Oh no...

Ebay Whip Inflation Now intervention fails! Dow rises 600 points!

Ketchup Soup

1.2 Trillion Dollars vanished from our imagination here in the United States, and we moved four years back in time. The S&P 500 had the biggest percentage loss since October 1987. The Vix (Fear Gauge) hit a level that has only been seen in 1987, the Russian Default of 1998, and the aftermath of the 9/11 attacks.

Campbell Soup was the only stock in the S&P 500 which gained today. But, if we are really in the worst crisis since the Great Depression, shouldn't this be the worst performer?

This is deeply disturbing. Either everything is going to be okay, or we should all go out and enter a spread: shorting Campbell soup and buying some second-tier ketchup like Hunts.

By the way, the Ebay Whip-Inflation-Now Indicator is flashing high alert as it hit 100% unconcerned about the prospects for inflation. At zero bids, Ebay W.I.N. Indicator is signalling crisis level fears of imminent depression. I may have to intervene in the market.

Reflections on Today, from Henry Clews, 1908.

"The action of commerce, like the motion of the sea or the atmosphere, follows an undulatory line. First comes an ascending wave of activity and rising prices; next, when prices have risen to a point that checks demand, comes a period of hesitation and caution; then, care among lenders and discounters [or not -ed.]; then comes the descending movement, in which holders simultaneously endeavor to realize, thereby accelerating a general fall in prices. Credit then becomes more sensitive and is contracted; transactions are diminished; losses are incurred through the depreciation of property, and finally the ordeal becomes so severe to the debtor class that forcible liquidation has to be adopted , and insolvent firms and institutions must be wound up. This process is a periodical experience in every country; and the extent of the destructiveness of the crisis that attends it depends chiefly on the steadiness and conservatism of the business methods in each particular community affected. In addition to this ordinary and, I would even say, natural liability to commercial crises with a greater or lesser degree of panic, we, in the United States, have to stand the far more violent oscillations so inseparable from our great mass of new and immature undertakings.

In times of crisis, the obligations issued against such enterprises suffer instantly from the uncertainty about their intrinsic value. Holders are anxious to get rid of them; banks which have advanced money on them, call in their advances; and they became virtually unavailable assets...

In view of the facts, what is the use of discussing the possibility of averting our periodic panics? Risks and panics are inseparable from out vast pioneering enterprise; and all we can hope is, that they may diminish in severity in proportion as our older and more consolidated interests afford an increasing power of resistance to their operation. I am disposed to think that, in the future, the counteraction from this source will be much more effective than it has been in the past...

But, whilst maintaining that panics cannot be avoided in a country situated as ours is in its present incomplete development, I cannot avoid expressing the opinion that conditions are permitted to exist which needlessly aggravate the perils of these upheavals when they do occur. In every panic much depends upon the prudence and self-control of the money lenders. If they lose their heads and indiscriminately refuse to lend, or lend to only the few unquestionably strong borrowers, the worst forms of panic ensue; if they accommodate to their fullest ability the larger and reasonably safe class of borrowers, the latter may be relied on to protect that whom the banks reject, and thus the mischief may be kept with in legitimate bounds. Everything depends upon rashness being held in check by an assurance that deserving debtors will be protected. This is tantamount to saying that all depends on the calmness and wisdom of the banks...

These periods of the breaking-down of unsound enterprises and of the weeding out of insolvent debtors and of liquidation of bad debts can never be wholly averted; nor is it desirable that they should, for they are essential to the maintenance of a sound and wholesome condition of business; but it is a grave reproach to our legislators if, when the day of purgation comes, the law treats the deserving and the undeserving with equal severity."

-"Fifty Years in Wall Street," Chapter 10 PANICS-THEIR CAUSES-HOW FAR PREVENTABLE, Henry Clews, 1908

One way bets... Vallejo, CA

Amidst a financial crisis of the worst kind, let's put things in perspective. For at least a decade, my fiancee's grandfather, Grampa Moe, was convinced that the "bad times" were coming. He prepared for one scenario, a repeat of the Great Depression. This required land, a house, several watercraft, 30 pressure cookers and ample stockpiles of gold and silver. In light of recent events, this seems extraordinarily prescient. If he were alive today (he got tired and frustrated waiting so long for it to happen) he would tremendously enjoy his vindication and his transformation in his family's eyes from eccentric to genius.

But history will not repeat the past because we have in our employ Chairman Ben Bernanke, the foremost scholar on the Great Depression, and possibly the most creative, trenchant, and able authority to sit on the Reserve Board since Marriner S. Eccles presided over the New Deal.

Grampa Moe prepared for the crisis in broad strokes. But eight years into a recession which has now reached its crisis phase, it is time to make some refinements to his strategy.

The gold and silver he stockpiled has trebled in value. The pressure cookers are most likely rusted. And while the house has fallen in price, its value is unchanged. If five years from now when the crisis abates and life returns to some semblance of normality, the gold and silver will fall and the value of the home will rise again.

In this situation then it seems prudent to sell the metals now while they are extremely valuable, in the hopes that everything will eventually be okay. Under no circumstances could it possibly make sense to sell the home at its extremely distressed price, because after all this is Monterey, California.

In the Dust Bowl where did everyone go? California. California, the most fertile state in our nation, the epicenter of our innovation, is gift from God which appeared to its immigrants literally on a golden platter.

With that in mind lets turn our attention to the focus of this installment of "One way bets..." Vallejo, California.

Vallejo sits at the mouth of the Sacramento river, on the border of Napa County, in the North of San Francisco Bay. It is a 45 minute ferry ride to the Ferry Building in San Francisco, surely the most pleasant commute in the entire Bay Area. It is filled with charming Craftsman-era bungalows and is a short 10 minutes away from the new 300 million dollar cancer research facility at Turou University.

It is currently in the embroiled in the largest city bankruptcy in California history and is one of the largest casualties of the sub-prime collapse with thousands of foreclosures citywide. Houses are down in many cases 70% from their peak in early 2006. With all of the foreclosures, rental rates have gone through the roof as people struggle to find adequate housing. In this climate, it is easy to find a bungalow for a hundred thousand dollars which, at a 6% rate, require monthly payments of $600. With rents averaging $750-1000, this is a steal even if you assume the house sits vacant for a few months every now and then.

Prepare to kick yourself in 15, in 30 and again in 45 years if you miss this opportunity now.

Whip Inflation Now!

Despite my feeling that the reprise of the Resolution Trust Corp. will be inflationary, the Ebay Whip Inflation Now indicator is not flashing red. The "Ebay Whip Inflation Now" Indicator you may ask? Actually, it's my own invention.
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Since January, every time inflation has surfaced as the predominant worry in the economy, the price of Ford-era Whip Inflation Now buttons has surged. Today the price action appears calm. Perhaps this bailout will actually accomplish its goal of preventing deflation while not proving too inflationary. But more likely with today's $25 surge in oil or the $180 leap in gold over this week people are more worried about the future than feeling ironically nostalgic about the past. The next button goes on sale in six days. We'll know soon enough.

When one door closes...

The upcoming reprise of the Resolution Trust Corp., will weigh on the dollar in the near term and the implications of this course of action are a little hard to suss out. One one hand it will strengthen the dollar if the U.S. finance industry and by extension the economy is put on decent footing. On the other hand, it will massively increase the Federal Budget leading to a surplus of Treasury bonds. Since the government is in effect setting a floor under mortgaged backed securities, it is in effect inflating away the value of the debt in order to prevent a deflationary unwind.

While I have worried quite a bit recently about the potential for a deflationary outcome to the turmoil, it is instructive to remember that Bernanke is the country's foremost scholar on the Great Depression and determined to prevent deflation at all costs. Much of my concern was caused by the fact that I could not foresee further mechanisms for addressing the deflationary spiral. This new gambit by Paulson & C0. allays those fears.

The dollar will not collapse. Much as we have seen the correlation between the direction of the Euro and the direction of commodity prices breakdown over the past three weeks, we may be in for a period where inflation accelerates while the dollar's relative strength against its trading partners continues. If you just went, "Huh?!" I empathize. I am not sure that this is even possible according to the laws of economics, but this is one of the reasons I'm writing on this website. If you have any ideas on this unorthodox notion, please let me know.

One way bets... Charles Rangel

Do you think Charles Rangel will be forced out as chairman of the Way and Means committee by Dec. 31st 2008? The odds are good and the spread is better. On the Intrade Prediction Markets, you can speculate on anything from Barack Obama becoming President, to Israel attacking Iran before the end of 2009, to the likelihood of mad cow disease emerging in the American herd. When forced to put their money on the line, the wisdom of the crowds always trumps simple opinion polls.

It works so well that the CIA briefly considered setting up a market along the lines of Intrade.com in order to ask people to speculate on where the next terrorism attack would occur. Unfortunately, the project was shelved because the administration deemed it too insensitive.

The accuracy of Intrade is well documented, accurately predicting all of the Senate election outcomes in 2006. Betting sites are great for determining how in-step your opinion is with general reckoning and the direction to which they're out of alignment. You can bet for or against yourself, depending on where you see the equilibrium. With 2:1 odds on Rangel being removed, I think the price is way out of alignment. According to the NY Post, Pelosi's spokesman denies that Pelosi will insist on Rangel stepping down. But with the current price, you'll see 100% gain if you believe Pelosi will do the right thing.

Crisis averted for now...

So as I wrote last night, the relative stability in the Yen proved to be a good indicator for the fact that the markets would pull through. This does not mean that the crisis is over, but stocks should rally for the next month or so. The next shoe to drop will be defaults in the corporate bond sector, which will prove that the chaos in the markets over the last 14 months has spread to the real economy. But given the extremely weak covenants in the bond market in the second half of 2006 and the first half of 2007, these defaults will take place later in the cycle then normal. That being said, almost two years out from the period of lax underwriting the defaults can't be too long now. So don't you be to long either. Sell into the rally.

Harry Reid Says Congress Won't Act on Markets

Because quote, "NO ONE KNOWS WHAT TO DO."
At least they're being honest. I was aghast during the Bernanke's testimony before congress in July 2007 when no one addressed the looming crisis in the credit default swap market and I realized that I, with no formal economic training, knew more than members of congress did. That being said, I think that these days we're getting more or less equal.

The Fear Gauge

Today was the most fearful day in the markets that probably anyone living can recall. Gold surged 11%. Banks essentially stopped loaning money to each other. At one point banks were so scared that they were willing to invest in 3 month U.S. government debt (which they can use as collateral in case of disaster) for 0.03%, essentially for free. This was the lowest rate anyone has seen since the Second World War. The Vix, a measure of the amount of volatility traders expect over the next thirty days, reached its highest point since the crisis began last July. Since its inception it has only been this high twice, once during Russia's default on its debt in 1998 which caused the largest hedge fund collapse up until that time, and once during 2002. At its current level the Vix indicates that the S&P 500 will move up or down by 10.4% over the next 30 days. My personal feeling is that this is either the end of things as we know it or the worst its gonna get, staring into the precipice wise. Since I've been expecting Armageddon for since 2006 the fact that it hasn't happened yet is encouraging. Also despite the extreme stress in almost all markets, the Japanese yen which has typically surged during times of crisis has remained steady over the past 2 days. Finally, for the past 14 months it has been profitable to bet on volatility declining every time the Vix has broken 30 on an intra-day basis. I believe it is extremely unlikely that the Vix will break 40. That said, I have no idea what other policy initiatives the central banks of the world will pull out of their pockets. They can't just make bad loans good, and despite the massive injections of liquidity into the markets, there is no way that temporary liquidity can solve credit problems. Oh and by the way, the Federal Reserve has run out of money and has asked the Treasury to begin borrowing money on its behalf so that it can continue to function

Europe's Enthusiasm May Accidentally Defeat Obama

Since 1976, in every presidential election year when gasoline prices were lower than they were in the previous presidential election year, the party in the White House remained in the White House. While the prospect of prices declining to their 2004 level is extremely unlikely in the next 8 weeks, their recent pullback will have a large psychological impact on the public. Therefore it is ironic to note the supporting role Obama played in their rapid decline.

The Euro/US Dollar exchange rate is primarily driven by economic factors, but sentiment also plays an enormous role. The recent astounding crash in the Russian Rouble immediately upon their engagement with Georgian forces comes to mind. Therefore I find it extremely interesting that while the economic news about Europe deteriorated precipitously in the months leading up to July, the actual breakdown in the Euro began within days of Obama's speech to ecstatic crowds in Berlin. This rise in the dollar in turn reduced inflationary pressures making oil and other commodities less attractive investments. While Europe remains enthusiastic about an Obama presidency, their trader's vote of confidence may have unintended consequences.

The Architecture of Washington Mutual

The saddest thing about the demise of Washington Mutual is the loss of the one true champion of architecture in corporate America. Never has a financial firm embraced architecture as an expression of their role in the genesis of personal wealth with such a radical and catholic program.

The Palm Springs Branch:


Sunset and Vine, allegedly (I thought this was on Wilshire:)


Sunset and Vine, Mosaic Detail:


Oakland (I think:)



Early 20th Century Sketch of a Branch:


Somewhere in the San Fernando Valley:


This Spanish Colonial Ranch empathizes with the aspirations of elderly tract home mortgage applicants in the greater Orlando area.

The Carpets are Falling

Back in January I thought I had a foolproof plan to survive the turmoil. I assumed the recession would be inflationary. (to comfort my fiancee I assured her it would be just like the most glamorous moments of the 70's) The only way I could imagine the debtors in this country getting out of trouble was for inflation to take off in such a way that everyone's debts would shrink as they paid them back with inflated dollars.

I had long planned for the two possible recession scenarios. If it was inflationary, I would move into hard assets like real estate and art. If it was deflationary, well I would hide under the mattress with my cash.

I thought I had a foolproof plan, I would buy vintage keyboards, oriental rugs, and some chinese vases. Keyboards to sell to aging yuppies or trust fund hipsters, rugs because they're pretty, and Chinese pottery because at some point the Chinese will want their heritage back (unless they get really good at counterfeiting that too).

I also had a tube of that poisoned Chinese toothpaste which I'd bought in a dollar store in Manhattan and held onto after it made me really sick because I figured lawsuits are good for income in any type of recession.

I was also aware that the Fed was taking an enormous gamble, hoping to create inflation so fast that commodities too became a speculative bubble primed to burst leaving the stimulative effects of easy money without the troubling result of embedded structural inflation.

But now that this gamble paid off better (it seems) than I could have possibly imagined I am faced with a troubling prospect. No one seems to have any money to purchase keyboards.

The prospect of carpet prices falling terrifies me much more than any sort of stock price declines, because if we have truly entered into a deflationary phase, nothing will be glamorous and our debts will become increasingly onerous as we pay them back with our stagnant wages.

The only bright side I can see is that this scenario will keep the bond holders happy which will continue to enable our government to do what it does best, spend its way out of trouble.

Robinson Crusoe and the Subjectivity of Desire

“Price is what you pay. Value is what you get.” -Warren Buffett

What matters to us and what price? Until the 1860’s, economists such as Adam Smith and Karl Marx struggled to develop a compelling theory to explain how humans qualify value and quantify price. Smith thought that the value of a good was a gestalt of the various costs required in its manufacture. Marx sort-of believed that a good’s value was determined by the amount of the labor required put the good together. The Austrian economist, Carl Menger, was the first to articulate in a brilliant and compelling fashion, how humans value goods and derive their price at the market.

Menger uses the example of Robinson Crusoe shipwrecked on his island. Let’s assume Crusoe has 100 cups of water at his disposal each day. Crusoe determines that he requires 10 cups of water in order to feel healthy and hydrated. He also needs 50 cups of water to irrigate his crops. He uses 25 cups for washing his clothes and dishes, and he uses the remaining 25 cups to water flowers in his garden. He has no further need for any more water.

What is the value of one additional cup of water: the 101^st cup? Zero. It has no value because Crusoe has no use for it. The 101^st cup, Menger terms “non-economic.” Looking at this metaphor from the other extreme, if Crusoe’s spring dries up and he is left with only one cup of water, the value of this one cup is priceless. It means the difference between life and death.

Menger posits that all human interactions in the marketplace are composed of sliding valuations, valuations bordered at their extremes by the non-economic and the priceless goods. Menger, therefore, strikes directly at the subjectivity implicit in the vast majority of these pricing decisions: the subjectivity of desire.

Absent the terrible coercion of poverty, we predicate our decisions of whether to buy or sell purely within the framework of our own sense of justice. In the vast majority of our purchases and sales, we only ask, “What is the value of this good to me, and is the price a fair representation of its value?”

Money provides a handy calculus for this determination. By referencing all goods with respect to their price in dollars, we manage to shackle our subjective musings under a link of objectivism. Our ration of water, to extend the Crusoe metaphor, is our weekly paycheck; and after accounting for the basic needs of our survival, we can begin to attend to our wants.

It is for this reason that inflation fills us with dread. The rising cost of bread breeds anxiety because it sows doubt in our minds about our ability to pay for our needs. But more subtle, sinister, and insidious is the inchoate notion deep in the back of our minds that the markings on our yardstick are in flux; that money, the arbiter of all goods, is no longer predictable, discernible, or just.