patrick.net

I wonder what the real unemployment rate would be in a truly healthy capitalist society.

So many companies that are employing people are on a credit lifeline. Either through venture capital, debt, or even now our government.

How much of that is due to the credit bubble? If you immediately bring the debt system back to reality, what is a reasonable unemployment rate? 10%? 15%?

As long as all these bailout programs don't work, de-flation is the order of the day and prices will keep going down and you really have to worry about de-flation with a "d".

But, the Federal Reserve and world central banks have engaged in activity, even up to today's money market fund action, that can best be described as hyper-inflationary. They are inflating their balance sheets and they are inflating the world money supply to a degree no one ever thought we would see.

The fear is that "when the chain catches the sprocket" and the credit starts flowing and everything starts moving again, then we flip into a hyper-inflationary environment because of all the money that's been put into the system.

Money is being destroyed at a rate many times greater than all the worlds' central banks can create it. Hundreds of trillions in leverage are disappearing. That is why there is such a growing downdraft of deflation. And it is why the liquidity-trap is real. The Fed can keep on printing all they want, it just mainly goes into this or that bank's balance sheet to lower their leverage a bit more.

The actual money supply isn't growing all that much, netted out. That's what keeps Heli Ben up at night. For all his truly well studied Great Depression knowledge, it could well be that deflation is just the inevitable outcome of the perversion of capitalism by oligarchs.

---

The term "toxic asset" has been in use for at least 12-15 years. Probably for longer. It comes from the name for the lowest, junk-rated debt tranche. I believe that itself came out of the insurance industry, which I know was doing tranching of debt in the early 1980s, probably earlier.

Randy,

I don't think the Fed has exhausted their ways of printing yet.

Japan is different from us, because

1) Japan didn't get a coordinated rate cut or printing support from around the world, so there is leakage, lots of Yen are borrowed from the government to fund carry trade in other countries, therefore, the supply of Yen got sucked into a blackhold.

That is also why when everyone else is in a deflation mode, Japan is having its highest inflation in years, because the Yen carry trade unwinding is bringing home all the Yen!

2) Yen is not the world's reserve currency, USD is. They are a much smaller country with extremely limited resources, they could not print recklessly to jeopardize trade. They had to maintain some sort of value of Yen so that they could obtain the much needed resources. Not the case with the US, except for oil, which we could obtain through military means, we can afford to be far more reckless in printing.

3) We have not even started the Japanese style printing yet. Japan's biggest printing was building roads and bridges to nowhere. We have yet to get to that point when grand, multi-year infrastructure plans are funded by the government creating employment. That is the most efficient way of distributing printed money.

I think there is a time lag between the printed money and the inflation. Give it 6-12 months, inflation will come roaring back, particularly that we are getting coordinated printing support from all CBs.

Yahoo to fire at least 1,500 workers after third-quarter profit plunges 64 percent

SAN FRANCISCO (AP) -- Yahoo Inc. will fire at least 1,500 workers to cope with a crumbling economy that dented its third-quarter profit and turned up the heat on the slumping Internet company's management as investors stew over a missed opportunity to sell to Microsoft Corp. for $47.5 billion.

The purge outlined Tuesday represents a 10 percent reduction in Yahoo's payroll of about 15,000 employees. It's the second time in nine months that Yahoo has resorted to mass layoffs in what so far has been an ineffectual effort to rebound from a financial funk that has left its stock price near a 5 1/2-year low.

I worked for Yahoo and could not sustain politics and resigned after five months. I worked in Panama project ....

PermaRenter,

What was the Panama project. Building a proverbial canal into search advertising revenue?

Hanky Pank Paulson was on Charlie Rose (PBS) tonight. It is amazing how much less smart he sounds when he has to hold an actual conversation.

Here's one of the statements that Paulson made (lightly paraphrased from memory):

He did not make the decision to let Lehman Brothers go bankrupt, because there was no buyer and hence no decision to make, and the Fed did not have the authority to do anything.

Does he believe anyone will fall for that one? Fed could bail out AIG but not LEH?

>> What was the Panama project.

http://yhoo.client.shareholder.com/press/ReleaseDetail.cfm?ReleaseID=226887

SUNNYVALE, Calif., Jan 23, 2007 (BUSINESS WIRE) -- Yahoo! Inc. (Nasdaq: YHOO), a leading global Internet brand and one of the most trafficked Internet destinations worldwide, today announced that it will launch its new search marketing ranking model in the U.S. on Monday, February 5. With the new ranking model, all Yahoo! search marketing ads in the U.S. will be ranked by quality in addition to keyword bid price. As a result, Yahoo! will be able to provide a more relevant search experience to users, more valuable customer leads to advertisers, and additional opportunities to its distribution partners.

"Yahoo! is very excited to introduce our new, more quality-focused ranking model because it has the power to significantly enhance the experience we deliver to our users and unlock the full potential of Yahoo!'s search marketing network," said Terry Semel, chief executive officer, Yahoo! Inc. "With this important piece in place our new search marketing system will allow Yahoo! to more effectively connect people with the businesses, products, services and information they are passionate about."

PermaRenter Says:
Yahoo to fire at least 1,500 workers after third-quarter profit plunges 64 percent

The "real number" that I heard was closer to 3500 - not sure whether the announcement of 1500 is the first of several cuts, or if there is a different reason for the diff, or if the 3500 rumor was false.

It looks like most of the cuts so far are in the overhead roles (product marketing, administrative, etc.) and fewer in the core engineering talent. Although I have recently got a significant spike in linked-in messages from Yahoo engineers looking to jump ship. I cannot imagine why any talented technical staff would stick around at this point.

Yes.

Where have all the white swans gone?

PermaRenter,

I'll take that as a "yes" :-)

Derivitives are begining to blow up.
That slow motion train wreck we had in the markets until they went to heck. . . well the derivitve market is going that way.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a5x0jMKZf4yc&refer=home

Uhg.

Now this is very "interesting"": Banks have been holding back on realizing losses, EXCEPT when they are about to be taken over, in which case they realize as much as possible.

Case in point, Wachovia just reported about 24B in losses today, in time for the takeover by Wells Fargo.

http://tinyurl.com/597gw8

Not that anyone is surprised, but clearly people are wondering what is hiding in the balance sheets of the supposedly "good" banks.

From Duke's Link:

The banks that structured the securities and investors both failed to do ``fundamental credit analysis,'' said Janet Tavakoli, president of Tavakoli Structured Finance in Chicago. ``They were using correlation models, they were using spread models, but they weren't doing analysis on the underlying corporations.''

'Cause, dontcha know, everything always goes UP so why do we need to worry about Underlying Strength?

I think the thing with Wachovie was this: the IRS just changed the tax code and how it allows for losses. What wells is doing is dragging losses forward to realize tax savings. It pays to mark-down now. So, models were tweaked. . .
If itturns out to not be as bad, the IRS will recapture the tax savings in the future.

Does anyon believe it won't be as bad?

Duke, I had not seen that. Do you have a reference on the iRS change?

I get the feeling we're close to the next inning. I think everyone is starting to realize that all of our government's activity is only helping banks, and no one else.

In theory, they are helping the banks lend more money. But we all know no one wants to borrow right now except those who shouldn't be. And the banks won't lend to them anyways. So in summary the biggest free market intervention in the history of our country is simply being used by banks to deleverage. Wonderful!

Jobs are being lost at an alarming rate as companies come to grips with what will be the worst Christmas season in many years. Any products even slightly frilly (like everything Circuit City carries for example) will sit on the shelves untouched. Look for any retailer that focuses on such products to get slammed in Q4.

Does the government really think people are going to keep buying speaker sets for their ipods when they are desperately trying to figure out how their going to afford their house for the next 2 months? I think we'll cross the double digit unemployment before the end of Q1 09, as companies on debt-based lifelines burn through their remaining cash and go belly up.

Meanwhile the market is about to retest it's low point, less than 2 weeks after it hit it the first time. That is rather soon from a technical perspective. There is a good chance it won't hold as it's getting harder and harder for the powers that be to trick the people into thinking help is on the way. I get the feeling we might be retesting the 2002 lows before the end of the year, and maybe even in the next month.

Remarkable times.

Now, why on earth we are still honoring CDS with no basis in economic reality is beyond me. Annul these stupid things! THAT will give people the confidence to invest.

I think the issue with CDS' is that there are a million wannabe' Nassim Taleb's out there trying to replicate his performance during the S&L fiasco.

I say junk the whole market. If hedge funds want to make money, let them invest in US companies, instead of betting they go broke.

I think we’ll cross the double digit unemployment before the end of Q1 09, as companies on debt-based lifelines burn through their remaining cash and go belly up.

That may be true is wages do not decline. China is already closing literally thousands of factories (ABC News) as demand fron the US dries up. Part of the demand loss is more US local manufacture, such as furniture making returning to Carolina from China. As shipping costs increase and US wages fall, we may see the "insource" trend continue. If so, US unemployment will not be so high, but the the jobs created will pay less. But with decreased housing costs, those lower wages may afford the same market basket as the previous debt-inflated wages.

I say junk the whole market. If hedge funds want to make money, let them invest in US companies, instead of betting they go broke.

I am frustrated at this kind of attitude. It is precisely why we are here in the first place.

Mal-investments must be liquidated. Why favor investment in a time of purge?

Annul these stupid things! THAT will give people the confidence to invest.

When policy makers start annulling private contracts based on their self-righteous judgment, people will LOSE all confidence to invest.

Do you admire Hugo Chavez?

All-right, lets take Peter' argumnet.
"Hi, I am in insurance comany. Pay me $1k a year and I will insure your $300k home."
However, the insurance company sets aside NO money to actually pay people. What it does is plays at the race track losing everything as fast as it comes in. No one cares since there are no fires for 8 years. Then, we get a big fire. It burns hundreds of thousands of homes.
And the inurance company laughs and simply goes out of business.

Look, regulation is there to ensre that insurance companies actually make real provisions for real risk based on real analaysis.

I keep wondering who would willingly be a countryparty to hedging debt bets? I mean, we ALL see massive debt loses coming. So who? Either their cost shold shoot way up (and they are, but still not enough) or the company is already bankrupt. It is willing to keep taking on bad CDS deals in the hope the new premiums will help it pay off its old bad bets and that eventually they will simply get lucky and stop having to pay out. Its like betting bigger andbigger at Vegas (until you go bankrupt).
OR the get the US governement to back them and then take on ay CDS deal out there, cuz' why not? Its just Unlce big bucks that cover pay outs.

Illegal contracts are anulled ALL THE TIME. IT IS A PART OF LAW! We frequently only lear later how some product is used in an unintended manner which has devestating consequences. CDS, since they are NOT tied to an interest in the actual Debt, and Since the Hedge can be many many times larger than the debt itself mke no econmic sense.

What we have is heigtened risk and heghtened volatility. The lesson lerned by these people is that the governement wll step in using its systemic risk clause. Heck, it is part of their business model. Dick Fuld admitted as much. "Why didn't I get MY bailout?"

If we had clear access to the worlds positions on CDS you would see the world - um sweat. Becuase you cannot even puish he bad guys. If you drive their stock to zero for their stupid positions, you suddenly discover that the debt of the stupid guys is backed by other stupid guys. And so on. For more than 10x world GDP. Since the bad cannot be punished, becasue everyone is bad, you must simply annull. The only other options is to asymetrically reward people in more ordinal positions.
For example, when we get runs on money market funds, at some threshold they HAVE to shut down a fund. The thinking is that the first people out the door get all of their money, and each person in turn less and less until evetually the last person (at the leverage limit) gets alomost nothing. To avoid self-fulfilling panicks we wite into law how to shudder funds. Just as we right into la how we annull unenforcable contracts.

I admire your purist views, Peter, but they are remarkably shallow in the context of how the world actaully works. The abuses of 'pure market forces' are amazing - and we have already seen the abuses.

Your snotty question about Chavez is beneath you and I will not respond in kind.

Strange, I find myself agreeing with Peter P alot lately.

Thanks, Lost Cause.

Insurance regulations protect consumers. Exotic financial instruments are not designed for consumers. They are intended for supposedly sophisticated institutions.

Every single book on financial risks talks about counter-party risks in derivatives (esp. OTC derivatives).

Regulating private transactions is not the answer.

Transparency is a much better step. We also need better risk management models. We will learn. And we have to learn faster than overzealous policy makers.

I am frustrated at this kind of attitude. It is precisely why we are here in the first place.

Absolutely not.

We are here because of the immutable nature of Gresham's law. Systemic fraud has overwhelmed the financial markets and all but driven out all the good money.

You do realize we are talking about fraudulent insurance against fraudulent loans graded with fraudulent ratings?

All thanks to de-regulation of the free market? How on earth could that be an argument for even *less* regulation?

Epic. F*cking. Fail.

You can't have transparency in unregulated markets. Fraudulent transactions need to be opaque in order to attract participants on the losing side. The only thing that can compete against fraud is more fraud, so the most successful instruments need an opacity approaching infinity. This is the situation we find ourselves in now.

They are intended for supposedly sophisticated institutions.

Like pension funds?

The government should bail out the most regulated public holders of CD's; let the hedge funds rot and then either ban swaps or regulate them like they do insurance (which is what they are).

Here's a brilliant idea; how about we divide the market up into regulated and unregulated securities. Regulated securities are implicitly backed by the government/taxpayer. Unregulated ones are not.

Let the market decide which one is the better investment.

If you even consider the possibility that this mess was partially caused by an imprudent interest rate policy than OVER-REGULATION could be the culprit.

Regulated securities are implicitly backed by the government/taxpayer. Unregulated ones are not.

No securities should be backed by the taxpayer.

Like pension funds?

Yes. Hopefully this spells the end of defined-benefit retirement plans.

Here is my proposal of the perfect retirement plan:

1. Abolish capital gains tax
2. Let people manage their own retirements in their previously "taxable" accounts
3. Scrap social security

Another Berkeley Hills Firestorm special.
7235 BUCKINGHAM BLVD
Sold: 9/21/2006 $1,500,000
Repossessed by bank on 6/25/2008 for $1,200,000.
Currently for sale for $1,072,900
Unfortunately, property shark doesn't have the loan info so we can't tell if there was a luck second lien holder.

Why should the government favor pension funds over hedge funds? Don't pension funds invest (at least partially) in hedge funds?

Why should the government favors pension funds over hedge funds? Don’t pension funds invest (at least partially) in hedge funds?

Pension funds are tightly regulated by the government and restricted as to their investment methodology. They have strict requirements regarding leverage and shorting, for example.

Hedge funds are almost entirely unregulated and have no such restrictions. Pension funds cannot invest in hedge funds. Hedge funds are only open to accredited investors (i.e. rich people).

Pension funds cannot invest in hedge funds.

Pension Officers Putting Billions Into Hedge Funds

http://www.nytimes.com/2005/11/27/business/yourmoney/27hedge.html

Hedge funds are only open to accredited investors (i.e. rich people).

Many pension funds are richer than most rich people. Besides, ever heard of Fund of funds?

In my opinion ONLY, an investment plan is unsound unless shorting is allowed.

Not investment advice

The concept of a liquidity trap is flawed. The theory that pumping money into the economy can somehow fix things is flawed. Japan is proof enough of this.

The simple solution to this imaginary "trap" is to do nothing.

Prices are too high and need to come down. Overcapacity needs to worked through. Resources need to be freed from unproductive activities.

It's that simple.

deflation says:
"The concept of a liquidity trap is flawed. The theory that pumping money into the economy can somehow fix things is flawed. Japan is proof enough of this.

Liquidity always helps if lack of it is causing the economy to function below its capacity.I don't know if that was the case in Japan.
I completely agree that throwing more liquidity at an economy functioning at full capacity will stoke inflation and do no good. classic text book case and fed is well aware of it.

BTW , Gold is down a lot. I hope we don't have many folks here who were victims of irrational Gloominess and thus bought at peak prices.

Many pension funds are richer than most rich people. Besides, ever heard of Fund of funds?

Thank you for reminding me why I moved out of New Jersey.

However, I will happily admit my error and appreciate the correction.

O.T.

Anyone care to freak out? See the latest from the Market Ticker.

http://market-ticker.denninger.net/

Comments?

Andrew Lahde: Now I'm out of the hedge fund business, I can finally enjoy myself

Andrew Lahde was the manager of a small US hedge fund that returned 866 per cent to investors in 2007. Last week, he closed down the fund. The following is an extract from his farewell letter...

Thursday, 23 October 2008

Recently, a hedge fund manager who was closing up a $300 million fund was quoted as saying, "What I have learned about the hedge fund business is that I hate it." I could not agree more with that statement.

I was in this game for the money. The low-hanging fruit, the idiots whose parents paid for prep school, Yale and then the Harvard MBA, who were there for the taking.

These people who were (often) truly not worthy of the education they had received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behaviour supporting the aristocracy only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

I will no longer manage money for other people or institutions. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. I have enough of my own wealth to manage. I will let others try to amass nine, 10 or 11-figure net worths.

Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two-week vacation in January during which they will be glued to their Blackberries or other such devices.

What is the point? They will all be forgotten in 50 years anyway. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life. So this is it. With all due respect, I am dropping out. Please do not expect any type of reply to emails or voicemails within normal time frames or at all.

I have no interest in any deals in which anyone would like me to participate. I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the sub-prime debacle.

kewp, don't worry...

Sometimes, I argue just for the sake of arguing :)