The debt fueled bubble and the recession that followed

[kujo]

Another quote:
"You know how screwed up Europe is when you have a German Pope and an Italian Central Banker"

the solution to sovereign debt crisis in one word: dilution

First USD and GBP
then EUR
next JPY
RMB is already diluted artificially, will China let it appreciate or dilute it further?

[Peter]

the solution to sovereign debt crisis in one word: dilution

Right on. Thank you for that insight. Commodities should do really well in this scenario. There is wide consensus on physical delivery vs paper purchases.

However this is a market that is completely leveraged and manipulated as well. Word on the street is that MF Global was hit to pare the heat. Stalwarts such as Gerald Celente (long time gold bug) and Bill Fleckenstein have lost money (both lost personal accounts in the six figures). Jon Corzine has gone under the radar, but for how much longer?

Clarification on the previous Kyle Bass interview: While Kyle responded in a calm and orderly way, the BBC interviewer seemed clueless and mean-spirited. She will likely fit right into CNBC (a stark indicator of the lame and clueless US mainstream media).

On another note, here's some Sunday humor. Bankers vs Consultants hip-hop (caution, it auto-starts and is loud).

[Peter]

Jon Corzine subpoenaed to Congress next week. Zero hedge thinks the hearing will look like this

[kujo]

An illustrative article in WSJ: Subsidizing Wall Street to Buy Chinese Solar Panels

Some excerpts below:

Law of Misguided Subsidies: Whenever Washington disrupts a market by dumping subsidies into it, Wall Street will find a way to pocket a majority of the money while the intended subsidy beneficiaries are harmed by the resulting market turmoil.
.........
Consider the current 30% federal solar energy subsidy. A home solar system with 60 solar panels produces about 15,000 watts of power, enough to completely offset the $6,000 annual electricity bill of a typical upscale California home. The system costs about $90,000 prior to the 30% federal income-tax credit, which reduces its cost to $63,000. After a simple payback period of about 10 years, the homeowner literally enjoys free electricity for the remainder of the guaranteed 20-year system life, a very profitable 10 years.
.........
There is now a growing market for what might be called "solar-backed securities." Wall Street understands the time-value of money; the federal government and consumers do not.

[kujo]

BTW, Corzine was not using the word "fifth" today. Instead used a lot of "intend" and "direct" in his answers, to avoid criminal charges later on...

[Peter]

Tomorrow if you show up at your bank and ask for your money, and they say i don't know, what would you do? Yes, that is exactly what this prick Corzine has told Congress. Farmers in Minnesota lose their livelihoods, but the primary dealers continue profiting from the largesse of the Fed.

What a farce our country has become.

[kujo]

From one of the farmers:

Commingling or whatever they call it in their world -- back on Main Street, it's called stealing

http://money.cnn.com/2011/12/12/news/co ... al_senate/

[prasen9]

Corzine was a smart guy with future political ambitions. This thing is like committing career suicide. I don't think he personally gained that much vis-a-vis his personal wealth. Why did he do these things? Can anyone explain this nonsense? It makes no sense to me. Alternatively, we should try to figure out who got how much money. That may shed a light.

[kujo]

It doesn't make any sense. I believe he was throwing good money after some bad money (losses) in trying to save the firm and the bets it made; ended up where he is now....


Meanwhile, the "end of Sparta" or more commonly - PIIGS After Three Tries, Germany Has At Last Won Europe

[Peter]

Excerpts from a book i read recently. Boomerang by Michael Lewis

Final chapter:
States tightening the screws on cities and counties. The cities are where most of the pain will be felt
The US national economy is a collection of regional economies (Meredith Whitney)

States are grappling with:

* Underfunded pension funds
* Assumption of 8% returns
* Reduction in federal dollars
* Depression in tax revenues caused by a soft economy

Companies are more likely to flourish in the stronger states. Ultimately people will follow these companies.

The country might organize itself into zones of financial security and financial crisis.

The folks who cannot relocate will become more dependent on welfare.

California is in the most serious trouble.

People want services and not to pay for them (same as Greece)

Legally obligated to meet pension fund costs, cities will have to increasingly cut public services.

Not a hypothetical situation, but a mathematical inevitability.

Service-level insolvency (scarce operational budget)

We have suffered from a series of mass delusions. We're all going to be rich. We're all going to live forever.

The problem with police officers and firefighters isn't a public-sector problem; it isn't a problem with government; it's a problem with the entire society. It's what happened on wall street in the run-up to the subprime crisis. It's a problem of people taking what they can, just because they can, without regard to the larger social consequences. It's not just a coincidence that the debts of cities and states spun out of control at the same time as the debts of individual Americans. Alone in a dark room with a pile of money, Americans knew exactly what they wanted to do, from the top of the society to the bottom. They'd been conditioned to grab as much as they could, without thinking about the long-term consequences. Afterward, the people on wall street would privately bemoan the low morals of the American people who walked away from their subprime loans, and the American people would express outrage at the wall street people who paid themselves a fortune to design the bad loans.

Vallejo (city) 's main disease was not financial. That was the symptom. The disease was the culture. The solution is to learn how to behave.


* Being respectful towards each other
* Integrity
* How to strive for excellence

Human beings are neurologically ill-designed to be modern Americans. Human beings evolved in an environment of scarcity. It was never desgined, at least originally, for an environment of extreme abundance.

Human brains have the core of the average lizard. Wrapped around this reptilian core, is a mammalian layer (associated with maternal concern and social interaction). And around that is wrapped a third layer, which enables feats of memory and the capacity for abstract thought. The only problem is that our passions are still driven by the lizard core. We are set up to acquire as much as we can of things we perceive as scarce, particularly sex, safety and food. The allure of chocolate cake even when on a strict diet. We cannot think of the long term consequences.

Lizard core is instant gratification. We've created physiological dysfunction. We have lost the ability to self-regulate, at all levels of the society. ($5 M at GS is the chocolate cake upgraded.)

Everywhere you turn you see Americans sacrifice their long-term interests for a short-term reward. Our only hope is if we learn to deal with an environment of scarcity.

[Atithee]

Not necessarily agreeing with all the thoughts in Peter's post, but having lived here for the past 25+ years, this cultural change has paralleled the break neck speed of immigration (both legal and illegal). The mentality mentioned here is subtly a result of the large influx of the seriously (economically) deprived population since the first amnesty in the eighties. It is a subtle change, but clear to me. The "entitlement" mentality is certainly on the rise. I am not saying it was not there before; but, in this country, civic duty and general good for the society (including charitable giving, K-12 education, basic infrastructure including roads, power, firefighting, and law enforcement) was always prioritized and never seen as optional. Unfortunately, these very institutions have jumped on the gravy train with glee (largely based on the ill conceived wealth mirage designed by the "financial engineers" on the Wall Street) and caused an unsustainable situation.

Sorry Jay (and PKB), I cannot share your optimism about America's growth and positive outlook. It seems to me that we are once again making every effort to repeat what got us here in the first place. Everywhere I turn, the real estate rebound is touted as the cure all. However, all the efforts to prop up the real estate are once again premised on somehow making people who would not be able to afford mortgages, take them up again, so we can artifically prop up the agents, brokers, appraisers, remodeling, and construction sectors. The artificially inflated real estate was merely a ponzi scheme (taking a real one dollar and turning it into a fictitious hundred dollar bill or more) and the only thing that kept the economy afloat in the Bush years to fund the wars that are not worth either the moral or definitely the financial cost in my opinion.

[jayakris]

Atithee, I agree with almost all of what Peter's post above and your post here said. My only problem is in the timing of solutions. When people are out of jobs and simply in a mess that they themselves may have created with the help of the government, you first do whatever it takes to help the people to survive, and get some movement in the economy. Yes, economies are cyclical but I don't believe that the cycles' frequency is automatic. You have to do some things to accelerate the swing to the positive side. Once that happens, THEN we can talk about the issues you and Peter raise. Fairly soon, that is. Like in a year or two, hopefully. I simply don't think the sky will come down that fast. The extreme reaction over the last two years about spending, is what bothered me. Can't keep doing it, yes.

May be I am biased as an academician, but whether to be optimistic or pessimistic about the future, to me, depends on what I see the country does in keeping (or in some cases regaining) the leadership it had in education and R&D. I don't have a very clear sense of whether we are doing better or worse right now.

Jay

[Atithee]

We can cut our losses in the wars we are fighting for no good reason and invest at home right now. What do we have to show for the wars we have fought? The US is far less secure, both psychologically and realistically, it is hated by even more people (who also love the American ways in a cruel irony), the oil prices have shot up many fold, many soldiers and innocents on all sides have been killed, and all we have achieved is getting rid of Saddam and Osama. Truth be told, the internal uprising in the Arab world has achieved a lot more with non-violent means than all these wars combined have.

You are a civil engineer Jay and know that the infrastructure that was the envy of the world is in such dismal shape here. I dread driving over bridges in the US now. The car loses its alignment every day due to the pot holes. The roads in Mexico and India are starting to look good. I have seen more power outages in the last five years than the previous twenty. There is so much we can do for our country rather than fighting the wars without either a cause or a solution at least in my mind.

You live in California and are part of the UC system. Don't even get me started on how despite paying the highest state income tax and sales tax, and even the Prop 13 protected property tax, I dare not send my child to most silicon valley public schools. The public colleges are getting out of reach of even people earning over $100K annually. Health care is draining away 20-30% of GDP, yet no one can afford minor hospitalization costs. So many uninsured folks who are priced out of a basic human need despite such high per capita spend. It is not that we are not spending Jay; we are spending it in the wrong places.

Where does it end? What gives you hope? There simply are no good jobs left here. We build apps, gossip sites, and social networks that are really the most unsocial things around making us fat, lazy, and unproductive. Apple is worth half a trillion dollars and GM etc. who actually make a product are needing bailouts. Apple recently claimed that it creates over 400K American jobs that include the UPS drivers who deliver their ipods, ipads. And the auto industry, which actually employs these many Americans or more, struggles to even survive. Well, good for the few Apple employees and the stockholders but this is not what will bring the country out of mess. Sorry, I forgot about the next big thing -- Green jobs and the Green industry -- what a joke!

I have written on my remedy for this issue before in the forum. The latest posts just opened the wounds once again. Sorry, but US is not what it used to be and I doubt if it can ever reclaim its glory ever. I believe that our high dollar products (big part of GDP) are arms and planes. All these wars around the world keep us in business. Pakistan buys F-16s. It employs a lot of Lockheed/Boeing type of employees. We have gone too far down a suicidal path. When quarterly earnings start mattering more than the strategy, you can start counting the days. Wall St has played Satan's role quite well and refuses to reform itself. Oh, yeah, I forgot, Facebook's IPO is imminent. That'll be the messiah we've been waiting for, right? Please do not "unfriend" me for my views now. OK?

[jayakris]

Hey, whatever gave you any idea that I would disagree with you, Atithee? I did not say that I am that positive about the future or anything, though I still don't think that anybody else in the world is doing so well as to overtake the US that easily with a better future (well, has somebody come up with technological advances that are earthbreaking in any area elsewhere? I doubt it. For all I know, the next advance could well come from the US, still... but that is all another discussion). The US condition has not that drastically deteriorated like you would seem to imply. I have had only one power outage in my home in the last 10 years. In fact, the infrastructure conditions were worse a couple of decades back - but much more needs to be done. The rest of the world is still quite behind, except that newly built things will always look better than what was built decades back.

The problem, I feel, is that a lot of folks in this country just seem to feel that US falling behind just because a lot of the rest of the world is catching up. But in many ways, they are all way behind US in many many things too.

Anyway, I think you were mistaken when you said I was positive like PKB. Probably because of my comments on Obama and deficit spending in another thread. But that is a separate matter. What you are talking about are issues resulting from what successive US governments have done over the past several decades. I was talking about what Obama had done recently, none of which is the cause for the situation you described. My point was that the solution to fixing issues just didn't seem to be to over-react and cut all spending. That's all.

Jay

[Peter]

Jim Grant on CNBC (yeah) today. Capitalism is an alternative for what we have now.

Grant is spot on. Although he forgets to mention why the capital markets are being gamed. It is to recapitalize the banks, pure and simple. And to perpetuate the deficit/debt ponzi. Genuine masters at work.