by Justice Litle
"In much the same condition as the Aral Sea, the former
Soviet Union is a disaster that is about to spiral into a
catastrophe."
— Jim Rogers, Adventure Capitalist
The Dec. 16 edition of The Economist has a mocking sendup
of Vladimir Putin on the cover. The Russian president's
head is pasted on the body of a Prohibition-era gangster,
complete with white fedora hat and zoot suit. In shades
of Al Capone, Putin aims a gas pump nozzle as if it were
a Tommy gun. The text reads, "Don't Mess With Russia."
Inside, the lead article closes with a bland flourish of
hope: "Russia is one of the few countries that could
produce more oil — if only Mr. Putin changed his
thuggish ways."
This cloying sentiment brings to mind a crusty old
nugget of bartender wisdom: "If ifs were a fifth, we'd
all be drunk."
Is there any chance Mr. Putin will soon reform and make
nice? Not really. It is far more likely that the opposite
is true. Russia may well be gearing up for an ugly — and
possibly brutal — confrontation with the West
Blustery March winds blew through global markets
again yesterday.
At one point, the Dow was sold off to under 12,000,
before recovering. The London stock exchange took a
beating too.
Investors are "jittery" says the Financial Times, over
the subprime crisis in the US. European and Asian
stockmarkets suffered their second biggest losses of the
year yesterday.
One thing is clear – volatility has returned. That long,
lazy, self-assured and complacent period that annoyed us
for so long seems to be over. And good riddance.
We are literary economists and market voyeurs, here at
the Daily Reckoning. We like action...something to look
at...someone to laugh at. We like tragedies...
comedies...something that causes our ribs to heave...
someone who gets what he has coming...a story with some
excitement and drama. At last, we seem to be getting one.
For months...no years...we have been watching. Waiting.
Hoping. 'Something has to give..' we kept saying. 'This
can't go on forever...' we wrote so many times we began
to wonder if it was true. 'When the end comes...' we
warned ominously.
Well, the end may still be far away. But at least a few
more people can see it coming. They've seen prices go up
and down sharply. It doesn't take too much imagination to
see them going down decisively.
Which means that the price of insurance is going up.
"Banks face rise in cost of default protection," says the
FT. Credit Default Swaps are going up. So is the
protection available to the average investor.
Yesterday, the VIX reached its highest level since
June of last year.
What is gratifying about this sort of action is that it
has genuine heroes and cads...people whom the gods reward
for their virtue or destroy for their vices. New Century
Financial, for example. Teetering on the edge of
bankruptcy, we regretted that we couldn't give it a push.
But yesterday, along came Barclay's bank to do what we
couldn't. The British bank demanded $900 million, and it
wants it right now.
But don't worry about Barclay's. "All of our exposure to
US subprime lending is fully collateralised..." it told
the press. "We do not envisage any material losses due to
exposure to the sector."
We are not privy to the details. But we can also
perfectly well imagine that Barclays is misinformed. All
the subprime debt was fully collateralised. That was not
the problem. The problem was that the collateral was
fraudulent. Encouraged by rising property prices, aided
and abetted by appraisers, mortgage brokers, and real
estate agents, enabled by 'low document' lending
procedures – neither the subprime collateral, the
subprime securitised debt, nor the subprime borrowers
were worth what they said they were worth. Now, with
property prices falling in many parts of the country, it
may be impossible to unload the foreclosed houses for
anything near to what lenders had expected – especially
if subprime troubles spread into the rest of the
mortgage market.
"The reliance on judgment and reason will be pushed
aside," said 80-year-old Henry Kaufman in New York on
Tuesday night. What we found interesting was his use of
the future tense, referring to the growing tendency to
replace wisdom and experience in the financial markets
with sharp calculations. If there is a half a point of
yield to be gained by exchanging yen for ringgit...buying
emerging market bonds...leveraging with zlotys and
hedging with euros...even though the old timers might
judge it too risky or too complicated, the mathematicians
will find it irresistible.
We fuddy-duddy literary economists are not the ones who
have made money in this liquidity bubble. We're not
complaining. Our gold rose from a low of $252 in 1999 to
around $645 last time we looked. But the real money was
made by those who reached for yield, leveraged it up and
sold it on. Yesterday, we learned that Goldman Sachs
actually outperformed analysts' expectations. Yes, the
master of the masters of the universe masterfully
masterminded a masterstroke...theirs is a masterpiece of
...well, never mind.
The report referred to earnings 'in the first quarter.'
The quarter ended on February 23...only four days later
world markets sold off on panic following a 9% drop in
the Shanghai composite index. And what's this? On
February 27 Goldman was down 12% from its all-time high
of 222.75 made on Feb. 22.
Talk about nice timing.
There's something screwy about the whole spectacle. The
numbers – for all their pretended precision – never seem
to add up. How can you have a 'quarter' that ends in
February? How could the whizzes on Wall Street make such
errors about the value of their subprime debt?
Still, who says the top is in? Who says America is in
decline? Who says the liquidity bubble is over? Who says
there isn't more money to be made?
We literary economists don't to presume to know and don't
pretend to care. But at the show is definitely getting
more interesting.
More news:
----------------
Rob Mackrill:
*** An opposition to the global warming consensus
appears to be making itself known. The Times reports an
angry email exchange between Martin Durkin, executive
producer of a recent UK Channel 4 programme entitled
'The Great Global Warming Swindle' and two respected
British scientists.
"The BBC is now a force for bigotry and intolerance..."
said Mr Durkin. "Since 1940 we have had four decades of
cooling, three of warming, and the last decade when
temperature has been doing nothing. Why have we not heard
this in the hours and hours of shit programming on global
warming shoved down our throats by the BBC?"
- John Authors in the FT reports on a speech Henry
Kaufman made in Wall Street on Tuesday. The ex-chief
economist of Salomon Brothers earned the nickname Dr Doom
for his gloomy views. Now in his 80s he's not turning any
more cheerful says Authors. Kaufman reckons 'the problem
[today] lies in the changing definition of liquidity.
'After the war, liquidity was an "asset-based concept" –
companies cash on hand and so on. Now "firms and
households alike often blur the distinction between
liquidity and credit availability. Money matters but
security counts". Securitisation and improved technology,
he said, stimulated risk appetites.'
- On the subject of securitisation, UK Chancellor Gordon
Brown has a novel idea to raise more cash reports the FT.
Package up the £16bn in student debt and sell it in the
market, then recycle the estimated £4.5bn a year back
into... education.
- You've heard of OPEC, how about OPEGASUR says the Wall
Street Journal? A South American inspired gas cartel was
established yesterday that embraces Brazil, Bolivia and
Venezuela. A development that has got some in its energy
dependent northern neighbour worried. Michael Economides,
editor of Energy Tribune warns:
"With domestic gas production in decline, the United
States and many of its allies will grow more dependent on
imports to generate electricity and heat homes," he
wrote. "Gas suppliers will band together in response to
the growing global demand, just as oil producers did
decades ago. Few people talk about the looming U.S.
dependency on imported natural gas, but it could
be painful."
And the potential pain of gas dependency is something
Europeans have become all too aware of as well. Russia,
the big daddy of natural gas, has already cut off the
taps a couple of times to get its way with uppity Ukraine
and Belarus. And President Putin is moving to strengthen
his hand in the gas market. Last month he visited the
Middle East and sat down for talks with the emir of
Qatar, another leading gas producer, about...you guessed
it... setting up a gas cartel. (See today's essay from
Justice Litle for more on Putin's Russia)
- European stockmarkets tanked yesterday after nervous
investors took fright that the US subprime mortgage
meltdown could spread to other financial markets.
Investment guru Jim Rogers shares their fears. Falling US
real estate prices will trigger defaults. "It is going to
be a huge mess. When markets turn from bubble to reality,
a lot of people get burned." He tells The Times. European
markets are all positive this morning, however, with
the FTSE 100 up over 100 points at 6,120 having shed
160 yesterday.
- Lost in the fury of falling stock prices, a modest item
of semi-positive news. The US current account deficit
actually shrunk in the final quarter of 2006 to $195.8bn
against estimates of $204bn. But the overall for the year
it was still an ugly number. At $856.7bn it was up 8% on
2005 and amounted to 6.5% of GDP. A record says the New
York Times.
-----------------------------
And more thoughts from Bill...
*** The world's second largest economy looks like a much
better bet for investors than its first largest one.
While the rest of the world enjoyed one sunny day after
another, poor Japan has remained in darkness. Its stocks
had crashed. Its property had crashed. Its consumer
prices had crashed. For, what....14 long years?...
nothing seemed to come from Japan but good cars and bad
news. But in 2005, thus rising sun began to peek over the
horizon. Stocks soared 40%. Consumers and businessmen
seemed to recover some of their old bonsai spirit. Last
year, again, stocks rose...though much less than in 2005.
And now the economy is expanding nicely.
But what attracts our attention today is Japan's property
market, where prices are still going down! Japan, and
Japan alone, is still bucking the worldwide trend towards
higher prices for immoveable objects. Its property is
down 32% since 1997. Last year, the stuff fell another
2.7%. By contrast, US housing rose 102% during the last
10 years. This was modest compared to Ireland, with a
253% increase...and South Africa, where prices
jumped 351%.
For a contrarian, what's not to like in Japan? The
currency has been going down for years. Speculators are
short the yen...hundreds of billions of dollars worth.
Stocks are still less than half what they were 17 years
ago. And the Japanese economy...after a long period of
on-again, off-again deflation... finally seems to be
growing at decent rates.
It is America, Britain, China and the other high-fliers
that a contrarian should be wary of. A few years ago, we
wrote a book, with Addison Wiggin, predicting that the US
would follow Japan into a long, dark slump. We were
surely early. We're still not convinced we were wrong.
*** "Zimbabwe sinks into hell of hyperinflation," says
the lead editorial in today's Financial Times. You know
the story already, dear reader. Inflation is running at
more than 1,700% in the country...and seems to be out
of control.
Also out of control are Zimbabwe's police, who rounded up
protestors the other day – including the man seen as most
likely to replace the current president – and beat them
up. The challenger, Morgan Tsvangirai, was then hauled
before the courts and charged with inciting people to
commit acts of violence. But it was obvious to everyone –
including the judge, who promptly ordered the defendant
to the hospital – that Tsvangirai, with his swollen and
beaten head, was not so much the inciter of violence as
the victim of it.
But then comes the most remarkable part of the editorial.
Here, on the very Ides of March, the FT is prodding
Cassius and Brutus to stick the knife into a lawfully
elected president of a sovereign, democratic state! "Get
involved now," it urges neighbouring South Africa, "while
the Zimbabwe state can still be saved."
Our friend Michel is still puzzling over the issue. He
took out a dictionary to get a definition for democracy
and found this: "a government where the people exercise
sovereignty." If we recall correctly, Robert Mugabe was
elected by the people of Zimbabwe to run the state.
According to the press reports at the time, the election
was as honest as most below the Sahara...and probably not
much more dishonest than some above the Rio Grande. Maybe
a few voters were roughed up. Maybe more were discouraged
from taking to the polling stations. But there is no
such thing as an election that functions perfectly.
Whatever can be said for the election, Robert Mugabe has
been running the state...into the ground. There is no
doubt about that. And to the extent that the people of
Zimbabwe elected him...or even tolerated him...they get
what they deserve.
What's more, there's no definition of democracy that we
know of that permits a foreign people to "get involved"
in the misgovernment of another democratic state...or
even in an undemocratic state. And in every example we've
heard of – whether of the Napoleonic army in Spain or the
Bushian army in Iraq – the results have been disastrous.
Nevertheless, that is the central inspiration of
America's 'Wilsonian' foreign policy...and the fervent
wish of every addled neo-conservative in Washington.
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