Signs of the Economic Apocalypse, 6-25-07
Gold closed at 657.00 dollars an ounce Friday, down 0.3% from $658.70 at the close of the previous Friday. The dollar closed at 0.7426 euros Friday, down 0.6% from 0.7469 at the previous week’s close. That put the euro at 1.3466 dollars compared to 1.3388 the Friday before. Gold in euros would be 487.90, down 0.8% from 492.01 for the week. Oil closed at 69.14 dollars a barrel Friday, up 1.7% from $68.00 at the close of the week before. Oil in euros would be 51.34 euros a barrel, up 1.1% from 50.79 for the week. The gold/oil ratio closed at 9.50 Friday, down 2.0% from 9.69 the Friday before. In U.S. stocks, the Dow Jones Industrial Average closed at 13,360.26 Friday, down 2.1% from 13,639.48 at the close of the week before. The NASDAQ closed at 2,588.96 Friday, down 1.5% from 2,626.71 for the week. In U.S. interest rates the yield on the ten-year U.S. Treasury note closed at 5.13% Friday, down four basis points from 5.17 at the end of the previous week.
Stocks fell last week on news that problems in the subprime mortgage market are affecting hedge funds.
Wall Street stumbles as subprime worries reemerge
Jun 22, 2007
NEW YORK (Reuters) - Stocks tumbled on Friday, wrapping up their worst week since a global sell-off in February amid fears that trouble at two Bear Stearns hedge funds may signal worse problems lie ahead for credit markets.
Investors also were rattled by news that Democrats in the U.S. Congress introduced legislation to end a tax advantage for investment fund managers as well as a jump in volatility ahead of the rebalancing of several important benchmark indexes.
The session's losses did not derail the market debut of private equity firm Blackstone Group LP, which surged over 13 percent following the biggest U.S. initial public offering in five years.
However, the broader financial sector did not fare nearly as well. The S&P financials group sank to a two-month low as efforts by Bear Stearns Cos. to rescue one of two ailing hedge funds with steep losses on subprime mortgage bonds focused attention on troubles in the sector.
Investors worry Bear's problems could presage a credit crunch that would stall the takeover boom that has powered the stock indexes to all-time highs.
"This shows that the subprime market is not some funny little area, this is serious stuff and has the potential of upsetting a lot of apple carts," said Gary Shilling, president of A. Gary Shilling & Co. in Springfield, New Jersey. "There are a lot of players in this game, everybody was involved because it was a very lucrative market."
The Dow Jones industrial average was down 183.31 points, or 1.35 percent, at 13,362.53. The Standard & Poor's 500 Index was down 19.50 points, or 1.28 percent, at 1,502.69. The Nasdaq Composite Index was down 28.00 points, or 1.07 percent, at 2,588.96.
For the week, the Dow lost 2.1 percent, the S&P shed 2 percent and the Nasdaq slipped 1.4 percent.
Bear Stearns said on Friday it will provide up to $3.2 billion in financing for a struggling hedge fund that it manages, but sources said a second fund is still working out a restructuring plan with creditors. Bear Stearns shares fell 1.4 percent to $143.75, capping a 4.2 percent decline on the week.
Other investment banks with large mortgage exposure also dropped. Lehman Brothers Holdings stock fell 3.3 percent to $76.62. Merrill Lynch & Co. stock was down 3.2 percent to $84.48. The S&P financials lost 1.7 percent.
Blackstone shares surged 13.1 percent to $35.06 in its market debut as the largest private equity firm to go public, raised $4.13 billion in an initial public offering on Thursday.
The Bear Stearns hedge fund problem looks unfortunately like a harbinger of worse things to come:
Bear Stearns funds collapse hits subprime securities market
21 June 2007
The major investment and brokerage firm Merrill Lynch is going ahead with a sale of $850 billion worth of financial assets seized from two troubled hedge funds controlled by another major Wall Street firm Bear Stearns.
The confrontation between the two Wall Street giants started to unfold on Tuesday following news that the two hedge funds, set up only 10 months ago, were experiencing sharp falls in the valuation of their assets.
Initial reports suggest there is interest from other investors in purchasing the assets, consisting mainly of collateral-backed debt obligations, mostly related to subprime mortgages. Provided buyers can be found, the sale process is expected to proceed smoothly. But if the assets have to be liquidated at so-called “fire sale” prices this could trigger turbulence across financial markets.
The decision to sell came after the rejection of a plan by Bear Stearns to save the funds. Under the plan, Bear Stearns would have put up $1.5 billion with other banks contributing $500 million in new equity to meet margin calls. In return, creditors would have had to agree not to make margin calls for another 12 months.
Merrill Lynch apparently rejected the plan because it felt that over a period of 12 months the market could move against the Bear Stearns investments.
The collapse of the two funds is symptomatic of problems in US financial markets caused by the fall off in the housing market, which has exposed the risky financing operations undertaken during the housing boom. It is estimated that since 2000 Wall Street has created more than $1.8 trillion worth of securities backed by subprime mortgages.
Now with the national median home price set to show the first annual decline since the Great Depression and the stock of unsold homes at a record 4.2 million, Wall Street firms, which have invested heavily in mortgage-backed securities, are beginning to feel the effects.
Goldman Sachs, the world’s biggest securities firm, and Bear Stearns, the largest underwriter of mortgage-backed securities in 2006, have both reported that the increase in foreclosures has hit their profits. Bear Stearns said profits fell 10 percent, while Goldman Sachs reported a 1 percent gain, the smallest increase for three quarters.
The brief history of the failed Bear Stearns hedge funds is indicative of the way in which the market pressure to accumulate ever-greater profits leads to increasingly risky ventures.
The two funds—High-Grade Structured Credit Strategies Enhanced Leverage Fund and the High Grade Structured Credit Strategies Fund—were set up by Bear Stearns just 10 months ago.
As the length of their names indicates, they were to be engaged in highly complex operations in the securities markets. But while the methods were complicated, the underlying profit plan was simple: the aim was to borrow a large amount of money to make big bets on the sub-prime mortgage backed securities market. The market has seen an increasing degree of turbulence in the recent period because of the increased level of mortgage defaults by high-risk borrowers.
The funds manager, Ralph Cioffi, described by the Financial Times as having a “stellar reputation”, apparently believed that collaterised debt obligations (CDOs) backed by subprime mortgages would start to increase in value over the longer term following their recent decline.
With Bear Stearns, one of the biggest operators in the mortgage business, and given Cioffi’s reputation, money for the funds was not hard to come by. Some of the world’s biggest finance companies, including Citigroup, Barclays, Merrill Lynch, Goldman Sachs, Deutsche Bank, Credit Suisse and Bank of America extended as much as $9 billion in credit. The funds also raised around $600 million in equity from investors, including $40 million from Bear Stearns and its executives.
Problems started to emerge last month when Enhanced Leverage reported that its value fell 6.75 percent in April after its bets in the mortgage market had gone wrong. Two weeks later it reported that the loss was 18 percent, sending a shiver of fear through investors.
The sudden increase in the loss estimate indicates the inherent valuation problems in the complex derivatives markets in which the funds were dealing.
As an article in Wednesday’s edition of the Wall Street Journal explained: “Unlike stocks and Treasury bonds, whose prices are continually quoted and easily explained, many of these derivative instruments trade infrequently and don’t have clear market prices. To come up with market values for these investments—a process known as ‘marking’ their positions to market—investment funds often rely on their own valuation models.
“They might also ask the dealers who sell them the bonds to update them on changes in the bonds’ underlying value. When there are no sales to base prices on, dealers come up with prices based on their own statistical models and an array of assumptions about what’s happening in the market or the assets that back the securities.”
This means that there can be some very rapid shifts in valuations. A market value in “normal” times may be very different from one obtained in a period of stress—and the transition from one period to another can take place quickly.
According to the Wall Street Journal, there has been “no indication that Bear Stearns’s managers sought to mislead lenders or investors about the value of the funds. Indeed, the firm’s approach to valuing its securities seems to be in line with guidelines set up by Moody’s Investor Service, which evaluates hedge-fund practices. But this crisis does point to the kinds of valuation problems hedge funds and their investors can run into, even when they follow sound practices.”
These words bring to mind the collapse of the Long Term Capital Management (LTCM) hedge fund in 1998. LTCM also followed “sound practices”—its valuation and pricing model was designed by Nobel laureates—but an unexpected shift in currency market valuations led to the collapse of the fund, necessitating a $3 billion bailout organised by the then Federal Reserve Board chairman Alan Greenspan in order to prevent a meltdown of the financial system.
Since the LTCM collapse, the spreading of risk had made markets less vulnerable to the collapse of a single fund. But as Financial Times commentator Gillian Tett observed: “Although the financial system has absorbed isolated failures, no one knows what might happen with a string of collapses.
In such an environment with massively leveraged hedge funds creating derivatives on a huge pile of really bad debt, a huge collapse can take place quickly. But it won’t take place without warning. The word has been going out that the plug will get pulled soon, and we ignore it at our peril.
It’s Official: The Crash of the U.S. Economy has begun
Richard C. Cook
June 14, 2007
It’s official. Mark your calendars. The crash of the U.S. economy has begun. It was announced the morning of Wednesday, June 13, 2007, by economic writers Steven Pearlstein and Robert Samuelson in the pages of the Washington Post, one of the foremost house organs of the U.S. monetary elite.
Pearlstein’s column was titled, “The Takeover Boom, About to Go Bust” and concerned the extraordinary amount of debt vs. operating profits of companies currently subject to leveraged buyouts.
In language remarkably alarmist for the usually ultra-bland pages of the Post, Pearlstein wrote, “It is impossible to predict when the magic moment will be reached and everyone finally realizes that the prices being paid for these companies, and the debt taken on to support the acquisitions, are unsustainable. When that happens, it won't be pretty. Across the board, stock prices and company valuations will fall. Banks will announce painful write-offs, some hedge funds will close their doors, and private-equity funds will report disappointing returns. Some companies will be forced into bankruptcy or restructuring.”
Further, “Falling stock prices will cause companies to reduce their hiring and capital spending while governments will be forced to raise taxes or reduce services, as revenue from capital gains taxes declines. And the combination of reduced wealth and higher interest rates will finally cause consumers to pull back on their debt-financed consumption. It happened after the junk-bond and savings-and-loan collapses of the late 1980s. It happened after the tech and telecom bust of the late '90s. And it will happen this time.”
Samuelson’s column, “The End of Cheap Credit,” left the door slightly ajar in case the collapse is not quite so severe. He wrote of rising interest rates, “As the price of money increases, borrowing and the economy might weaken. The deep slump in housing could worsen. We could also discover that the long period of cheap credit has left a nasty residue.”
Other writers with less prestigious platforms than the Post have been talking about an approaching financial bust for a couple of years. Among them has been economist Michael Hudson, author of an article on the housing bubble titled, “The New Road to Serfdom” in the May 2006 issue of Harper’s. Hudson has been speaking in interviews of a “break in the chain” of debt payments leading to a “long, slow economic crash,” with “asset deflation,” “mass defaults on mortgages,” and a “huge asset grab” by the rich who are able to protect their cash through money laundering and hedging with foreign currency bonds.
Among those poised to profit from the crash is the Carlyle Group, the equity fund that includes the Bush family and other high-profile investors with insider government connections. A January 2007 memorandum to company managers from founding partner William E. Conway, Jr., recently appeared which stated that, when the current “liquidity environment”—i.e., cheap credit—ends, “the buying opportunity will be a once in a lifetime chance.”
The fact that the crash is now being announced by the Post shows that it is a done deal. The Bilderbergers, or whomever it is that the Post reports to, have decided. It lets everyone know loud and clear that it’s time to batten down the hatches, run for cover, lay in two years of canned food, shield your assets, whatever.
Those left holding the bag will be the ordinary people whose assets are loaded with debt, such as tens of millions of mortgagees, millions of young people with student loans that can never be written off due to the “reformed” 2005 bankruptcy law, or vast numbers of workers with 401(k)s or other pension plans that are locked into the stock market.
In other words, it sounds eerily like 2000-2002 except maybe on a much larger scale. Then it was “only” the tenth worse bear market in history, but over a trillion dollars in wealth simply vanished. What makes today’s instance seem particularly unfair is that the preceding recovery that is now ending—the “jobless” one—was so anemic.
Neither Perlstein nor Samuelson gets to the bottom of the crisis, though they, like Conway of the Carlyle Group, point to the end of cheap credit. But interest rates are set by people who run central banks and financial institutions. They may be influenced by “the market,” but the market is controlled by people with money who want to maximize their profits.
Key to what is going on is that the Federal Reserve is refusing to follow the pattern set during the long reign of Fed Chairman Alan Greenspan in responding to shaky economic trends with lengthy infusions of credit as he did during the dot.com bubble of the 1990s and the housing bubble of 2001-2005.
This time around, Greenspan’s successor, Ben Bernanke, is sitting tight. With the economy teetering on the brink, the Fed is allowing rates to remain steady. The Fed claims their policy is due to the danger of rising “core inflation.” But this cannot be true. The biggest consumer item, houses and real estate, is tanking. Officially, unemployment is low, but mainly due to low-paying service jobs. Commodities have edged up, including food and gasoline, but that’s no reason to allow the entire national economy to be submerged.
So what is really happening? Actually, it’s simple. The difference today is that China and other large investors from abroad, including Middle Eastern oil magnates, are telling the U.S. that if interest rates come down, thereby devaluing their already-sliding dollar portfolios further, they will no longer support with their investments the bloated U.S. trade and fiscal deficits.
Of course we got ourselves into this quandary by shipping our manufacturing to China and other cheap-labor markets over the last generation. “Dollar hegemony” is backfiring. In fact China is using its American dollars to replace the International Monetary Fund as a lender to developing nations in Africa and elsewhere. As an additional insult, China now may be dictating a new generation of economic decline for the American people who are forced to buy their products at Wal-Mart by maxing out what is left of our available credit card debt.
About a year ago, a former Reagan Treasury official, now a well-known cable TV commentator, said that China had become “America’s bank” and commented approvingly that “it’s cheaper to print money than make cars anymore.” Ha ha.
It is truly staggering that none of the “mainstream” political candidates from either party has attacked this subject on the campaign trail. All are heavily funded by the financier elite who will profit no matter how bad the U.S. economy suffers. Every candidate except Ron Paul and Dennis Kucinich treats the Federal Reserve like the fifth graven image on Mount Rushmore. And even the so-called progressives are silent. The weekend before the Perlstein/ Samuelson articles came out, there was a huge progressive conference in Washington, D.C., called “Taming the Corporate Giant.” Not a single session was devoted to financial issues.
What is likely to happen? I’d suggest four possible scenarios:
1. Acceptance by the U.S. population of diminished prosperity and a declining role in the world. Grin and bear it. Live with your parents into your 40s instead of your 30s. Work two or three part-time jobs on the side, if you can find them. Die young if you lose your health care. Declare bankruptcy if you can, or just walk away from your debts until they bring back debtor’s prison like they’ve done in Dubai. Meanwhile, China buys more and more U.S. properties, homes, and businesses, as economists close to the Federal Reserve have suggested. If you’re an enterprising illegal immigrant, have fun continuing to jack up the underground economy, avoid business licenses and taxes, and rent out group houses to your friends.
2. Times of economic crisis produce international tension and politicians tend to go to war rather than face the economic music. The classic example is the worldwide depression of the 1930s leading to World War II. Conditions in the coming years could be as bad as they were then. We could have a really big war if the U.S. decides once and for all to haul off and let China, or whomever, have it in the chops. If they don’t want our dollars or our debt any more, how about a few nukes?
3. Maybe we’ll finally have a revolution either from the right or the center involving martial law, suspension of the Bill of Rights, etc., combined with some kind of military or forced-labor dictatorship. We’re halfway there anyway. Forget about a revolution from the left. They wouldn’t want to make anyone mad at them for being too radical.
4. Could there ever be a real try at reform, maybe even an attempt just to get back to the New Deal? Since the causes of the crisis are monetary, so would be the solutions. The first step would be for the Federal Reserve System to be abolished as a bank of issue and a transformation of the nation’s credit system into a genuine public utility by the federal government. This way we could rebuild our manufacturing and public infrastructure and develop an income assurance policy that would benefit everyone.
The latter is the only sensible solution. There are monetary reformers who know how to do it if anyone gave them half a chance.
Ah yes, the Carlyle Group, Pathocrat Central, sees a huge buying opportunity of a lifetime in the coming crash. Did the Clintons liquidate their stock holdings for the reasons stated, to avoid conflicts of interest as Hillary runs for president? Or do they know something?
How did we get to this place, the edge of a huge cliff? It took three and a half centuries of capitalism to create so much debt and so much servitude and malaise among the workforce, whether affluent of poor. It took some three millennia of religious programming to set the stage. Is there anything we can do about it?
An editorial comment on an optimistic essay in the Wall Street Journal article in the Signs of the Times has this to say about our predicament:
Technological progress and the illusion of prosperity is the trap. In fact, humanity is going in circles. Material progress means nothing if it is not accompanied by evolution of our inner lives, of our knowledge of ourselves. The technological world around us is the expression of our inner lives: mechanical, programmed, focused on greed and survival.
But how many people are ready to understand that truth? The world is as it is because it is the expression of mankind, 6 billion people getting ready to walk off a cliff at the orders of the psychopaths in charge, all the while thinking they are building a future for their kids. However, for those who have some spark of conscience in them, they understand, if ony subconsciously, that the rosy future is an illusion. Hence the growing anxiety, the greater numbers of individuals on anti-depressants and anti-anxiety medicine. Some part of them is screaming at them to wake up and see the world as it really is.
Last week we discussed the authoritarian nature of the workplace even in so-called democratic countries and the debilitating effects of learning to survive in such an environment. According to Laura Knight-Jadczyk, writing about the deep history of the “immigration problem,” this is no accident and speaks directly to our predicament.
First we must consider that the development of an adult human's gifts, skills, realistic thought, and psychological world-view is optimal when the level and quality of his education and the demands of his professional practice correspond to his actual talents and abilities. This is the aim of most normal human beings: to achieve a position in life that allows productive creativity, freedom, the pursuit of happiness, etc. And, the fact is, when many people in a society are able to achieve such a standard of life, the society itself - as a whole - benefits from this collective, individual achievement. What is more, such an individual would feel that the society in which he or she lives is socially just and equitable.
When, however, the group of pathological deviants in a society begins gradually maneuvering to control more and more of the wealth and resources of that society, utilizing their special knowledge of human psychology based on something like game theory, and the society itself has been dumbed down, has no adequate and accurate psychological knowledge to defend themselves from predation, interesting things begin to happen.
One of the first dynamics to come into play is that the deviants who have risen to the top by virtue of their lack of conscience and special abilities already mentioned, seek to force other individuals to exercise functions which deny their humanity, their talents, their intelligence. The deviants also arrogate to themselves and their cronies - other deviants - jobs and positions for which they are not only ill-suited, but totally incapable of performing effectively and efficiently.
Another aspect of the problem is when we find individuals (not pathological) who obtain important positions because they belong to the privileged elite group in power. If their talents and abilities are inadequate to their position, they will avoid the problems they are supposed to solve in their position, instead devoting themselves to those minor things that don't really matter - but which they can do - in a grandiose and ostentatious way. We call them "upwardly adjusted" because they are operating at a higher level than they are capable of managing. An individual in such a situation is likely to develop a progressive case of histrionics and tests will show, as the study quoted above, that their correctness of reasoning actually deteriorates.
So, in order to hold onto their high position in the face of the unbearable (and thus, denied), realization of their incompetence, such an individual will begin to direct attacks against anyone with greater talent or skill, even actively seeking to remove them - or have them removed - from their position which, of course, engenders in the other person a feeling of injustice regarding this "downward social adjustment." Naturally, upwardly-adjusted people favor "whip-cracking" governments which will protect their positions and their incompetence.
… Capitalism, as it is practiced in the United States, as well as its so-called "democracy," gives increased access to unrestricted power and control over resources, including other human beings. It is not absolute power that corrupts, it is power that attracts the corrupt.
So it is that the U.S. system was set up by and for psychopaths, and it has only been the informed citizenry that has kept them in check until recent years. Over the past 100 years or so, as psychopaths have gradually taken over those positions where they could consolidate their power and gains, they began a deliberate program of dumbing down the populace, utilizing the education system, medical system, science, the media, etc. There is no area of U.S. society that has not been co-opted and corrupted to the purposes of the Pathocracy.
In such a society, a normal person may start out basically healthy, but after a period of exposure to psychopathy in the workplace, things take on a different tone. If circumstances are brought to bear on an average person with a lack of psychological knowledge so that he or she is forced to perform functions which do not fit his abilities and talents, he begins to feel cheated and even overwhelmed by duties which prevent him from achieving his own self-realization. In such a situation, the person begins to dissociate, to daydream about a world where he or she is what he should be, deserves to be, and is capable of being. This is particularly true if the professional adjustment is downward. A particular danger of the downward adjustment is that the individual, not being regularly challenged, fails to establish an accurate estimation of his own abilities and talents. In his dissociated daydreams, he "fixes" the unfair world and dreams of having the power to do so. In this way, he acquires psychopathic traits even though he may not be a psychopath.
… Upward and downward social adjustments results in a total waste of any society's most precious resource: the talent pool of its members. This process will lead to increasing dissatisfaction and tensions among individuals and social groups. Evolution or devolution in all areas of cultural, economic and political life depend on the extent to which this human resource talent pool is properly utilized. And, as Lobaczewski points out, in the final analysis, it also determines whether there will be evolution or revolution.
Certainly, in such a society as described above, there will be people who are capable of figuring out what is wrong to some extent, and to begin to try to apply their abilities to right the widespread social injustice. They may approach the problem from the point of view of legislative reforms, or from the point of view of religious moral revival, or disseminating accurate psychological knowledge about the nature of the problem among the masses. Elimination of social injustice and revival of morals and education level of the society could deprive a pathocracy of any chance to take over. And so, such reformers and moralists must be consistently neutralized by various means. If they can't be bought or co-opted, they will be defamed and their character assassinated. The most dangerous among them will be murdered by various set-ups so that the blame never falls on the deviants.
The one hopeful scenario outlined in the above article by Richard Cook (abolishing the current Federal Reserve system, rebuilding industrial and public infrastructure and assuring adequate incomes), could only happen when normal humanity (those with potential consciences) gains a true understanding of what it is up against: the pathocracy or psychopaths who rule. When that happens, steps can be taken to limit the damage the psychopaths can do, but until that happens, we will be helpless. As Knight-Jadczyk concludes:
There are only two things that can bring a psychopath under submission: 1) a bigger psychopath; 2) the non-violent, absolute refusal of all others to submit to their controls no matter the consequences. If every single normal person in the U.S. (and elsewhere) simply sat down and refused to lift a hand to further one single aim of the psychopathic agenda, en masse, if people refused to pay taxes, if soldiers refused to fight, if government workers and corporate drones refused to go to work, if doctors refused to treat psychopathic elites and their families, the whole system would grind to a screeching halt.
But that can only happen if the masses of people KNOW about psychopathy in all its horrible details. Only if they know that they are dealing with creatures that really aren't human can they have the understanding of what they must do. And only when they get miserable enough that the misery that the psychopath will inflict on them in the beginning of their resistance pales in comparison, will they have the will to do this. That, or the understanding of the world the psychopaths are creating for their children in which case love for the future of humanity will motivate them to resist.