise and deploy capital, the way we do trade and manufacturing, the way we go from point A to point B, the way we educate children, the way we stay healthy, and the way we occupy the landscape. I know, it sounds like a lot, maybe too much. But grok this: we don’t have any choice if we want a plausible future on this portion of the North American continent.
Of course, none of that is likely to happen.
Instead, and under the worst imaginable economic conditions, we’ll probably embark on a campaign to prop up the un-prop-up-able and sustain the unsustainable – that is, defend every status quo habit and behavior that we’re used to, whether it can be salvaged or not. Of course, this would be a fatal squandering of our dwindling resources, but it tends, historically, to be the last act of the melodrama in any faltering empire.
The result, pretty soon into that process, will be social breakdown and political upheaval.
Every tattoo freak out there who has been prepping for his own starring role in some kind of comic book Armageddon will finally get his chance to shine. Lots of people will get hurt and starve. Property will change hands in a disorderly way.
And at the end of this process an American corn-pone Hitler may be waiting to set everything and everyone straight.
Regards,
James Howard Kunstler
URGENT ALERT TO ALL MY READERS!
MEDIA ALERT:
Nouriel Roubini predicts the worst financial crisis since the Great Depression and the worst U.S. Recession in the last few decades.
New York, July 15, 2008-
In a series of recent writings on the RGE Monitor Nouriel Roubini – Chairman of RGE Monitor and Professor of Economics at the NYU Stern School of Business - has argued that the U.S. is experiencing its worst financial crisis since the Great Depression and will undergo its worst recession in the last few decades.
His analysis leads to the following conclusions: * This is by far the worst financial crisis since the Great Depression * Hundreds of small banks with massive exposure to real estate (the average small bank has 67% of its assets in real estate) will go bust * Dozens of large regional/national banks (a’ la IndyMac) are also bankrupt given their extreme exposure to real estate and will also go bust * Some major money center banks are also semi-insolvent and while they are deemed too big to fail their rescue with FDIC money will be extremely costly.
* In a few years time there will be no major independent broker dealers as their business model (securitization, slice and dice and transfer of toxic credit risk and piling fees upon fees rather than earning income from holding credit risk) is bust and the risk of a bank-like run on their very short term liquid liabilities is a fundamental flaw in their structure (i.e. the four remaining U.S. big brokers dealers will either go bust or will have to be merged with traditional commercial banks).
Firms that borrow liquid and short, highly leverage themselves and lend in longer term and illiquid ways (i.e. most of the shadow banking system) cannot survive without formal deposit insurance and formal permanent lender of last resort support from the central bank.
* The FDIC that has already depleted 10% of its funds in the rescue of IndyMac alone will run out of funds and will have to be recapitalized by Congress as its insurance premia were woefully insufficient to cover the hole from the biggest banking crisis since the Great Depression
* Fannie and Freddie are insolvent and the Treasury bailout plan (the mother of all moral hazard bailout) is socialism for the rich, the well connected and Wall Street; it is the continuation of a corrupt system where profits are privatized and losses are socialized.
Instead of wiping out shareholders of the two GSEs, replacing corrupt and incompetent managers and forcing a haircut on the claims of the creditors/bondholders such a plan bails out shareholders, managers and creditors at a massive cost to U.S. taxpayers.
* This financial crisis will imply credit losses of at least $1 trillion and more likely $2 trillion. * This is not just a subprime mortgage crisis; this is the crisis of an entire subprime financial system: losses are spreading from subprime to near prime and prime mortgages; to commercial real estate; to unsecured consumer credit (credit cards, student loans, auto loans); to leveraged loans that financed reckless debt-laden LBOs; to muni bonds that will go bust as hundred of municipalities will go bust; to industrial and commercial loans; to corporate bonds whose default rate will jump from close to 0% to over 10%; to CDSs where $62 trillion of nominal protection sits on top an outstanding stock of only $6 trillion of bonds and where counterparty risk – and the collapse of many counterparties – will lead to a systemic collapse of this market.
* This will be the most severe U.S. recession in decades with the U.S. consumer being on the ropes and faltering big time as soon as the temporary effect of the tax rebates will fade out by mid-summer (July).
This U.S. consumer is shopped out, saving less, debt burdened and being hammered by falling home prices, falling equity prices, falling jobs and incomes, rising inflation and rising oil and energy prices.
This will be a long, ugly and nasty U-shaped recession lasting 12 to 18 months, not the mild 6 month V-shaped recession that the delusional consensus expects.
* Equity prices in the US and abroad will go much deeper in bear territory. In a typical US recession equity prices fall by an average of 28% relative to the peak. But this is not a typical US recession; it is rather a severe one associated with a severe financial crisis. Thus, equity prices will fall by about 40% relative to their peak. So, we are only barely mid-way in the meltdown of stock markets.
* The rest of the world will not decouple from the US recession and from the US financial meltdown; it will re-couple big time.
Already 12 major economies are on the way to a recessionary hard landing; while the rest of the world will experience a severe growth slowdown only one step removed from a global recession.
Given this sharp global economic slowdown oil, energy and commodity prices will fall 20 to 30% from their recent bubbly peaks.
* The current U.S recession and sharp global economic slowdown is combining the worst of the oil shocks of the 1970s with the worst of the asset/credit bust shocks (and ensuing credit crunch and investment busts) of 1990-91 and 2001: like in 1973 and 1979 we are facing a stagflationary shock to oil, energy and other commodity prices that by itself may tip many oil importing countries into a sharp slowdown or an outright recession.
Also, like 1990-91 and 2001 we are now facing another asset bubble and credit bubble gone bust big time: the housing and overall household credit boom of the last seven years has now gone bust in the same way as the 1980s housing bubble and 1990s tech bubble went bust in 1990 and in 2000 triggering recessions. And a similar housing/asset/credit bubble is going bust in other countries – U.K., Spain, Ireland, Italy, Portugal, etc. – leading to a risk of a hard landing in these economies.
* But over time inflation will be the last problem that the Fed will have to face as a severe US recession and global slowdown will lead to a sharp reduction in inflationary pressures in the U.S.: slack in goods markets with demand falling below supply will reduce pricing power of firms; slack in labor markets with unemployment rising will reduce wage pressures and labor costs pressures; a fall in commodity prices of the order of 20-30% will further reduce inflationary pressure.
The Fed will have to cut the Fed Funds rate much more – as severe downside risks to growth and to financial stability will dominate any short-term upward inflationary pressures. Leaving aside the risk of a collapse of the US dollar given this easier monetary policy the Fed Funds rate may end up being closer to 0% than 1% by the end of this financial disaster and severe recession cycle.
* The Bretton Woods 2 regime of fixed exchange rates to the US dollar and/or heavily managed exchange will unravel – as the first Bretton Woods regimes did in the early 1970s – as US twin deficits, recession, financial crisis and rising commodity and goods inflation in emerging market economies will destroy the basis for its existence.
* Thus, the scenario of 12 steps to a financial disaster that I outlined in my February 2008 paper is unfolding as predicted. If anything financial conditions are now much worse than they were at the previous peak of this financial crisis, i.e. in mid-march of 2008.
Nouriel Roubini predicts the worst financial crisis since the Great Depression and the worst U.S. Recession in the last few decades.
New York, July 15, 2008-
In a series of recent writings on the RGE Monitor Nouriel Roubini – Chairman of RGE Monitor and Professor of Economics at the NYU Stern School of Business - has argued that the U.S. is experiencing its worst financial crisis since the Great Depression and will undergo its worst recession in the last few decades.
His analysis leads to the following conclusions: * This is by far the worst financial crisis since the Great Depression * Hundreds of small banks with massive exposure to real estate (the average small bank has 67% of its assets in real estate) will go bust * Dozens of large regional/national banks (a’ la IndyMac) are also bankrupt given their extreme exposure to real estate and will also go bust * Some major money center banks are also semi-insolvent and while they are deemed too big to fail their rescue with FDIC money will be extremely costly.
* In a few years time there will be no major independent broker dealers as their business model (securitization, slice and dice and transfer of toxic credit risk and piling fees upon fees rather than earning income from holding credit risk) is bust and the risk of a bank-like run on their very short term liquid liabilities is a fundamental flaw in their structure (i.e. the four remaining U.S. big brokers dealers will either go bust or will have to be merged with traditional commercial banks).
Firms that borrow liquid and short, highly leverage themselves and lend in longer term and illiquid ways (i.e. most of the shadow banking system) cannot survive without formal deposit insurance and formal permanent lender of last resort support from the central bank.
* The FDIC that has already depleted 10% of its funds in the rescue of IndyMac alone will run out of funds and will have to be recapitalized by Congress as its insurance premia were woefully insufficient to cover the hole from the biggest banking crisis since the Great Depression
* Fannie and Freddie are insolvent and the Treasury bailout plan (the mother of all moral hazard bailout) is socialism for the rich, the well connected and Wall Street; it is the continuation of a corrupt system where profits are privatized and losses are socialized.
Instead of wiping out shareholders of the two GSEs, replacing corrupt and incompetent managers and forcing a haircut on the claims of the creditors/bondholders such a plan bails out shareholders, managers and creditors at a massive cost to U.S. taxpayers.
* This financial crisis will imply credit losses of at least $1 trillion and more likely $2 trillion. * This is not just a subprime mortgage crisis; this is the crisis of an entire subprime financial system: losses are spreading from subprime to near prime and prime mortgages; to commercial real estate; to unsecured consumer credit (credit cards, student loans, auto loans); to leveraged loans that financed reckless debt-laden LBOs; to muni bonds that will go bust as hundred of municipalities will go bust; to industrial and commercial loans; to corporate bonds whose default rate will jump from close to 0% to over 10%; to CDSs where $62 trillion of nominal protection sits on top an outstanding stock of only $6 trillion of bonds and where counterparty risk – and the collapse of many counterparties – will lead to a systemic collapse of this market.
* This will be the most severe U.S. recession in decades with the U.S. consumer being on the ropes and faltering big time as soon as the temporary effect of the tax rebates will fade out by mid-summer (July).
This U.S. consumer is shopped out, saving less, debt burdened and being hammered by falling home prices, falling equity prices, falling jobs and incomes, rising inflation and rising oil and energy prices.
This will be a long, ugly and nasty U-shaped recession lasting 12 to 18 months, not the mild 6 month V-shaped recession that the delusional consensus expects.
* Equity prices in the US and abroad will go much deeper in bear territory. In a typical US recession equity prices fall by an average of 28% relative to the peak. But this is not a typical US recession; it is rather a severe one associated with a severe financial crisis. Thus, equity prices will fall by about 40% relative to their peak. So, we are only barely mid-way in the meltdown of stock markets.
* The rest of the world will not decouple from the US recession and from the US financial meltdown; it will re-couple big time.
Already 12 major economies are on the way to a recessionary hard landing; while the rest of the world will experience a severe growth slowdown only one step removed from a global recession.
Given this sharp global economic slowdown oil, energy and commodity prices will fall 20 to 30% from their recent bubbly peaks.
* The current U.S recession and sharp global economic slowdown is combining the worst of the oil shocks of the 1970s with the worst of the asset/credit bust shocks (and ensuing credit crunch and investment busts) of 1990-91 and 2001: like in 1973 and 1979 we are facing a stagflationary shock to oil, energy and other commodity prices that by itself may tip many oil importing countries into a sharp slowdown or an outright recession.
Also, like 1990-91 and 2001 we are now facing another asset bubble and credit bubble gone bust big time: the housing and overall household credit boom of the last seven years has now gone bust in the same way as the 1980s housing bubble and 1990s tech bubble went bust in 1990 and in 2000 triggering recessions. And a similar housing/asset/credit bubble is going bust in other countries – U.K., Spain, Ireland, Italy, Portugal, etc. – leading to a risk of a hard landing in these economies.
* But over time inflation will be the last problem that the Fed will have to face as a severe US recession and global slowdown will lead to a sharp reduction in inflationary pressures in the U.S.: slack in goods markets with demand falling below supply will reduce pricing power of firms; slack in labor markets with unemployment rising will reduce wage pressures and labor costs pressures; a fall in commodity prices of the order of 20-30% will further reduce inflationary pressure.
The Fed will have to cut the Fed Funds rate much more – as severe downside risks to growth and to financial stability will dominate any short-term upward inflationary pressures. Leaving aside the risk of a collapse of the US dollar given this easier monetary policy the Fed Funds rate may end up being closer to 0% than 1% by the end of this financial disaster and severe recession cycle.
* The Bretton Woods 2 regime of fixed exchange rates to the US dollar and/or heavily managed exchange will unravel – as the first Bretton Woods regimes did in the early 1970s – as US twin deficits, recession, financial crisis and rising commodity and goods inflation in emerging market economies will destroy the basis for its existence.
* Thus, the scenario of 12 steps to a financial disaster that I outlined in my February 2008 paper is unfolding as predicted. If anything financial conditions are now much worse than they were at the previous peak of this financial crisis, i.e. in mid-march of 2008.
LOG ON PROBLEMS ON MARKETWATCH
Tuesday 7/15/08 6:29 PM PDST
Both Geist, Goldmelter and myself are not able to log into GOLDTRADER'S GROUP
on MarketWatch...
I have sent MW an email that should get their attention...
I can't even create a new account, as they say a brand new email I just recently
created at Gmail, is not valid...
Please try to log on to the Group and let me know what happens..
Send your messages to GOLDTRADERRR@GMAIL.COM
GT
Both Geist, Goldmelter and myself are not able to log into GOLDTRADER'S GROUP
on MarketWatch...
I have sent MW an email that should get their attention...
I can't even create a new account, as they say a brand new email I just recently
created at Gmail, is not valid...
Please try to log on to the Group and let me know what happens..
Send your messages to GOLDTRADERRR@GMAIL.COM
GT
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