Saudi Arabia to Run Out of (exportable) Oil: "Keeping it to themselves"

From the Economist:

Gulf states not only pump oil; they burn it, too

EVERYONE knows why oil prices, at around $125 for a barrel of Brent crude, are so high. The long-term trends are meagre supply growth and soaring demand from China and other emerging economies. And in the short term, the market is tight, supplies have been disrupted and Iran is making everyone nervous.

Saudi Arabia, the only OPEC member with enough spare capacity to make up supply shortfalls, is the best hope of keeping the market stable. The Saudis recently reiterated their pledge to keep the market well supplied as American and European Union sanctions hit Iran. Over time, other producers in the Persian Gulf may be able to pump more. Iraq—and Iran itself—have vast oilfields that could eventually provide markets with millions more barrels a day (b/d). All this is conventional wisdom.

Yet these calculations do not take account of the region’s growing thirst for its own oil. Between 2000 and 2010 China increased its consumption of oil more than any other country, by 4.3m b/d, a 90% jump. It now gets through more than 10% of the world’s oil. More surprising is the country that increased its consumption by the second-largest increment: Saudi Arabia, which upped its oil-guzzling by 1.2m b/d. At some 2.8m b/d, it is now the world’s sixth-largest consumer, getting through more than a quarter of its 10m b/d output.

Saudi Arabia is not the only oil-producer that chugs its own wares. The Middle East, home to six OPEC members, saw consumption grow by 56% in the first decade of the century, four times the global growth rate and nearly double the rate in Asia (see map).

Energy use per head is also rising. According to BP, in 1970 in the Middle East it was half what it was in other emerging markets. By 2010 it was three times higher. Global oil consumption stayed at roughly 4.6 barrels a head annually between 2000 and 2010, but the average Iranian and Saudi was getting through roughly 30% more by the end of the decade. The Saudis consume 35.1 barrels each. Overall energy consumption per head, at 7.3 tonnes of oil equivalent, is roughly the same as in America (see chart), which is much richer.

There are three explanations for this growing taste for oil. The first is demography. Populations in the Persian Gulf, and in OPEC as a whole, are growing fast. Tiny Qatar’s population trebled between 2000 and 2010. Saudi Arabia’s grew from around 20m to 27.4m, a 37% increase. Demand for power, water and petrol has risen accordingly. Saudi power-generating capacity has doubled in the past decade. Partly this is to mitigate the fearful heat: according to a report from Chatham House, a think-tank, air-conditioning units soak up half of all power generated at peak consumption periods....MORE

Things I Don't Understand: "Vicar hospitalised with potato up his bum"

Lifted in toto and presented without comment:
From Improbable Research:

The vicar’s fall from grace (onto a potato)

The British edition of The Metro reports (in an article derived from reporting by The Sun:

Vicar hospitalised with potato up his bum

A vicar claims a potato got stuck up his bottom after he fell on to the vegetable while hanging curtains in the nude.

The clergyman, in his 50s, told medical staff at Sheffield’s Northern General Hospital [pictured here] that the accident was definitely not due to a sex game….
A&E nurse Trudi Watson said: ‘He explained to me, quite sincerely, he had been hanging curtains naked in he kitchen when he fell backwards on to the kitchen table and on to a potato. But it’s not for me to question his story.’

(HT Ed Yong)
BONUS: Stress Test for Vicars
BONUS:  The rectum of the Bishop of Durham, preserved in a museum.
BONUS: The Ig Nobel Prize-winning study about objects found in people’s rectums

RBS Was Taking Requests from Hedge Funds to Change Libor

Who knew?
And, who knew it was that easy?
From the Telegraph:

Former RBS trader Tan Chi Min claims hedge fund asked UK bank to change Libor

One of Europe's largest hedge funds is alleged to have asked Royal Bank of Scotland to alter the London interbank borrowing rate (Libor) five years ago, according to a court filing by a former trader at the lender.

Tan Chi Min, a former RBS trader who claims he was wrongfully dismissed by the bank after it fired him for allegedly trying to manipulate Libor - the average rate at which banks lend to each other - said he had received the request in 2007 from Brevan Howard.

"Brevan Howard telephoned on 20 Aug 2007 to ask the defendant to change the Libor rate," according to a paper filed with the Singapore High Court cited by Bloomberg.

The court filing alleges RBS "received this request without objection". Brevan Howard is not a party to the lawsuit and is not being investigated or sued for any alleged wrongdoing. RBS and Brevan Howard both declined to comment.

Mr Tan claimed in his filing that Scott Nygaard, head of short-term markets finance at RBS, knew about the call from Brevan Howard. However, the filing contained no further details to support his allegations. However, he is reported to have said he would provide further evidence at a later stage....MORE

Qadaffi Was Waaay Long Italy: Unicredit. Juventas

From: Guardian:

Gaddafi family assets worth more than €1bn seized in Italy

Late dictator, his son and intelligence chief owned property, shares in football clubs, and a Harley-Davidson motorbike

Assets worth more than €1bn belonging to the late Muammar Gaddafi, his son, and his intelligence chief were seized in Italy in raids by its revenue guard made at the request of the international criminal court in The Hague.

They included holdings in some of Italy's biggest corporations, a 1.5% stake in the Serie A side Juventus and a Harley-Davidson motorbike.

Also seized from the Libyan leader was a 150-hectare estate on the Mediterranean island of Pantelleria, a destination for illegal migrants and refugees attempting to enter Europe by boat from Libya. The seizures were ordered by the Rome appeals court at the request of the international criminal court in The Hague. The ICC launched a hunt for property belonging to Gaddafi and his associates last June when it issued warrants for their arrest on charges of crimes against humanity.

Financial assets owned by the late Libyan leader had earlier been frozen in the European Union and elsewhere following two UN resolutions in February and March, 2011. Gaddafi was killed by insurgents last October after failing to put down a popular uprising backed by most western powers.

The most valuable single item seized was a 1.26% interest in Italy's biggest bank, Unicredit, worth more than €600m (£502m). Other significant shareholdings included stakes in the oil and gas giant, ENI, the defence firm Finmeccanica and two companies in the Fiat motor group....MORE

HT: Passport

"Lumber Says This Is A Top For Housing Stocks" (ITB; XHB)

From McClellen Financial:


March 30, 2012

Here is an update to an article I posted in September 2011, describing the leading indication that lumber prices give for the shares of housing related stocks.  Back then, it was saying that a rally was ahead for homebuilders, building materials providers, and others involved in the housing industry.  And that opinion ran contrary to what was being voiced back then by a lot of other analysts.

Now the commentary I hear on the business TV channels seems largely bullish toward housing stocks.  They cite the growing economy, falling unemployment, rising rental prices, and other factors that should benefit the housing sector....MORE

HT: History Squared

ITB and XHB are homebuilder ETF's. Since their October lows they are both up dramatically. Via Yahoo:

"Cocaine is God's Way of Saying You Have Too Much Money"

That was the considered judgement of  a very sharp* friend.
From Reuters via the Huffington Post:

Diamond Jubilee Whiskey On Sale In Singapore For Nearly $200,000

A whisky made to mark the 60th year on the throne of Britain's Queen Elizabeth II is on sale in Singapore for a mere S$250,000 ($198,500) a bottle - and it may well find a buyer.

No doubt it's a premium sip. Only 60 bottles of Diamond Jubilee were made by the Johnnie Walker unit of Diageo PLC from a blend of whiskies distilled in 1952.

It's also a premium price for Asian aficionados at the month-long Master of Spirits II event featuring speciality wine and liquor put on by luxury travel retailer DFS Group, part of the LVMH empire of high-end goods and services.

Singapore is the first stop this year for a series of DFS events highlighting a wide range of luxury offerings....MORE

*He was also the commenter at a trial that showed losing money in a scam you abet is not a good defense:

...I once knew a guy who lost retail clients a bunch of money in a deal in which the manager also had some skin. His legal team brought this up repeatedly in court.

Finally the judge got tired of the B.S. and said:
"I am not allowing the stupidity defense".

At that point one of the spectators on the rail said
"Billy, you done bammed your last boozle".

Even the judge couldn't keep a straight face and the defense attorney was giggling as he asked for an immediate mistrial....

From our July 2007 post "Amaranth: In All Fairness..."

"Anonymous Is Supposed to Attack the Internet Today"

Ho-hum.
From Gawker:

 

Today's the big day, Anonymous: Operation Global Blackout. Hackers have been advised to attack the Domain Name System, which is responsible for taking a domain name like "gawker.com" and turning it into a series of numbers that makes sense to computers. Anonymous plans to bombard the system with junk traffic, thereby slowing just about everything on the internet down....MORE

Also at Gawker:

Jerry Lee Lewis Marries the Ex-Wife of His Underage Ex-Wife’s Brother

Climateer Line of the Day: Old School Ties Edition

I had intended to post this yesterday but had to leave early, I'm still laughing.
To a certain cohort of a certain class this is either the epitome of wit or it's simply a fact Jack:

“He might have talked about this deal or that connection.

But as an Etonian I simply assumed that Neil, being a Harrovian,

might be prone to embellishment here and there.”

From the DailyBeast's "Neil Heywood & China’s Bo Xilai Scandal: Drinker, Sailor, Fixer, Spy?":

The death of Englishman Neil Heywood alone in a Chonqing hotel room makes the spectacular sacking of high-ranking Chinese official Bo Xilai seem even more like a Hollywood thriller. Melinda Liu reports.

Feverish conspiracy theories rampaged through China’s expat community this month when the U.K. government asked Beijing authorities to investigate the death of a Briton named Neil Heywood, who reportedly knew the Harrow-educated son and lawyer wife of former Chongqing party secretary Bo Xilai.

The request came nearly five months after the discovery of the lifeless 41-year-old Englishman in a Chongqing hotel room; local authorities blamed the death of “excessive alcohol consumption” and swiftly cremated Heywood’s remains without an autopsy. Although his Chinese wife didn’t ask for an inquiry, members of the British community said Heywood was not a heavy drinker and pressed their embassy to ask for a probe.

The investigation request has fanned the already-virulent speculation surrounding Bo’s recent ouster by top Communist Party officials. Before the Heywood twist, Bo’s fall was beginning to look like a matter of yet another power-hungry and reportedly corrupt cadre who flew too close to the sun. Now, his tale involves a murder mystery as well. Or does it? Before getting transfixed by the rumor-mongering over Heywood’s demise, let us review the (sparse) facts of the case:

In November, Heywood died while on a visit to Chongqing. In February, Bo’s high-profile police chief Wang Lijun unsuccessfully tried to seek political asylum in an American consulate; he was whisked away by Chinese officers instead and is now under “investigation.” In mid-March, Bo got sacked. Shortly afterward, British officials say they asked Beijing to investigate Heywood’s demise due to “suggestions of suspicious circumstances involved in his death.” Throughout it all, no one has disputed that Heywood, also a Harrow alum, knew Bo’s flamboyant 24-year-old son Bo Guagua....MORE

Chartology: "Is the Chinese Stock Market About to Crash?"

ZeroHedge has the commentary, here's the chart:


(click through to ZH post to enlarge)

U.S. Top 1% Not Pulling Their Weight: "Asia now leads the world in centa-millionaires"

From Foreign Policy's Passport blog:

North America's 1 percent are not pulling their weight, according to a new study by CitiGroup. Boomberg summarizes: 

The number of Asians with at least $100 million in disposable assets overtook North America’s tally for the first time as the world’s “economic center of gravity” continued moving east, Citigroup Inc.’s (C) private bank said.
There were 18,000 “centa-millionaires” in Southeast Asia, China and Japan at the end of 2011, compared with 17,000 in North America and 14,000 in Western Europe, the bank said today in The Wealth Report 2012, published in partnership with Knight Frank LLP.

James Poulos notes that this might actually be dangerous for Asian countries...MORE

Part of their "Decline Watch" series

Natural Gas: "US natgas rig count climbs for 1st time in 12 weeks"

These folks may be shooting for natgas liquids which is the only way some companies are going to survive the summer.
From Reuters:

* Natural gas-directed rig count at 658, up 6
    * Horizontal rig count gains for second time in 3 weeks
    * Oil rigs again hit 25-year high

    By Joe Silha
    NEW YORK, March 30 (Reuters) - U.S. energy producers this week boosted the number of rigs drilling for natural gas for the first time in 12 weeks despite historically low prices for the fuel that have squeezed profit margins and forced some to curb dry gas drilling operations.
    The gas-directed rig count climbed by six to 658, after hitting a 10-year low of 652 last week, data from oil services firm Baker Hughes released on F riday showed.
    However, the gain in rigs was too small to impact prices, gas traders said. Natural gas produced during development of more-lucrative liquids-based plays is likely bolstering gas output despite the rig count drop over the last three months....MORE

Here's BHI investor relations' map of where the rigs are.

"US farmers' huge bet on corn had better pay off"

Get rid of the EPA's ethanol mandate.
From Agrimoney:

US farmers' bet on yellow had better pay off.

Corn growers in the world's top producing country were on Friday revealed to beplanning to plant 95.9m acres with the grain – the largest corn acreage in 75 years.

Which, on the face of it, is good news. Consumers worldwide need a big American corn harvest to rebuild depleted inventories.

But the extent of the switch into the yellow grain carries the risk of being too much of a good thing.

Ideal situation

OK, it could set up the world for far better supplies.

Assume an 8% abandonment rate, and the yield the US Department of Agriculture is predicting for those acres that make it through, and the crop comes in above 14.4bn bushels, a clear record.

Ending stocks will end 2012-13 at some 1.7bn bushels, according to US Commodities, around the levels of 2009-10.

Buyers may hope so. US supplies were ample enough to keep prices below $4 a bushel for most of that season.

Yield threats

But the risk is that yields fall short of that USDA forecast, as they have done for both the last two crops – landing America with disappointing supplies....MORE

Natural Gas: Storage Sites Begin to Turn Gas Away as WSJ Contemplates $0.00 Spot Price

The near futures were up 0.007 last I saw.
First up, the Edmonton Journal:

Owners of some U.S. natural gas storage sites began turning some customers away this week for fear that the system will overflow in autumn, the clearest sign yet that surging production may wreak havoc in the market later this year.

Huge supplies of shale gas from newly exploited deposits are set to fill U.S. storage caverns and tanks to their limit this year for the first time, threatening to force producers to shut down wells or risk overloading the pipeline network.

Signs of the strain became evident this week, as storage operators rejected some supplies to ensure they have enough space to meet all of their contractual commitments over the summer. Gas inventories typically fall in winter and rise in summer, and storage companies usually sell much of their capacity months or years in advance.

TransCanada's ANR Storage, one of the country's biggest storage owners, halted gas injection services indefinitely for interruptible clients this week "due to storage field constraints," a notice on its website said....MORE

And from the Wall Street Journal:
Why Natural-Gas Prices Could Fade to Red

Traders like to exude an "I've-seen-this-movie-before" air of nonchalance. But the thriller unfolding in natural-gas markets—call it "Frackopalypse Now"—has even the most jaded of them on the edge of their seats.

U.S. natural-gas prices are at a decade low, at about $2.20 a million British thermal units. That marks an unprecedented discount to crude oil. And next week heralds the start of "injection season," the time from April through October when warmer weather allows for rebuilding gas inventories.
This could make an already bad glut of gas far worse. The fear is that producers could be forced to actually give gas away.

Thursday's weekly report from the Energy Information Administration will likely show an earlier-than-normal start to the injection season, with an inventory build of about 50 billion cubic feet of gas, according to analysts' estimates. The mild winter and bountiful supply from the new production technique of hydrofracturing, or "fracking," shale formations has left inventory higher than ever for this time of year. April will kick off with inventories near 2.5 trillion cubic feet, 900 billion cubic feet above the five-year average.

Over the past heating season, inventories declined at a 30% slower rate than the five-year average. If half that was due to warmer weather and the other half to structural overproduction, capacity of four trillion cubic feet could be full by mid-August, with 12 weeks left in the injection season.

Since gas would have nowhere to go, prices could, in theory, turn negative. Market forces will do their best to counter that as dirt-cheap gas prompts more utilities to switch from coal. Industrial companies such as Dow Chemical Co. DOW +1.38%and Nucor Corp. NUE +0.35%also are reacting by using more cheap gas and related products....MORE

MIT Prof. Rips Morgan Stanley-commissioned Report on Volcker Rule Costs to Energy Traders and the Economy

Thanks to a reader.
I've not yet read the study but may get to it this weekend.
Parsons is MIT's Executive Director, Center for Energy and Environmental Policy Research and Joint Program on the Science and Policy of Global Change  and a Senior Lecturer, Sloan School of Management.

From his Betting the Business blog:
The quickest way to a conclusion, … jump. 

Earlier today, the consulting firm IHS released a report decrying the horrible consequences that the Volcker Rule would have for the US energy industry and the economy.
It’s a hatchet job.
Why?

There are 2 essential fallacies at the heart of the IHS report. And many other ones, too, but let’s focus on the essential ones.

First, the report assumes its conclusion. The Volcker Rule bans banks from proprietary trading. But the Volcker Rule does not ban anyone else from proprietary trading. The IHS report assumes that when banks stop proprietary trading, no one else will step in and do so.

That’s a ridiculous assumption. Let’s look at other industries where governments sometimes regulate which institutions may and may not operate – take alcohol sales, for example. Suppose a state were to ban grocery stores from selling alcohol. Does that mean alcohol would not be sold? Obviously not.

So why does IHS assume that if bankers stop providing this service, no one else would step in to do so. The report never explains.

It’s a long, bloated report. But only after 91 pages (electronic count)… in the conclusion no less … do the authors get around to addressing the critical assumption. When they do, all they can say is:

U.S. banks’ deep knowledge of the complexity of energy and financial markets cannot be replaced quickly.

Quickly? So now, the issue is quickly? So finally, at the end, the authors tell us that the real issue is just the speed of implementation. Does IHS mean that the Volcker Rule would be a good idea, but we must implement it slowly, so as to give new businesses time to step into the breach? Certainly the Executive Summary does not seem in line with that nuance in the conclusion....MORE (and meaner)

"Are High Taxes About to Make Silicon Valley Pack Up and Leave?"

As we've pointed out over the years, Intel has publicly stated they will never again build a manufacturing plant in California (Arizona says thanks for the new $5Billon plant), Google and Microsoft will not pay California utility rates when they build server farms, the entire aerospace industry has adiosed, and on and on and on.
Martin Hutchison writing at Money Morning:

California Governor Jerry Brown is at it again.

He's cut a deal with the teachers' unions that would take the top rate of state income tax from 10.3% to 13.3%.

If passed on the November ballot, that would increase taxes on the top tier by a hefty 29%.

Since that would be the highest rate in the nation, it begs the question: How high would taxes have to go before Silicon Valley's zillionaires decided to make the great escape?

It's a very important question considering the condition of California's state budget.

After all, the Facebook IPO alone is expected to produce $2.5 billion in state tax revenue over the next five years. What if high tax rates set in motion the law of unintended consequences?

Like in the late 1990s when dot-com revenues enabled the state to go on a massive spending spree.

Not long after the tech bubble burst, the sudden budget crunch that followed in 2001-02 caused Governor Gray Davis to be recalled in a referendum.

It's a different set up this time, but the results could be the same.

Higher Taxes Create Capital Flight

Silicon Valley's tech sector provides both capital gains taxes from tech giants selling their stakes after companies go public and massive income tax revenues from their salaries and bonuses in the interim.

Faced with higher taxes the threat of relocation is very real - even among large, well-established companies. For instance, Boeing (NYSE: BA) relocated from Seattle to Chicago in 2001.

California's taxes and other living costs are already large enough to cause flight; in 2007-10 an annual average of 135,000 more people left California than arrived there.

However, the largest generators of California's tax base are not established companies, they are the young, brilliant entrepreneurs, venture capitalists and engineers involved in Silicon Valley enterprises.

These people are exceptionally footloose, with few family ties.

On the plus side, Silicon Valley is very tightly networked, so at least the more junior members of the tech sector would be tied there by their colleagues, competitors and mentors.

Still, the corollary of the Valley's networked nature is that the departure of a small number of key people could cause a mass exodus, with junior employees following their bosses and mentors....MORE

Corn Stockpiles at 8-Year Low, Planting Intentions at 75-Year High, Who Wins? (hint: long ain't wrong)

Corn up .352 at 6.392, Soybeans up .55 at 14.104, Wheat up .316 at 6.442.
Big moves.
First up, BusinessWeek:
Corn Stockpiles Fall to 8-Year Low; Wheat Supply Drops

Corn inventories in the U.S., the world’s biggest grower and exporter, were down 7.9 percent on March 1 from a year earlier, the government said. Wheat supplies fell 16 percent, while soybeans reserves rose.
Corn stockpiles on March 1 totaled 6.009 billion bushels, down from 6.523 billion a year earlier and the lowest for that time of year since 2004, the U.S. Department of Agriculture said today in a report. Analysts in a Bloomberg survey expected 6.16 billion, on average.

“It’s going to be a tight supply situation until farmers begin harvesting this year’s crops,” Marty Foreman, an economist for Doane Advisory Services Co. in St. Louis, said before the report. “We still need to grow a good crop this year to rebuild inventories.”

Before today, corn futures tumbled 11 percent since reaching a five-month high on March 19 on the Chicago Board of Trade, partly on concern that USDA would report a higher inventory estimate than analysts expected....MORE

And from Agrimoney:

US corn plantings to hit 75-year high

US farmers intend to plant the biggest corn acreage since the year Picasso painted Guernica and George Gershwin died, lured by strong returns - and at the expense of soybeans and wheat.

The data sent soybeans to a six-month high in Chicago, while spring wheat soared 5.0% in opening deals in Minneapolis.

US growers are to plant 95.9m acres with corn this year, an area bigger than Japan, and the highest acreage since 1937, the US Department of Agriculture said.

"There is a yellow tsunami coming. This is a huge number of acres," Sal Gilbertie, president of commodity-based exchange traded fund specialist Teucrium Trading, told Agrimoney.com.

Forecasts trounced

The estimate, revealed in a long-awaited sowings report, was far bigger than investors had expected, with analysts predicting a figure of at best 95.6m acres, and potentially as low as 93.5m acres....MORE

D. Acemoglu and S. Johnson: "Who Captured the Fed?"

From the NYT's Economix:
Daron Acemoglu is Elizabeth and James Killian Professor of Economics at the Massachusetts Institute of Technology and co-author of “Why Nations Fail: The Origins of Power, Prosperity and Poverty.” Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

A hundred years ago, monetary policy – control over interest rates and the availability of credit – was viewed as a highly contentious political issue. People on the left of the political spectrum feared the central bank would be used to prop up Wall Street banks; those on the right thought it would unduly expand the role of government, giving too much power to politicians.

Today’s Economist

Perspectives from expert contributors.

In the 1980s we entered a phase in which the Federal Reserve, along with other major central banks around the world, was seen as independent and run by technocrats supposedly immune from political pressure.
But in the light of the crisis of 2008 and its aftermath, we have to ask: Has our central bank fallen back under the influence of special interests?

The origins of the Federal Reserve System lie in an emotional debate, conducted more than 100 years ago, about whether the government should seek to affect interest rates – and support the credit of Wall Street firms during times of crisis – and, if so, how.

The Panic of 1907 convinced many people that the United States needed a central bank of some kind. A complete collapse of the financial system was too scary a prospect. But there was also a longstanding American aversion against ceding too much power to big banks.

At the dawn of the republic, Thomas Jefferson railed against the risks posed by government backing for concentrated power in the financial sector. President Andrew Jackson fought to abolish the Second Bank of the United States in the 1830s, the leading private bank of his day, which helped manage public finances and the banking system. Consequently, there was nothing resembling a central bank in the United States for much of the 19th century.

The Federal Reserve System, created in 1913, was a uniquely American compromise, trying to balance public and private interests. Banks controlled the boards of the 12 regional Feds – with big Wall Street firms holding great sway over the New York Fed, which had a disproportionate influence within the system as a whole — and still does.

This version of the system presided over a crazed and highly leveraged stock market boom in the 1920s and the catastrophic collapse of credit in the early 1930s, while protecting the big Wall Street firms.

Under Franklin Delano Roosevelt, the role of the Federal Reserve Board of Governors, based in Washington, was strengthened, and Wall Street was more generally constrained by effective changes to a wide range of banking and securities laws. These reforms and the effects of World War II pulled the central bank away from powerful bankers and further into the orbit of elected officials....MORE

How A Baby Bust Will Turn Asia's Tigers Toothless

From NewGeography:

For the last two decades, America’s pundit class has been looking for models to correct our numerous national deficiencies. Some of the more deluded have settled on Europe, which, given its persistent low economic growth over the past 20 years and minuscule birth rates, amounts to something like looking for love in all the wrong places.

More rational and understandable have been those who have looked for role models instead in East Asia. After all, East Asia has been the world’s ascendant power for the better part of past 30 years. It is home to both China and Japan, the world’s second and third largest economies, as well as the dynamic “tiger” economies of Korea, Taiwan, Hong Kong and Singapore.

Thomas Friedman, long enamored by authoritarian leviathan China, recently praised the tiger countries as exemplars of forward thinking. He traces their strong emphasis on “highly effective teachers, involved parents and committed students” as keys to turning their resource-poor countries into first world successes.

Yet for all their laudably good school test scores, these tigers could turn somewhat toothless in the future. Already Japan, which fashioned the first great Asian model, is beset by a series of massive challenges including a lack of technological competitiveness and disastrously declining demographics. They also face competition from places like China and India, behemoths which may not equal the Tigers’ spectacular per-capita education numbers, but which can marshal overwhelming numbers of ambitious, educated and skilled people.

Many in the tiger nations recognize this competitive plight far more than their western cheerleaders. Some even wonder if they may even have been too rational and credential-obsessed for their own good. Like Japan after the Second World War, they invested heavily in educating their young people to excel on tests and work long hours . But this also fostered high levels of stress and hyper-competition that discourages both family formation and child bearing .

Singapore (where I serve as Senior Visiting Fellow at the Civil Service College) is arguably the best planned and most cleverly conceived of all the Tigers. Singaporeans live well — their per-capita incomes surpass those of Americans — but this edge is largely blunted by extremely high costs. As in all the Tiger countries, consumer goods like cars are extraordinarily expensive (a modest Korean model can run upwards of $75,000 or more in Singapore) and housing costs far higher than experienced by most Americans. In Hong Kong, notes researcher Wendell Cox, an average apartment, usually quite small, costs roughly twice as much as one  in New York or San Francisco, two most elite metro U.S. markets, relative to income....MORE

Matt Taibbi on Thomas Friedman

A half-decade old but still good fun.
From NYPress via AlterNet:

Flathead

New York Times columnist Tom Friedman's latest book on Globalization is a battle between twisted logic and atrocious writing.

I think it was about five months ago that Press editor Alex Zaitchik whispered to me in the office hallway that Thomas Friedman had a new book coming out. All he knew about it was the title, but that was enough; he approached me with the chilled demeanor of a British spy who has just discovered that Hitler was secretly buying up the world's manganese supply. Who knew what it meant--but one had to assume the worst

"It's going to be called 'The Flattening,'" he whispered. Then he stood there, eyebrows raised, staring at me, waiting to see the effect of the news when it landed. I said nothing.

It turned out Alex had bad information; the book that ultimately came out would be called 'The World Is Flat.' It didn't matter. Either version suggested the same horrifying possibility. Thomas Friedman in possession of 500 pages of ruminations on the metaphorical theme of flatness would be a very dangerous thing indeed. It would be like letting achimpanzee loose in the NORAD control room; even the best-case scenario is an image that could keep you awake well into your 50s.

So I tried not to think about it. But when I heard the book was actually coming out, I started to worry. Among other things, I knew I would be asked to write the review. The usual ratio of Friedman criticism is 2:1, i.e., two human words to make sense of each single word of Friedmanese. Friedman is such a genius of literary incompetence that even his most innocent passages invite feature-length essays. I'll give you an example, drawn at random from "The World Is Flat." On page 174, Friedman is describing a flight he took on Southwest Airlines from Baltimore to Hartford, Connecticut. (Friedman never forgets to name the company or the brand name; if he had written "The Metamorphosis," Gregor Samsa would have awoken from uneasy dreams in a Sealy Posturepedic.) Here's what he says:

I stomped off, went through security, bought a Cinnabon, and glumly sat at the back of the B line, waiting to be herded on board so that I could hunt for space in the overhead bins.

 Forget the Cinnabon. Name me a herd animal that hunts. Name me one.

This would be a small thing were it not for the overall pattern. Thomas Friedman does not get these things right even by accident. It's not that he occasionally screws up and fails to make his metaphors and images agree. It's that he always screws it up. He has an anti-ear, and it's absolutely infallible; he is a Joyce or a Flaubert in reverse, incapable of rendering even the smallest details without genius. The difference between Friedman and an ordinary bad writer is that an ordinary bad writer will, say, call some businessman a shark and have him say some tired, uninspired piece of dialogue: Friedman will have him spout it. And that's guaranteed, every single time. He never misses.

On an ideological level, Friedman's new book is the worst, most boring kind of middlebrow horseshit. If its literary peculiarities could somehow be removed from the equation, "The World Is Flat" would appear as no more than an unusually long pamphlet replete with the kind of plug-filled, free-trader leg-humping that passes for thought in this country. It is a tale of a man who walks 10 feet in front of his house armed with a late-model Blackberry and comes back home five minutes later to gush to his wife that hospitals now use the internet to outsource the reading of CAT scans. Man flies on planes, observes the wonders of capitalism, says we're not in Kansas anymore. (He actually says we're not in Kansas anymore.) That's the whole plot right there. If the underlying message is all that interests you, read no further, because that's all there is....MUCH MORE

HT: Long Form

"Marx at 193"

Karl, not Groucho.
From the London Review of Books:

In trying to think what Marx would have made of the world today, we have to begin by stressing that he was not an empiricist. He didn’t think that you could gain access to the truth by gleaning bits of data from experience, ‘data points’ as scientists call them, and then assembling a picture of reality from the fragments you’ve accumulated. Since this is what most of us think we’re doing most of the time it marks a fundamental break between Marx and what we call common sense, a notion that was greatly disliked by Marx, who saw it as the way a particular political and class order turns its construction of reality into an apparently neutral set of ideas which are then taken as givens of the natural order.

Empiricism, because it takes its evidence from the existing order of things, is inherently prone to accepting as realities things that are merely evidence of underlying biases and ideological pressures. Empiricism, for Marx, will always confirm the status quo. He would have particularly disliked the modern tendency to argue from ‘facts’, as if those facts were neutral chunks of reality, free of the watermarks of history and interpretation and ideological bias and of the circumstances of their own production.

I, on the other hand, am an empiricist. That’s not so much because I think Marx was wrong about the distorting effect of underlying ideological pressures; it’s because I don’t think it’s possible to have a vantage point free of those pressures, so you have a duty to do the best with what you can see, and especially not to shirk from looking at data which are uncomfortable and/or contradictory. But this is a profound difference between Marx and my way of talking about Marx, which he would have regarded as being philosophically and politically entirely invalid.
Consider these passages from The Communist Manifesto, which Marx wrote with Engels in 1848, after being kicked out of both France and Germany for his political writings:

Capitalism has subjected the country to the rule of the towns. It has created enormous cities. Capitalism has agglomerated population, centralised means of production, and has concentrated property in a few hands.

Capitalism has left remaining no other nexus between man and man than naked self-interest, than callous ‘cash payment’.

Capitalism has been the first to show what man’s activity can bring about. It has accomplished wonders far surpassing Egyptian pyramids, Roman aqueducts and Gothic cathedrals; it has conducted expeditions that put in the shade all former Exoduses of nations and crusades. Capitalism has created more massive and more colossal productive forces than have all preceding generations together.

Capitalism cannot exist without constantly revolutionising the instruments of production, and thereby the means of production, and with them the whole relations of society. Constant revolutionising of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the capitalist epoch from all earlier ones. All old-established national industries have been destroyed or are daily being destroyed.

In place of the old wants, satisfied by the productions of the country, we find new wants, requiring for their satisfaction the products of distant lands and climes.

Commercial crises put on trial, each time more threateningly, the existence of the entire capitalist society. In these crises a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed.

It’s hard not to conclude from these selected sentences that Marx was extraordinarily prescient. He really did have the most astonishing insight into the nature and trajectory and direction of capitalism. Three aspects which particularly stand out here are the tribute he pays to the productive capacity of capitalism, which far exceeds that of any other political-economic system we’ve ever seen; the remaking of social order which accompanies that; and capitalism’s inherent tendency for crisis, for cycles of boom and bust.

I should, however, admit that I haven’t quoted these sentences exactly as Marx wrote them: where I wrote ‘capitalism’, Marx had ‘the bourgeoisie’. He was talking about a class and the system which served its interest, and I made it sound as if he was talking only about a system. Marx doesn’t use the word ‘capitalism’. The term never occurs in the finished first part of Das Kapital. (I checked this by doing a word search and found it three times, every time an apparent mistranslation or loose use of the German plural Kapitals – in German he never talks of Kapitalismus.) Since he is widely, and accurately, seen as capitalism’s greatest critic, this is quite an omission....MORE

See also:

Groucho versus Karl: the great Marx debate

Religion is the sigh of the oppressed creature, the heart of a heartless world, just as it is the spirit of a spiritless situation. It is the opium of the people.
Karl Marx
It isn’t necessary to have relatives in Kansas City in order to be unhappy.
Groucho Marx

Art is always and everywhere the secret confession, and at the same time the immortal movement of its time.
Karl Marx
I don’t have a photograph, but you can have my footprints. They’re upstairs in my socks.
Groucho Marx

The last capitalist we hang shall be the one who sold us the rope.
Karl Marx
Money frees you from doing things you dislike. Since I dislike doing nearly everything, money is handy.
Groucho Marx

Reason has always existed, but not always in a reasonable form.
Karl Marx
A child of five would understand this. Send someone to fetch a child of five.
Groucho Marx

The oppressed are allowed once every few years to decide which particular representatives of the oppressing class are to represent and repress them.
Karl Marx
In America you can go on the air and kid the politicians, and the politicians can go on the air and kid the people.
Groucho Marx

...MORE at SawyerSpeaks

Massachusetts Securities Regulator: Time For Credit Suisse To Open TVIX Books.

Following up on "TVIX: Here Come the Federales".
From MarketBeat:

Massachusetts’s securities regulator said it is looking into the VelocityShares 2x Long VIX Short Term Exchange note (TVIX), managed by Credit Suisse.

Secretary of the Commonwealth William Galvin submitted a written request on March 23 to Credit Suisse for information and documents related to every purchase of TVIX shares from Feb. 20 to March 23. The regulator also is seeking information on what time Credit Suisse filed its media release with the Securities and Exchange Commission on its plans to reopen issuance of TVIX beginning on March 23 and who was involved in making that decision....MORE

Lileks on Money

In the post immediately below I mentioned my Cassandra-like (no one listens) warnings on the effect of rising interest rates on the Federal budget (insert "blast at parties" comment here______) and referred to the warnings as "bleats".

I immediately felt guilty.
There is only one Bleat and that's the blog at the incomparable Lileks.com. Here's today's installment:

Walked downtown

for a break, wandered over to the coin store. I never buy coins. It’s useless money for me: the old paper stuff that has no value anymore, so it’s a matter of what he wants to charge and I want to pay.

“What does this useless stuff go for now?” I asked. He said it depended on how many I bought - pick ten, and they’re a buck-and-two-bits each. So I picked ten, and offered him ten. I mean, one was an old dollar bill. I’m not going to pay more than a dollar for a dollar. Sure, it was a silver certificate, but still. Those fascinated me as a kid - any sort of unusual money was alluring, like $2 bills, or changes to the coins. (The coins never changed, either. Not like these days. I was surprised to find the changes in the nickels and pennies, and the nickel’s been different for six years. Just not paying attention - or there are so many of the old ones in circulation. Or maybe I’m not alone; do you remember this?

(I don’t.) The idea that you could exchange a bill for silver was a thrilling idea. My dad set them aside, as if they were somehow more potent than paper dollars, and I suppose they were: you could get metal that other people would accept as something of intrinsic value, because, well, someone could turn it into rings, I guess. Same with gold. So the entire economic system for humankind is based on whether it’ll look good hanging from a woman’s ears or fastened around her wrist? Yes, my son. That is the way of things.

Interesting facts: there could only be as many silver certificates in circulation as there were silver coins to back them up. Isn’t that a quaint notion? That changed in 1963, when JFK signed an executive order that said Oh Hell, just print ‘em, and thereafter there was no relationship between the number in circulation and the actual amount of silver the government had. And that’s why he was shot. Four years later, the government said “that thing we said before? Never mind” and stopped redeeming the certificates. Because they could! The sand, you can pound it.

The reason for them in the first place? Perhaps a sop to people peeved that silver had lost the Official Metal Standard War, when the Coinage Act of 18whenever put us on the gold standard, more or less. Googling . . . okay, 1873, although the official adaptation of the gold standard came in 1900. So the people who were cheesed in 1900 might have lived long enough to see FDR order everyone to turn in their gold in 1934. Because they could! The sand, et cetera. WE WARNED YOU ABOUT THAT GOLD. ‘TIS A FICKLE BITCH WHAT BRINGS MISERY TO ALL. Silver, that’s the ticket.

Lest you think that micromanaging the macro economy is a new twist, let’s take a look at the good ol’ Sherman Sillver Purchase:

The Sherman Silver Purchase Act was enacted on July 14, 1890[1] as a United States federal law. It was named after its author, Senator John Sherman, an Ohio Republican, chairman of the Senate Finance Committee. While not authorizing the free and unlimited coinage of silver that the Free Silver supporters wanted, it increased the amount of silver the government was required to purchase every month. The Sherman Silver Purchase Act had been passed in response to the growing complaints of farmers and miners interests. Farmers had immense debts that could not be paid off due to deflation caused by overproduction, and they urged the government to pass the Sherman Silver Purchase Act in order to boost the economy and cause inflation, allowing them to pay their debts with cheaper dollars. Mining companies, meanwhile, had extracted vast quantities of silver from western mines; the resulting oversupply drove down the price of their product, often to below the point where it was not profitable to mine it. They hoped to enlist the government to artificially increase the demand for silver.

I’ll spare you the rest, but I love this: in their infinite wisdom, the government paid for silver with notes that could be redeemed for silver or gold. Which do you think people chose? Then came the Panic of 1893, and the bailout of the government by J. P. Morgan.

Anyway. I offered him a ten for the ten. He took it, complaining about my hard bargains and deal-making skill.

“You know I’m paying ten times more than they’re worth already,” I said, “although obviously they’re worth ten dollars to me.”

“Oh, there’s a lot of valuable stuff in that bin,” he said. I knew he was full of nonsense and he knew I knew. We go through this once a year.

“You have Japanese occupation money in there that isn’t worth half a penny.”

“Do you see it blowing down the street?” he said, spreading his arms to indicate the big wide world where Japanese occupation money is not blowing down the street, thus indicating that its relative scarcity here and now conferred greater value. Which, of course, it did, but not a buck’s worth.
Doesn’t matter. I love this stuff. There will be about 40 more pages added to the Engraveyard next month, after it’s scanned. The entire site is being redesigned. Of course. Because I have a new design paradigm in my head that's infecting all the new or redesigned sites, and will be irritatingly archaic when I see them again in a few years.

Here’s a preview: A dollar from the Dominion of Canada, our beloved neighbor to the north:



That’s George V. Interesting note from wikipedia:

(The King's doctor) Dawson's private diary, unearthed after his death and made public in 1986, reveals that the King's last words, a mumbled "God damn you!",[76] were addressed to his nurse when she gave him a sedative on the night of 20 January. Dawson wrote that he had ended the King's life by giving him a lethal injection of cocaine and morphine. Dawson noted he acted to preserve the King's dignity, to prevent strain on the family and so that the King's death at 11:55 pm could be announced in the morning edition of The Times newspaper rather than "less appropriate ... evening journals".

That’s fascinating. Damned vulgar press will probably run a headline like “Georgie Snuffs It” or “Georgie Porgie, Pudding, Dies.” A man of his stature deserves to have the Times get first crack. Watson, the needle.
Cocaine and morphine? Hell of an exit....MORE

We have lifted his annotated stcock certificate for the scripophily series but never linked to the blog.
Rectified!

See also:
Climateer Investing: Scripophily Recapitulates Philately
Climateer Investing: Scripophily Recapitulates Philately II
Climateer Investing: Scripophily Recapitulates Philately III
.

Of Debt and Interest Rates: This Ain't No Party, This Ain't No Disco

This ain't no foolin' around.
The debt clock ticks every second, and worse, as we've been bleating for a couple years, is the interest.
Here's a bleat* from last year:

Betting the Farm: Debt Brings Risk of Losing it All

The risk for farmers is the same as that faced by the U.S. government.
It's not the debt per se, it is the cost of servicing it. Low interest rates seduce borrowers into taking on more debt than they should because the current interest cost is manageable. Should rates increase the proportion of cash flow that must go to debt service can crowd out any other use.

I touched on this problem during the run-up to the 2010 mid-term elections in "For My Republican/Conservative/Tea Party Friends: "Here is where all that Government Spending is Really Going". In a November post, "U.S. Government Debt Service to Surpass Military Outlays by 2016" we had a chart showing Federal interest payments rising from a bit over $200 billion/year to $800 billion, $600 bil. that could go toward productive purposes but instead would be used to keep the collection agency from calling.

Here's yesterday's Catherine Baum column at Bloomberg:

Four Numbers Add Up to an American Debt Disaster

Illustration by Jordan Awan

Consider the following numbers: 2.2, 62.8, 454, 5.9. Drawing a blank? Not to worry. They don’t mean much on their own.

Now consider them in context:

1) 2.2 percent is the average interest rate on the U.S. Treasury’s marketable and non-marketable debt (February data).
2) 62.8 months is the average maturity of the Treasury’s marketable debt (fourth quarter 2011).
3) $454 billion is the interest expense on publicly held debt in fiscal 2011, which ended Sept. 30.
4) $5.9 trillion is the amount of debt coming due in the next five years.
For the moment, Nos. 1 and 2 are helping No. 3 and creating a big problem for No. 4. Unless Treasury does something about No. 2, Nos. 1 and 3 will become liabilities while No. 4 has the potential to provoke a crisis.

In plain English, the Treasury’s reliance on short-term financing serves a dual purpose, neither of which is beneficial in the long run. First, it helps conceal the depth of the nation’s structural imbalances: the difference between what it spends and what it collects in taxes. Second, it puts the U.S. in the precarious position of having to roll over 71 percent of its privately held marketable debt in the next five years -- probably at higher interest rates.

First Among Equals
And that’s a problem. The U.S. is more dependent on short- term funding than many of Europe’s highly indebted countries, including Greece, Spain and Portugal, according to Lawrence Goodman, president of the Center for Financial Stability, a non- partisan New York think tank focusing on financial markets.

The U.S. may have had a lot more debt in relation to the size of its economy following World War II, but the structure was much more favorable, with 41 percent maturing in less than five years, 31 percent in five-to-10 years and 21 percent in 10 years or more, according to CFS data. Today, only 10 percent of the public debt matures outside of a decade.....MORE

See also:
The Black Swan Isn't the Debt Ceiling, It is Holders of U.S. Treasuries Asking for Cash Rather Than Rolling the Paper
Grant's Interest Rate Observer vs. Paul Krugman on the U.S. Federal Debt
Geographic Areas to Short When the Debt Bomb Goes Off

And many more, use the "Search blog" box.

Natural Gas Futures Collapse after EIA Shows Bigger-than-expected Inventory Rise

Still looking for sub-$2 by May-June, $1.80 best guess.
At $2.15, last.
From Dow Jones Newswires:

--EIA said inventories rose 57 bcf last week
--Analysts saw 46 bcf rise in stockpiles - survey

Natural gas futures plunged Thursday after the government reported a bigger-than-expected increase in gas inventories last week, underscoring weak demand for the fuel in the face of elevated production.
Front-month futures dropped more than 5 cents in the first minute alone after the release of the 10:30 a.m. EDT report, which showed inventories last week rose 57 billion cubic feet.
The rise was well above the 46-bcf build projected in a Dow Jones Newswires survey of analysts.
"It's falling like a rock after that storage number," said Eric Bickel, analyst at Summit Energy in Louisville, Ky.

Natural gas for May delivery recently traded down 9.8 cents, or 4.3%, to $2.184 per million British thermal units on the New York Mercantile Exchange.

The contract fell as low as $2.165, cheaper than the Wednesday $2.191 expiration price of the April contract, which was a 10-year settlement low. May futures began the day more expensive than April's finish.
The sizable build comes amid weak demand for natural gas and near-record production from shale fields. The unusually mild winter and early spring has clobbered demand for natural gas used to heat homes and offices, leaving natural gas stores brimming and prices swooning....MORE

This follows on Tuesday's "Here We Go: "US spot natgas prices drop for fourth time in 5 days"' and at least three-score posts since November.

Al Gore is Dead to José Canseco

First up, the headline at BleacherReport:
Jose Canseco: Retired Slugger Laments Al Gore, Causes Mass Confusion
And the story via NBC Sports:

Rick’s Cafe: Jose Canseco, global warming and you (RIP, Al Gore)

Jose Canseco announced on Wednesday that he would discuss global warming with his Twitter followers the following day, and that they should “study” for the lecture, because “u clowns can’t comprehend global warning.”

True to his word, Canseco came back this morning with a barrage of tweets about recycling, the impending threat to polar bears, and how we can conserve energy by wearing flannel pajamas, “like the pioneers did.” But he also broke some big news during his Twitter rant: apparently, Al Gore has passed away. This comes as disturbing news to Al, I’m sure.

The tweets follow below, and I can think of very few things that are more entertaining. It’s slowly becoming clear that Jose Canseco’s Twitter feed is one of this country’s great treasures: possibly our first national landmark in cyberspace. Jose’s Twitter account should be visited with frequency, revered like the the Lincoln Memorial or the Liberty Bell. His brain is a comedy gold mine: full of great ironies, unintentional wit and fractured wisdom. It’s Sh*t My Father Says, if your father was an aging former Major Leaguer with a tenuous grasp on spelling and grammar who has several screws missing. His Twitter feed is at once a flight of fancy and a glimpse into madness....MUCH MORE 

TVIX: Here Come the Federales

From the Wall Street Journal:
Chaos Over a Plunging Note
Complex Security Drops 60% in Value in Past Week; SEC Is on the Case

Regulators are examining volatile trading in a complex exchange-traded note that caused it to lose 60% of its value in the past week.

The Securities and Exchange Commission is looking into the VelocityShares 2x Long VIX Short Term Exchange note, managed by Credit Suisse Group AG, which had about $700 million in assets before the decline, according to people familiar with the matter. The SEC review is preliminary, the people said.

The scrutiny comes amid rising investor alarm and confusion over trading in exchange-traded notes. The Credit Suisse note, which trades as TVIX and is designed to track stock-market volatility, plunged 29% on Thursday last week and then another 30% on Friday, even though market volatility was little changed. Another exchange-traded note, a Barclays Capital product designed to track natural gas, plunged this week for reasons that investors say remain unclear.

Spokeswomen for Credit Suisse and Barclays declined to comment....MORE

"Tragedies: The TacoCopter Was Just a Hoax"

Folks as disparate as the HuffPo and the Competitive Enterprise Institute were taken in. The CEI's OpenMarket blog has a wimpy retraction, the Huffington post hasn't scraped the Wired story yet.
From Eater National:

The new hotness that was the TacoCopter, the food-delivering unmanned aerial vehicle that took the internet by storm, has been revealed as a hoax by Wired.

The TacoCopter website promised "easy ordering on your smartphone" and "unmanned delivery agents" that are "fast and work tirelessly." But the dream of aerial taco delivery has been shattered: It turns out that the TacoCopter was simply a "product concept created by Star Simpson, an MIT grad" along with Dustin Boyer and Scott Torborg. Simpson admitted to creating the fake website so that he "would keep thinking about how to make something like this work."

Simpson believes it'll eventually be possible if the FAA relaxed its regulations and that "a network of command and recharging centers attached to kitchens capable of fulfilling demand orders could easily satisfy the taco delivery needs of a metropolitan area like San Francisco." For now though, no tacos from the sky.

The Atlantic is pitching the falsehood as brilliant marketing.

I'll show you brilliant. From our Feb. 2012 post "So, What Would You Do with a Swarm of Nano-quadrotors?":

I for one welcome our new nano overlords.
From the University of Pennsylvania:

Experiments performed with a team of nano quadrotors at the GRASP Lab, University of Pennsylvania. Vehicles developed by KMel Robotics

"The first sub-prime mortgage crisis and its aftermath" (1857)

"Emerging market speculation tends to appear at a juncture in the economic cycle when 

declining yields on domestic bonds combine with an excess of capital to make 

foreign investments particularly attractive."

-Edward Chancellor

Devil take the Hindmost: A History of Financial Speculation

Chapter 4, Fool's Gold: The Emerging Markets of the 1820's

That was a Climateer Quote of the Day back in 2010.

Keynote speech at the joint BIS/Monetary Authority of Singapore "Property markets and financial stability" workshop, 5Sept2011 released March 2012 via the Bank for International Settlements:

Introduction See also:

Financial markets in the years and months leading up to the financial crisis of 2007–08 were characterised by growth in the shadow banking sector, pyramiding and hidden leverage in the consumer and financial sectors, off-balance sheet financing by systemically important firms, and mortgage securitisation and other “creative” financing schemes that some say resembled games of “hot potato” and “hide the sausage”. The failure of a prominent financial institution triggered an eventual full collapse in stock prices, resulting in, among other things, a foreclosure crisis with long-lasting negative spillovers into the real economy.

Many believe the recent crisis to be unprecedented, where, for example, Hyun Song Shin (2010) wrote: “The global financial crisis that erupted in the summer of 2007 has the distinction of being the first post-securitisation crisis in which banking and capital market developments have been clearly intertwined.” In this speech I will present research I am conducting on the US panic of 1857 that contradicts Professor Shin’s observation, where the 1857 panic bore eerie similarities to the more recent panic.2

  3

The older panic, which occurred almost exactly 150 years prior to the more recent panic, had, in addition to the factors noted above, global capital flows emanating primarily from England and the Continent with clearly intertwined banking and capital markets. And, although sub-prime mortgage lending and securitisation were perhaps not as widespread as they were in the current crisis, they played a very central role in propagating the panic from a few strategically placed firms located near the frontier of the Old Northwest back east to New York City and Europe.

 

It is said that every crisis is similar and that every crisis is different. Identification of the relevant similarities and differences requires memory and retained knowledge, where this knowledge can be gained and retained in different guises. The broader objective of this speech is to argue that historical perspective, and more generally inductive methods to research, provides a strong complement to more traditional deductive research methods such as large-sample econometric analysis.

This speech is organised in three acts. The first act sketches the background of the US economy in the years and months leading up to the crisis of 1857 (which occurred in late August and lasted through October of that year). The second act analyses the sub-prime mortgages and their securities that existed at the time, which were known as the railroad farm mortgage (RRFM) and the RRFM-backed security. The third and final act considers the failure of the prominent financial institution that triggered the panic, and the panic’s aftermath as it specifically related to the RRFMs and their securities.

Act I: The years and months leading up to the panic of (late August through October) 1857

Some historical background on the 20 years leading up to the panic of 1857 is necessary to appreciate the panic’s many contributing factors. At a very basic and very real level, the panic of 1857 was the natural culmination of events that started with the even more severe panic of 1837.

For my story, there are two essential direct consequences of the earlier panic that are relevant. First, as a result of state-level funding of transportation infrastructure development (canals and the relatively new invention of the railroad), a number of states defaulted on their bonds after the panic of 1837. This experience caused many states to restrict any public funding of transportation projects. These restrictions shifted the burden of financing public goods to cities and more often individuals, resulting in a number of distorting effects. Second, bank failures in the 1837 panic were related to “money-run” as opposed to “deposit-run” problems, as deposit-based banking was in its infancy in the United States. Thus, the free banking era was born after 1837, with most of the regulatory focus on the quality of money printed by individual banks. Deposit-based banks consequently operated at the fringes of banking and bank regulation at the time, and were in effect shadow banks. By the time of the 1857 panic, other non-money issuing firms such as railroads also operated as shadow banks

by intermediating between direct capital suppliers and indirect investors.

In addition to state-level funding of infrastructure projects, significant amounts of the capital channelled into investment prior to the 1837 panic came from England and the Continent. After that crash, foreign investors said, “Never again!” Time and a yearning for easy riches erode many things, however. One key event that prompted a change in attitude among foreign investors was the California gold strike and gold rush of 1848 and 1849. That event significantly added to the gold stock of the United States and the world, resulting in, among other things, increased credit availability, growth in world trade, industrial construction and railroad building (Van Vleck (1943, pp. 38–39)).

Shortly after the gold rush, a railroad boom indeed began in earnest, as newfound wealth and an influx of foreign capital made its way into the hands of railroads and their promoters. Figure 1 shows the extent of the boom, with the amount of investment and added railways from 1850 to 1856. It is estimated that in excess of 25 per cent of the US GDP derived from the railroads during the mid-1850s. As noted in Panel B of the figure, Ohio, Indiana, Illinois, Michigan, Wisconsin and Iowa were considered western states at the time, at or near the frontier of the country and of railroad development. Figure 2 provides a visual depiction of

railroad investment/construction activity during the 1850s.

Largely because of the huge capital appetite of the railroads as a result of their stupendous growth during the 1850s, Wall Street began taking on its more modern character as an investment banker in addition to providing stock brokerage services and other methods of sourcing capital and making markets for securities. These developments helped lay the foundation for new creative ways to package securities for sale to investors....MORE (12 page PDF)

Charles Dickens on Finance and Financial Crises

To honor the bicentenary of Dickens birth I had planned to put together a post on Dickens and the commercial crisis of 1857-58 including the failure of the Strahan, Paul & Bates bank. Then I found that someone much, much sharper than I had done it back in 2008....

"ProShares Launches 3X Short T-Bond ETF" (TTT)

Another tool in the box.
From IndexUniverse:

ProShares, the world’s biggest purveyor of inverse and leveraged ETFs, today launched a triple-exposure ETF designed to short long-dated Treasurys, adding to a popular product from the Bethesda, Md.-based fund company that serves up double-short exposure to an index comprising U.S. Treasury bonds with at least 20 years to maturity.

The ProShares UltraPro Short 20+ Year Treasury ETF (NYSEArca: TTT), comes with a 0.95 total expense ratio, the same price as the double-exposure ProShares UltraShort 20+ Year Treasury ETF (NYSEArca: TBT). TBT, which had $3.79 billion in assets as of March 28, is the largest leveraged and inverse exchange-traded fund in the world....MORE

The world, according to Jim Rogers

From GulfNews:

Investor Jim Rogers offers sage advice on making money in the future — and he's been retired since he was 37

Excuse me," Jim Rogers says, pulling a navy blue sock over his right foot. "I'm a little jet lagged."
A Nepalese house boy is making over the Khaleej suite at Emirates Palace Hotel, the television is tuned to CNN, his laptop is open and dinging occasional alerts for new emails, and two BlackBerrys are charging on his desk.

“

A lot of the problems we're facing today is that people have forgotten how to work hard. It's a generational thing. If you go to a fast food restaurant or a department store in the United States, you'll see senior citizens working behind the counter or greeting customers. They're doing it because they have a work ethic

”

Investor Jim Rogers

"I have a problem with jetlag," he says. "Do you have a cure?"
Melatonin, but it's illegal in the UAE and most of the Arab world....MORE

..."My advice to young people would be to get into agriculture. If you want to make money over the next 20 years, agriculture is the way to go. If you don't want to be a farmer, buy the Lamborghini dealership or a restaurant in Iowa. Why? Because the farmers in Iowa are going to be very wealthy. And they will be able to afford Lamborghinis. Fewer and fewer people are producing more and more food for more and more of us. That's only going to get worse over the next 20 or 30 years. So if you're smart, put your money into anything related to agriculture."...

HT: Economic Policy Journal 

"Larry Summers and the Technology of Money"

We don't much care for Mr. Summers, either as a  policy wonk or as a human being.
Hoping that "third time's the charm" here he is as technologist.
From MIT's technology Review:

The former U.S. Treasury secretary and Harvard president sounds off about innovation in online currencies and mobile payments

Larry Summers has examined the role of money in society through many lenses. He's been chief economist of the World Bank, secretary of the U.S. Treasury, and lead economic advisor to President Barack Obama during the financial crisis; his views shaped the recovery effort.

No matter whether he's serving as a regulator or an academic—or just being portrayed as the blunt-spoken president of Harvard in the film The Social Network—Summers always expresses himself with candor, authority, and a level of conviction that's rare for just about anyone, much less an economist.

Less well known is that Summers is also a technologist at heart. Last year he joined the San Francisco venture capital firm Andreessen Horowitz as a special advisor, and he is on the board of Square, an online currency startup.

Technology Review reporter Conor Myhrvold sat down with Summers in his office at Harvard's Kennedy School of Government, where he teaches now, to discuss how technology will change our financial future.

TR: You once said that "anyone who cares about the performance of market economies has to be deeply interested in the innovations of information technology." What innovations are most imporant?

Summers: The move toward e-commerce. When something goes 1, 2, 4, 8, 16, 32, the gap between 16 and 32 is a lot bigger than the gap between 2 and 4. The penetration of e-commerce and the movement toward IT platforms of commerce is going to have a larger and larger impact on the real economy, simply because high percentage rates from a substantial base make more difference than high percentage rates from a very low base.

Amazon, and the fraction of all purchasing that's taking place online, is having a growing impact. We're also seeing all kinds of industries that nobody conceptualized even a few years ago, built around social networking in one way or another, of which online games are only one example. And we're seeing—this gets ahead of us slightly—the processes of commerce changing fundamentally when people are able to store value on their cell phones, when people are able to take payments digitally with minimal friction or red tape.

So whether it is how we carry on commerce, whether it is new industries associated with social networking, or whether it is more rapid penetration of e-commerce into the regular economy, I think in all these ways, information technology is having a growing impact....MUCH MORE