Nouriel Roubini's Global EconoMonitor

Mother of all Carry Trades Faces an Inevitable Bust

From the FT:
Since March there has been a massive rally in all sorts of risky assets – equities, oil, energy and commodity prices – a narrowing of high-yield and high-grade credit spreads, and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply, while government bond yields have gently increased but stayed low and stable.
This recovery in risky assets is in part driven by better economic fundamentals. We avoided a near depression and financial sector meltdown with a massive monetary, fiscal stimulus and bank bail-outs. Whether the recovery is V-shaped, as consensus believes, or U-shaped and anaemic as I have argued, asset prices should be moving gradually higher.
But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.

So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions.

Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March.

People’s sense of the value at risk (VAR) of their aggregate portfolios ought, instead, to have been increasing due to a rising correlation of the risks between different asset classes, all of which are driven by this common monetary policy and the carry trade. In effect, it has become one big common trade – you short the dollar to buy any global risky assets.

Yet, at the same time, the perceived riskiness of individual asset classes is declining as volatility is diminished due to the Fed’s policy of buying everything in sight – witness its proposed $1,800bn (£1,000bn, €1,200bn) purchase of Treasuries, mortgage- backed securities (bonds guaranteed by a government-sponsored enterprise such as Fannie Mae) and agency debt. By effectively reducing the volatility of individual asset classes, making them behave the same way, there is now little diversification across markets – the VAR again looks low.

So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles.

While this policy feeds the global asset bubble it is also feeding a new US asset bubble. Easy money, quantitative easing, credit easing and massive inflows of capital into the US via an accumulation of forex reserves by foreign central banks makes US fiscal deficits easier to fund and feeds the US equity and credit bubble. Finally, a weak dollar is good for US equities as it may lead to higher growth and makes the foreign currency profits of US corporations abroad greater in dollar terms.

The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy. Near-zero policy rates and quantitative easing were already in place in the UK, eurozone, Japan, Sweden and other advanced economies, but the dollar weakness is making this global monetary easing worse. Central banks in Asia and Latin America are worried about dollar weakness and are aggressively intervening to stop excessive currency appreciation. This is keeping short-term rates lower than is desirable. Central banks may also be forced to lower interest rates through domestic open market operations. Some central banks, concerned about the hot money driving up their currencies, as in Brazil, are imposing controls on capital inflows. Either way, the carry trade bubble will get worse: if there is no forex intervention and foreign currencies appreciate, the negative borrowing cost of the carry trade becomes more negative. If intervention or open market operations control currency appreciation, the ensuing domestic monetary easing feeds an asset bubble in these economies. So the perfectly correlated bubble across all global asset classes gets bigger by the day.

But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.

Why will these carry trades unravel? First, the dollar cannot fall to zero and at some point it will stabilise; when that happens the cost of borrowing in dollars will suddenly become zero, rather than highly negative, and the riskiness of a reversal of dollar movements would induce many to cover their shorts. Second, the Fed cannot suppress volatility forever – its $1,800bn purchase plan will be over by next spring. Third, if US growth surprises on the upside in the third and fourth quarters, markets may start to expect a Fed tightening to come sooner, not later. Fourth, there could be a flight from risk prompted by fear of a double dip recession or geopolitical risks, such as a military confrontation between the US/Israel and Iran. As in 2008, when such a rise in risk aversion was associated with a sharp appreciation of the dollar, as investors sought the safety of US Treasuries, this renewed risk aversion would trigger a dollar rally at a time when huge short dollar positions will have to be closed.

This unraveling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.

The writer is a professor at New York University’s Stern School of Business and chairman of Roubini Global Economics

336 Responses to “Mother of all Carry Trades Faces an Inevitable Bust”

GuestNovember 1st, 2009 at 7:25 pm

Members of this forum have been predicting economic collapse since 2007.Fundamentals have not changed. Magnitude of gubmint support was notpredicted and continues to shock and awe these spectators.Even though the big five banks, Fannie, Freddy, AIG, GE Capital, GMAC, Ford Financial, andabout 1,000 regional and smaller banks are all insolvent (bankrupt), gubmintsupport keeps the music playing.This whole process is strictly the result of fraud in the financial industrywhich has used its ill-gotten gains to bribe Congress and hold the presidenthostage.Now we sit and watch the collapse unfold in slow motion, helpless.

BobNovember 2nd, 2009 at 11:27 am

Yes, yes … and lets not forget that Congress and past Administrations were sold on deregulation as the financial answers to an ever expanding economy! Cheers for all our political idiots and the financing wonderkins that put us here!

V1_BrazilNovember 2nd, 2009 at 11:48 am

At this point, we have 3 ways:1 – The bubble bust and the dollar get strong again… Upside of 25%… deflationary recession or depression… Financial crisis are back… Debt cannot be paid… New bailouts… more unemployment… VV with entropy growing… Is just up interest rates…2 – The bubble dont bust and the dollar continue his moves to 50% of original value. Downside of 37%. All wages nominally the same, but half the purchase power, less wages, less unemployment, consumption low, inflationary depression, total debt half… More printing, more deficits… Its easy to make, just keep printing… But not so much, otherwise welcome to hyperinflation… L…3 – The dollar value remains flat… Interest rate up, but not so much… Deficit control needed… L…

GuestNovember 1st, 2009 at 9:43 pm

Claim: A Russian company is offering luxury yacht cruisesalong the Somali coast which provide passengers with theopportunity to shoot pirates: FALSE

SAM NIAZINovember 2nd, 2009 at 11:17 am

Now we see bubles every where; true, wealth building is not as profitable as speculations. Capital Investments are run by cartoon charechters that do not want to bothered by the result of their actions. We saw how they brought the global economy to the brink of disater. Mr Robini is agin brilliant in his macro anlysis but may be this is a return to real wealth building based outside the manipulation of “Fiat curruncies”. It will favour natural resources which is, in my opinion, the true basis of wealth and wealth creation. Can Mr Roubini make a comment??

Guest hahhahahhahaahhaha -oo-November 1st, 2009 at 9:44 pm

1,continuation from conversation from last thread/t..the explanation for why this is THE time, my “best” estimation the heart of the americanpeople has never been expressed. not to saythe americans have not displayed heart in theirlives but that their / our true heart has nevereven been allowed to be articulated in a collectiveway. probably true for most “peoples”. ?we have followed but never, at this moment, there is a vacuum. a voidcreated by the circumstance of universal origin,ecologic, historic, economic, techno-logic, cosmic,political and it is palpable. you can almost oractually feel time standing still, waiting forsomething. waiting for us. the windows and doorsare all is as if everything we have tried failed.the financial class is at a loss. defeated.the military class is floundering, all the resourcesand they do nothing but kill and get killed anddestroy things, history, stealing valuablecultural artifacts from mankind for all time.knowledge is being erased. they have failed.the political class has failed. they are frozen.they have no idea which way to go. theiroverlords are vacillating as they see theirsystem has spite of all the opacity, complexity andconfusion transparency is emerging. perhapsbecause of those things it is now becomingclear that the important, fundamental ingredientin economics, politics, technology is just onething. simple. the missing ingredient?for what is time waiting? what is that missingfactor, element or organ?ps.i would like to say there is one fundamentalproposition. when it is embraced fully andcompletely all things become possible and allproblems have solutions. it is the essenceof spirituality and the true basis of all true “religion”. the kicker is we all already know.children know! but who will stand for what is known?.the void is waiting for many someones to arriveas all of history has been conspiring to createthis moment and it is available! the confoundingforces are nearly exhausted!.freedom is embracing peace in your heart and mind.expressed collectively transforms. this is thefunction of leadership that creates the structurewe call civilization. the cause and effect towhich Mr. Bolton refers..everything else is just entertainment.imo, to my understanding, what i have learned in thislife. best.

GuestNovember 1st, 2009 at 10:57 pm

there’s something to this ramble. I feel too we’re witnessing the peak of human civilization/history…but I suppose others have thought that many times before.

blindmanNovember 2nd, 2009 at 12:11 am

g,yea. the opportunity is always in thepresent moment and the fruit is alwaysemerging, but ripe? ripe!will the farmer harvest his crop or wastethe fruit? i don’t know. but one choiceleads to survival/satisfaction, the other, they say, “lives are in the balance”.now! at this time, our lives!but what would we know?” our future will not be televised “.alteration of a gil scott-heron quote.perhaps the people have no heart? ridiculous.pain threshold will ultimately dispel thatnotion, should it come to it. i’m advocatinghere a potential shortcut to avoid needlessfurther suffering by understanding the naturaland undeniable dynamics associated with universallaws of cause and effect. in this moment.

The AlarmistNovember 2nd, 2009 at 8:41 am

Nah, just the peak of Western Civilisation. Hope you enjoyed living at the pinnacle … I sure did.

Guest hahhahahhahaahhaha -oo-November 1st, 2009 at 9:44 pm

1,continuation from conversation from last thread/t..the explanation for why this is THE time, my “best” estimation the heart of the americanpeople has never been expressed. not to saythe americans have not displayed heart in theirlives but that their / our true heart has nevereven been allowed to be articulated in a collectiveway. probably true for most “peoples”. ?we have followed but never, at this moment, there is a vacuum. a voidcreated by the circumstance of universal origin,ecologic, historic, economic, techno-logic, cosmic,political and it is palpable. you can almost oractually feel time standing still, waiting forsomething. waiting for us. the windows and doorsare all is as if everything we have tried failed.the financial class is at a loss. defeated.the military class is floundering, all the resourcesand they do nothing but kill and get killed anddestroy things, history, stealing valuablecultural artifacts from mankind for all time.knowledge is being erased. they have failed.the political class has failed. they are frozen.they have no idea which way to go. theiroverlords are vacillating as they see theirsystem has spite of all the opacity, complexity andconfusion transparency is emerging. perhapsbecause of those things it is now becomingclear that the important, fundamental ingredientin economics, politics, technology is just onething. simple. the missing ingredient?for what is time waiting? what is that missingfactor, element or organ?ps.i would like to say there is one fundamentalproposition. when it is embraced fully andcompletely all things become possible and allproblems have solutions. it is the essenceof spirituality and the true basis of all true “religion”. the kicker is we all already know.children know! but who will stand for what is known?.the void is waiting for many someones to arriveas all of history has been conspiring to createthis moment and it is available! the confoundingforces are nearly exhausted!.freedom is embracing peace in your heart and mind.expressed collectively transforms. this is thefunction of leadership that creates the structurewe call civilization. the cause and effect towhich Mr. Bolton refers..everything else is just entertainment.imo, to my understanding, what i have learned in thislife. best.

Miles KendigNovember 1st, 2009 at 11:28 pm

Professor, I have been attempting to tell you for months that your faith in some of your professional associates was misplaced. Perhaps there is a option in the works wherein those behind the nominees finally attempt to put away their fear and corral the monster they have loosed. If there is you will have some serious work to do Professor. I can only hope that when you answer the 911 call that you have sufficient back up when you start dialing yourself.All The Best

Miles KendigNovember 1st, 2009 at 11:35 pm

BTW, be careful professor. The 1,000 pound men will whine and cry at being prodded back to sustainable health as will numerous folks who have become totally codependent.Stay strong and stay the course.

RonNovember 2nd, 2009 at 8:01 am

Apt comment. Either he’ll lose weight via internal motivation or outside pressures will make the decision for him. Guess which usually wins out?

GuestNovember 1st, 2009 at 11:40 pm

All stock U.S. Futures are up! Clearly things are just fine?It’s just amazing to see how they manage to keep this thing inflated…

Young EconomistNovember 2nd, 2009 at 12:18 am

Economists may blame FED on subprime crisis but maybe it is wrong to conclude like that because the major reason of excess liquidity and bubbles is from the currency intervention by Asia’s central banks. When there is capital inflow into Asia countries, mainly from current account surplus first and capital account later, Asia’s central banks intervene the markets by injecting another liquidity; though they use sterilization but the outside liquidity is still on. Surely, the liquidity will flow back to US in form of the Asia central bank and private investments. That’s why US face the subprime crisis and bubble in asset prices even though there are no fundamental supports. This I called the liquidity reflectivity effects.FED may use the right monetary rule and inject the suitable liquidity to stabilize the price and growth in the past; however, when the currency intervention occur, the excess liquidity will occur in the two continents and we can see why there were the bubbles in Chinese and US markets together at the same times.This time is different because FED have the objective to devalue the dollar to suitable level to support the growth and solve the trade imbalance (that should be done to sustain the economy); however, Asia countries, especially China and Middle East, still use the same policy: interventions. That’s why we see the V-shape recovery in financial markets and maybe in the economy later. However, we would see the low inflation for sometimes under sticky price like the past cycle with too much excess liquidity. Nevertheless, the excess liquidity will turn into uncontrollable and create another bubbles that maybe larger than anyone expect and will create upward pressure on the inflations.I think only way the excess liquidity will reduce is the quit of Asia central banks to intervene the market. Although FED start to increase the interest rate, the liquidity is still on like we see the past cycles that FED increased the FED Fund rate in 2004 but the bubble was going on till 2007 and it ended be itself not by FED or other central banks.How can we achieve to reduce the excess liquidity? I think it is very difficult because the US central bank and Asia central bans have the different objectives. FED may need the price and growth stability without concerning the change in the exchange rat; however, Asia central banks need the exchange stability because their growths come from the international trades. That ‘s why no conclusive policies both sides to tackle the excess liquidity and no one think the excess liquidity will cause the severe effect in the global economy. Even the one country use policy to control liquidity but the others donot, the excess liquidity will exist.Maybe the next bubbles will surely happen, and it will be the same result that we past; unless Chinese government and Middle East start to float their currencies.

The AlarmistNovember 2nd, 2009 at 8:44 am

How does a heroine addict kick his habit? Nine times out of ten by overdose? Think the odds of the Fed withdrawling successfully are any better?

Pecos BankerNovember 2nd, 2009 at 10:50 pm

Very interesting analysis, YE. You are saying that the Asian banks use sterilization, which I understand to mean their central banks buy up the dollars generated by their exporters, exchanging those dollars for their own currency. They thereby increase their own money supply by printing their own currency which their people then invest in risky assets such as bonds and stocks. Their central banks also invest their dollars in US assets. This has the effect of lowering US interest rates and generating the subprime crisis, for example. I don’t see the foreign exporters whose dollars have been sterilized by their central banks turning around and buying US dollars to buy US assets. That would defeat the purpose of sterilization and make no sense. Presumably, those people would invest in non-dollar denominated assets. So where would those excess bats, yen, or yuan go? You suggest that one place is the Chinese stock market.Now that the American consumer is dead, however, I would assume that would put an end to exports to America and thus the need for foreign central banks to sterilize their currencies. So that source of generating excess Yuan, etc should have begun to dry up by now. You say correctly ,I believe, that the Fed is unconcerned with the exchange rate and is deliberately allowing the dollar to fall, and that this conflicts with the foreign central banks need for exchange stability to promote exports (to America, in particular). Yet if the US consumer is dead, Asian countries cannot export, so what purpose would the FCB interventions serve? They might as well just let their currencies rise. This would feed the carry trade on the back of the US dollar. Perhaps that is exactly what we are seeing–ie, the death of US consumer becomes basis for carry trade.

11b40November 3rd, 2009 at 9:04 am

This, I believe, gets to the very heart of the matter. Have the emerging markets, with China in primacy, reached critical mass? Are they now able to consume enough to mainain robust economies with diminished exports to the developing countries?If so, the game has a whole new rule book. If not, look out below.Independent Contractor

PeterJBNovember 2nd, 2009 at 2:50 am

Wrong:”Members of this forum have been predicting economic collapse since 2007.”@ Guest on 2009-11-01 19:25:56I predicted the collapse in writing in October 2006 ;-)AND, I get it straight from the one that does my laundry.Ho hum

FEDupNovember 2nd, 2009 at 6:25 am

Nice article professor! You conclude with: “The Fed and other policy makers seem unaware of the monster bubble they are creating”. You have identified a potentially lethal problem. Step 2 is to inform our illustrious and brilliant leaders of this problem and get a prompt response on the record before it is too late!

RedCreekNovember 2nd, 2009 at 8:05 am

I wonder how a chart that plots Tokyo house prices against Japanese inflation (real and nominal) and against 10Y govt yields would look like…

AnonymousNovember 2nd, 2009 at 8:09 am

Most economists say that we have either deflation or strong inflation ahead of us.But what if we get a mix of both: heavy inflation in certain goods like food and commonly needed consumer goods, going together with a continued real deflation of big ticket items such as houses???

economicminorNovember 2nd, 2009 at 9:16 am

Jim Puplava has been talking and writing about an inflationary depression for more than a year.I have been suggesting such on this blog for a few years at least.I think a deflationary recession with the amount of debt that is presently being carried will eventually lead to a much more serious depression as I can not comprehend how the current policy mix can lead to stability. If the additional debt or the transfer of debt from private to public was being invested in efficiency and productivity, maybe. Except that the majority is either being spent on consumption or in speculation. Neither of these are productive. In fact, both are the opposite of productive. They remove the capital and incentive to invest.Even though lots of debt has been re-written at lower interest rates, much of this debt hasn’t been in the areas that started the economic contraction. The defaults started with consumers and continue with consumers. Those who made the loans have been bailed out but not those who have to make the payments. Nor is any of the transferred debt going towards real investment that leads to additional jobs. At best it some is being spent to maintain unsustainable public employment.A sustainable economic model revolves around value added productivity and not around borrowing and or printing money. If we could survive around borrowing and printing, why should any one actually work?

V1_BrazilNovember 2nd, 2009 at 4:22 pm

Several great minds in this forum agree with you… Someone here say “inflation: things that you need, deflation: things that you have”… There are relative movements between this 2 classes, but the absolute depends on how much printing will happen…

MM CANovember 2nd, 2009 at 8:26 am

This guys is right, my reading says the numbe ris over 20 million now… Home Buliders are dead companies walking…How Bloomberg Fabricates U.S. Housing Numbersby: Jeff Nielson November 01, 2009Being one of the most vigilant observers of the U.S. housing market – as well as one of the most vociferous critics of fraudulent “statistics”, there was little chance that Bloomberg’s attempt to “rewrite history” would slip past me.Here is what Bloomberg wrote on February 3rd of this year:A record 19 million U.S. homes stood empty at the end of 2008…Here is the new version of “history” which Bloomberg spewed out Thursday:About 18.8 million homes stood empty in the U.S. during the third quarter…The record-high was in the first quarter [of 2009] when 18.95 million homes were vacant.Unless the U.S. propaganda-machine has also re-written the rules of arithmetic, then the 19 million empty homes which Bloomberg reported for last year (in February) is a larger number than the 18.95 million which Bloomberg claimed was a record this year.Admittedly, as far as statistical lies go, this particular example is hardly earth-shattering. However, what is important is it clearly established the fact that U.S. propagandists are simply inventing numbers when they report “statistics”.The really important departure from reality is how Bloomberg (and the rest of the U.S. propaganda-machine) have simply ignored the millions of already-foreclosed properties which U.S. banks are hiding from the market.As I demonstrated in “Fantasy Housing Numbers a Prelude for NEXT U.S. Housing Crash”, U.S. banks are on track to record close to 5 million foreclosures and repossessions – just in the current year. However, they are only on pace to sell about 1.5 “distressed properties” (which also include “short sales”). This simple arithmetic means that U.S. banks are adding at least 3.5 million empty homes to the millions of foreclosed properties they were already holding off the market prior to this year.Obviously, if there were 19 million empty homes at the end of 2008, and at least 3.5 million more empty homes this year (just counting only those being held by U.S. banks), then the real total of U.S. empty homes today would be at least 22 million. Clearly, Bloomberg’s claim of 18.8 million empty homes in the U.S. in the 3rd quarter of this year has absolutely no connection to the “real world”.Presumably a major news organization like Bloomberg is able to keep track of its own prior published articles, which strongly suggests the deliberate attempt to deceive. Interestingly, Bloomberg’s previous report on U.S. empty homes provides some data which strongly supports my assertion that U.S. banks have been accumulating vast quantities of foreclosed properties.Bloomberg noted in February that at the end of the 3rd quarter of 2008 U.S. banks were holding $11.5 billion worth of foreclosed properties (in nominal value) – more than double what they held a year earlier. This doubling of the banks’ inventories of foreclosed properties occurred during a year when there were ‘only’ 2.2 million foreclosures.This year, U.S. banks are on pace to nearly double the total number of foreclosures from 2008 – yet all the reports from U.S. propaganda outlets indicate declining inventories of unsold homes, month after month.This farce also extends to the new home market – except the fabrications are even more extreme. U.S. home-builders have been building roughly 50% more homes than they are selling, for every month for the last two years. This is why the U.S. propagandists never report “new home sales” and “new home starts” in the same article. Despite this horrendous discrepancy, and a long-term trend which can only end with mass-bankruptcies among home-builders, “inventories” of new homes have been reported as declining every month.This sham just hit a new level of absurdity this week. When “new home sales” were reported this week, there was a “surprising” decline in the latest reading – and the previous month’s number was revised lower. Yet in the same piece of propaganda it was reported that the inventory of new homes still supposedly declined in the last month.Putting aside the huge, existing gap between new home starts and sales, one would think that the compulsive liars of the U.S. propaganda-machine would not have the audacity to report increasing “starts” of new homes, decreasing sales – and still claim that inventories were falling. Clearly this is nothing less than a “slap in the face” for market sheep – who are presumed to be so brain-dead that the propagandists can write 100% contradictory “facts” in the same article, and expect no one to notice.Returning to the millions of foreclosed properties which U.S. banks are holding off the market, obviously part of the reason for this was to try to halt the collapse in housing prices. If U.S. banks had dumped an additional 5+ million homes onto the market (equal to a full year of demand by itself) then instead of the collapse in U.S. housing prices easing, it would still be accelerating.However, as I pointed out in “Who OWNS Foreclosed U.S. Properties, Part II: the role of MERS”, there is a second reason for U.S. banks to hide all these millions of foreclosed properties: credit default swaps. This $50+ trillion market represents the phony “insurance” on the entire Wall Street Ponzi-scheme – which was the key to (so-called) “regulators” allowing the U.S. financial crime syndicate to leverage the entire financial sector by an utterly insane average of 30:1.Now, with the U.S. housing market collapsing, these credit default swaps are being triggered. Selling these foreclosed properties locks-in the banks’ losses – causing these massive obligations to come due. As I illustrated in “Bankster Sues Bankster – AGAIN”, in one example of a credit default swap, Citigroup (C) is suing Morgan Stanley (MS) to collect on this contract.Even after the “collateral” which “backed” this insurance was liquidated, Morgan Stanley is still facing a pay-out of more than 300:1 based on the premiums it received for this insurance. While not every CDS will require 300:1 pay-outs, there is no reason that some of these payments could not exceed 300:1 – given the gross negligence of regulators in not requiring adequate collateral for this $50+ trillion “insurance market”.If you take the billions in losses which U.S. banks are racking-up on foreclosed U.S. properties, and then start making 300:1 pay-outs on those losses, it doesn’t take long for the entire U.S. financial system to appear hopelessly insolvent – even with the new, fraudulent accounting rules enacted in the U.S. in April.For the benefit of new readers, I will repeat my warning: it is perilous to accept any U.S. government-reported statistics at “face value”. The absurd reading on 3rd-quarter GDP is a prime example.The U.S. economy is supposedly now growing at a robust 3.5% annual rate. Wall Street is reporting “record profits” (and paying record bonuses). Yet the state of New York is desperately trying to close a $3 BILLION budget-gap – which has materialized over the same quarter where both Wall Street and the broader U.S. economy are supposedly thriving. Apparently Wall Street’s fantasy “profits” are producing only fantasy tax revenues for the state of New York.This entire Ponzi-scheme economy continues plunging toward collapse – and formal default on its massive, unpayable debts. Total public and private debt in the U.S. is now approximately $60 trillion, and this completely excludes the roughly $70 trillion in additional “unfunded liabilities” (for the federal government, alone). However, don’t expect to hear the truth about this from the U.S. propaganda-machine.

11b40November 2nd, 2009 at 8:52 am

Thank you for these sobering numbers, MM.Here are some interesting numbers from middle America published yesterday in Parade Magazine and distributed in Sunday newspapers around the country. It is a snapshot of how this recession is re-shaping our attitudes and perceptions. Here are some of the results:79% have felt the impact of the financial downturn.66% say it has had a big impact on their lives.69% have either lost a job, had pay reduced, or know someone who has.Almost half have either struggled to pay the mortgage or rent, or know someone who has.80% say they have been forced to do more with less.73% have had to make unexpected changes.19% have sought some form of govt. assistance.27% have pursued extra work.42% delayed or cancelled vacations.34% put off purchase of a major appliance.29% postponed or cancelled home renovations.28% elected not to buy a new car.87% are worried about the future of the nation.61% feel that they did everything right and still lost.65% can’t believe this has happened to us today in America.70% don’t believe our leaders have dealt well with the economy.71% feel betrayed by the government.76% say they will never trust investments the way the used to.65% feel anger toward Wall St.44% have adjusted portfolios to reduce risk.71% are paying more attention to news about the economy.74% say they are more politically aware now.83% are re-considering what they actually need in life.68% say that “creating a meaningful life” and “giving back” have become more important to them.43% are devoting more time learning new skills.30% report volunteering more.43% are exercising more.58% are reading more for pleasure.63% are becoming more “do it yourself” oriented.59% are getting more work done around the house.46% are connecting more with old friends.35% are re-discovering community or religious groups.52% are forming stronger relationships with spouses.It is also noteworthy that large numbers think that the ‘consumer’ society distorted the meaning of America, but now – 67% say the true meaning is about the opportunity to achieve through hard work and education, and 60% say it is about the liberty to do what one wants.68% say the American Dream is still within their grasp, and that of their children.89% are still proud to be Americans.89% feel we can overcome whatever the challenges may be, “as long as we come together to support one another.”Independent Contractor

ChignosNovember 2nd, 2009 at 10:41 am

Yes…….are there 47,000,000 Americans without health insurance, or 12,000,000……..or 29,000,000, or 3………or…………? Oh well, just pass a health insurance reform anywho.

GuestNovember 2nd, 2009 at 12:58 pm

There are thousands of terrorists, or maybe one thousand, or maybe just hundreds, or… 3? Never mind, just bomb the hell out of everyone!

ChignosNovember 2nd, 2009 at 9:30 pm

Right. Bomb everyone (except the US) —–Population control! Less global warming, I mean climate change….yeah, yeah that’s it.

P&LNovember 3rd, 2009 at 8:53 pm

Randy Newman, Political Science…No one likes us-I don’t know whyWe may not be perfect, but heaven knows we tryBut all around, even our old friends put us downLet’s drop the big one and see what happensWe give them money-but are they grateful?No, they’re spiteful and they’re hatefulThey don’t respect us-so let’s surprise themWe’ll drop the big one and pulverize themAsia’s crowded and Europe’s too oldAfrica is far too hotAnd Canada’s too coldAnd South America stole our nameLet’s drop the big oneThere’ll be no one left to blame usWe’ll save AustraliaDon’t wanna hurt no kangarooWe’ll build an All American amusement park thereThey got surfin’, tooBoom goes London and boom PareeMore room for you and more room for meAnd every city the whole world roundWill just be another American townOh, how peaceful it will beWe’ll set everybody freeYou’ll wear a Japanese kimonoAnd there’ll be Italian shoes for meThey all hate us anyhowSo let’s drop the big one nowLet’s drop the big one nowFrom:

The AlarmistNovember 2nd, 2009 at 8:40 am

Now that is some world-class doom!I also liked the Titanic metaphor at the end of the last thread … apt analogy.But it’s not just the Fed and its easy money policy, boys and girls. We also have politicos gone wild like it is Mardi Gras ….Have you noticed that the countries that have weathered the last storm best are those that were most moderate when it came to priming the pump? Nah, I didn’t think so? Did you also notice that the one profitable US auto maker is the one that didn’t take the government bailout?What is truly sad is that it is like Bambi vs. Godzilla … even if all the little countries (Like Germany lowering taxes to encourage prosperity) and free-market oriented companies (like Ford) do everything right, the big foot of our friends in Washington will crush them in the end. Truly sad indeed that the next time around they will ensure they take the whole world down with them.We are doomed!

GuestNovember 2nd, 2009 at 11:06 am

and free-market oriented companies (like Ford) do everything right, the big foot of our friends in Washington will crush them in the end.Ha ha, you’re funny!Ford always accepted being the lesser company, it didn’t over-strive, that’s why it’s better off, not because it didn’t accept any bailouts (yes, I’m glad that it didn’t).Ford may be practicing more closely “Free Market” practices, but that doesn’t mean that it’s necessarily free market oriented. They, as do all the other manufacturers, rely on government subsidized road systems (and oil- the war machine, er ah, persuasion machine, isn’t cheap); if not for these these companies would be MUCH smaller, if existing at all.And once again you miss the point of what created this entire mess. It wasn’t government, it was corporate lobbying. The government didn’t put a gun to anyone’s heads (well OK, maybe BOA) and told them that they had to be the recipients of their own lobbying! Your own statement about Ford proves this point.

11b40November 2nd, 2009 at 11:15 am

Isn’t that like saying it’s the kid’s fault because the parents gave in? What exactly do we elect these clowns to do?Independent contractor

The AlarmistNovember 3rd, 2009 at 2:27 am

The roots of the sub-prime crisis were planted by well-meaning politicians who put a big CRA gun to the heads of bankers they accused of the crime of ‘red-lining’ when they were simply making a credit decision to not lend to people who were not credit worthy. That it turned into a hugely profitable and unwise business was not solely the fault of the bankers, as it seems a whole lot of people in the USA winked and played along. How do you think the term ‘Liars Loans’ became such a common epithet.

11b40November 3rd, 2009 at 9:10 am

Just who exactly was accepting ‘liar loans’? Who threw lending standards out the window? Who thought 30:1 leverage was a good idea? Who sliced & diced and packaged these loan for re-sale around the globe? Who rated them AAA? Who spent millions of $’s lobbying Congress for ever more loosening of the rules?There is plenty of guilt and corruption to go around in this crazy simbiotic relationship between Congress and anyone with a bag of cash.Independent Contractor

GuestNovember 3rd, 2009 at 1:20 pm

Always the apologist for corporate criminals!You either are one or you’re under the illusion that you could someday be one!One need only look at who is getting all the trillions of dollars to know who instigated all of this. Only those who are blinded by ideology would refuse to see this.

MorbidNovember 2nd, 2009 at 9:41 am

The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy.

The damned if you do and damned if you don’t business is now giving perilous feedback. Could it have been – BETTER TO DO NOTHING! Hit the reset button and see what happens next. At least the medicine would have been clear – what is going on is NOT SUSTAINABLE!It seems economics is nothing more than a tool for the elite to able to design a system that the elite then use to their own enrichment.Where are the Three Musketeers?

Rick DorfmanNovember 2nd, 2009 at 9:51 am

As someone who is just starting to earn income and is therefore freshly exposed to income taxes, it weighs largely on my mind.My understanding is that tax rates should fall as the government is financing its budget at a historically low cost of capital. Since my taxes will be lower than that of the current generation, it would be rational for me to invest in riskier assets in the short term.A carry trade is inevitable, when a lender is willing to offer a home equity line at 4% and the equity market is up 50% in 6 months.From my end, even if a carry trade fails if the dollar strengthens or interest rates rise, I am still going to be in better shape because of the low yielding government bonds, so it’s rationale to take on added risk.

The AlarmistNovember 2nd, 2009 at 10:36 am

Nice try. Tax rates can’t fall because the government has to ‘create’ the money to service the interest payments on that ever growing ‘cheap’ debt. They also can’t fall because government rarely, if ever, shrinks until the point where civil society finally breaks under its weight.You are doomed.

GuestNovember 2nd, 2009 at 1:24 pm

And people said that housing prices couldn’t fall… Be careful about using/arguing absolutes. Also, as I’ve noted, there’s a difference between the various levels (federal, state and county/municipal) governments (in the U.S. that is).

GuestNovember 3rd, 2009 at 1:28 pm

To date I’ve proven many people wrong. Care to join that growing list?I had people in real estate tell me that housing prices wouldn’t go down. I said WRONG! I’ve had people look at me like I’m from another planet when I told them that I think that property taxes will go down. Guess what? I have family members whose property taxes have been reduced.Who controls the money? Banks. Who will end up owning LOTS of properties? Banks, which will then be responsible for paying property taxes. Care to guess what things that they will be lobbying for at local levels?Past performances are not necessarily indicators of future performance.For me, this forecasting stuff is really easy (as the Guru Mogambo would say), like shooting fish in a barrel, at blank range!

GuestNovember 2nd, 2009 at 10:21 am

@ Nouriel”The Fed and other policymakers seem unaware of the monster bubble they are creating.”no, they know what is coming just as they knew the crash of 08 was coming. Don’t be fooled by wolves in sheep clothing.

GuestNovember 2nd, 2009 at 11:28 am

You underestimate your(?) opponent. Not a wise thing to do. But…Is it even possible to “know what to do” when a system is inherently unstable and geared toward eventual failure (growth paradigm on a finite planet)?Given the narrow scope of their system they are doing exactly what they are supposed to do, what they can ONLY do. Remember: the Fed can really only set interest rates; and, as some mistakenly state- “print money” (not really, unless instructed by the US government).It’s like only being given the choice of going North or Northwest when the direction of travel really needs to be Southeast! But that Southeast direction means voluntarily giving up the existing system.These people are really strapped into a speeding vehicle heading toward a brick wall. And we’re all in the trunk! They tell us it’s a matter of “confidence,” and I’d agree, but in reverse: the more confidence we have in the system the more absolute is its demise; likewise, if we stop having “confidence” in the system we may be able to make the vehicle stop before it hits the wall and kills us all.PeterJB might be right (I’ve struggled with this for some time), it’s a matter of leadership. Leadership has to tell us that leadership cannot be trusted and that we need to give up our “hope” (“hopium”) and “confidence” in the existing system- we need to let go of the shore! But what a paradox, believe people who tell you not to believe them!

ChignosNovember 2nd, 2009 at 9:40 pm

You are so confused. I am not in the trunk, even if you are. The Feds are not my opponent; they are imminently estimable (they are stoopid). There is no inkling of Fed “leadership.” They have no idea what that might be. You are so confused.

The AlarmistNovember 3rd, 2009 at 2:30 am

Yes, a crisis is a terrible thing to waste, and unfortunately the last one was not used to its full advantage, so I actually concur with what some might call a wacko conspiracy theory. Besides, that is a lot more fun than accepting the fact that our political leaders are simply stupid.

GuestNovember 2nd, 2009 at 11:49 am

Do you always make assumptions about questions?Ever consider that it might refer to diversification or something of that nature, rather than puts, calls, etc.?

MichelleNovember 2nd, 2009 at 12:28 pm

Hedging can come in many forms, not necessarily derivatives. My point is: If you know what you’re doing you don’t need to hedge. If you don’t know what you’re doing, don’t play. That simple.Another known poster posing as guest again!

GuestNovember 2nd, 2009 at 12:55 pm

Sorry, I have always posted as guest, more due to laziness than anything else. Is there something bad about that? Would you feel better if I signed with something specific?I was going to post more, but it’s pointless. People see only what they want to see, and that’s usually only what makes them feel good about themselves and their opinions. I do somewhat agree with you, but for different reasons.

11b40November 2nd, 2009 at 12:40 pm

Michelle has a somewhat pious outlook toward investing. She would never short, never touch derivitives. However, she has no compunction about profitting from FED induced liquidity bubble as the hole we dig for our children gets deeper & deeper. She recently started moving to cash – another form of hedging.Wall Street is a casino, and you better recognize it as such. How smart is it to stand at the Roulette wheel and only play one color, regardless, when you can make money (or loose money) on both. Gambling is gambling. Long, short, whatever. If you aren’t playing to win, you should get out of the game. Right now, a very good argument could be made, and is made here every day, that going long is for suckers.Independent Contractor

GuestNovember 2nd, 2009 at 12:56 pm

It’s like the lottery, except that the number of participants is decreasing while the payout is INCREASING. But, the primary participants are able to BUY their payouts (lobbying).As has been stated before, it’s WORSE than a casino. At a casino EVERYONE is subjected to the same (slanted) odds!A spin on the lottery slogan: You can’t lose if you don’t play!

MichelleNovember 2nd, 2009 at 1:02 pm

11b40, spoken like a true short. Aren’t you partly responsible for plummeting 401k values? Look from within.

GuestNovember 2nd, 2009 at 1:26 pm

Why invest in corruption?You could call me a “short” too, though I am not invested in the “markets.” I’m just not “long” on the SYSTEM.

GuestNovember 2nd, 2009 at 1:31 pm

You do realize that those 401Ks represent people who are in the market who don’t know what they’re doing, right? But it’s okay that those particular noobs are playing the market because they’re not doing any hedging, is that it?

MichelleNovember 2nd, 2009 at 1:32 pm

The system has lots of problems as we can all agree. Doing nothing is a strategy as well and if that’s where one feels most comfortable, then good for them. All I can say is that I’d rather be long or in cash than swipe money out of hard-working peoples’ 401k’s and driving U.S. companies into the ground. Sometimes it isn’t always about making money and that’s all I’m hearing.

11b40November 2nd, 2009 at 2:22 pm

@Michelle – pleae don’t confuse ordinary shorting with naked shorting, which there are rules against that should be enforced. Big difference in the 2.I will protect my nest egg in any legal way that make sense to me, and if you choose to sit out a declining market, well OK, but hold the sermons, please.Independent Contractor

GuestNovember 2nd, 2009 at 3:53 pm

In this market, one can never know if your shorted shares are legit.Nor can we believe that you’re legit… Nothing is 100% clean. Look in the news and check out all the insider trading probes and you’ll find that even the supposed “legit” (non-shorting) activities are anything but clean.

The AlarmistNovember 3rd, 2009 at 2:41 am

I once had a professor of one of my Finance classes look down his long Connecticut nose and scold me because I dared to use the term ‘bet’ in his class, telling me “We don’t bet, we invest.”At that point I was reading Market Wizards, and I remembered this great quote from one of the profiled traders, so I playfully asked the prof: “Why do they call them blue chip companies?”He just stood there looking dumbfounded for a few seconds, and then asked “OK, Mr. A, Why do they call them Blue Chip companies.”And I replied, “Because the blue chip was one of the highest values at Monte Carlo.”I didn’t use the rest of the original quote, but it was even more precious, something along the lines of “So I threw away Graham & Dodd and bought a copy of Beat the Dealer, and I’ve been winning on Wall Street ever since.”I do short, and I do touch derivatives. I occasionally sip a good scotch, puff a nice Churchill, and even skip the condoms. Life is short, so you have to grab it and enjoy it.

11b40November 2nd, 2009 at 3:25 pm

Geithner “Burned Billions,” Shafted Taxpayers on CIT Loan, Prof. Bill Black SaysPosted Nov 02, 2009 12:00pm EST by Peter Gorenstein in Investing, Recession, BankingRelated: cit, aig, xlf, skf, gs, c, bacAnother one of the nation’s largest lenders has filed for bankruptcy. On the brink for months, CIT filed for Chapter 11 protection on Sunday.The prepackaged plan allows CIT to restructure its debt while trying to keep badly needed loans flowing to thousands of mid-sized and small businesses. The plan keeps CIT’s operations alive and makes it possible for the company to exit bankruptcy by year’s end.But here’s the bad news: While senior debt holders will only lose 30% of their investment, we, the U.S. taxpayer, will lose the entire $2.3 billion we lent the company this summer.William Black, professor at the University of Missouri-Kansas City School of Law is dumbfounded. “We put ourselves on the hook in a completely inept way where we lose first. We lose entirely as the taxpayers.”Black, a former top federal banking regulator, blames Treasury Secretary Timothy Geithner for negotiating such a bad deal on behalf of the American public.His argument goes as follows:The government was in no way obligated to lend the struggling CIT money and, in fact, initially refused to provide it bailout funds. More importantly, being the lender of last resort, the government should have guaranteed we’d be the first to get paid if CIT eventually filed Chapter 11. By failing to do so, “it’s like he [Geithner] burned billions of dollars again in government money, our money, gratuitously,” says Black.Black believes the problem stems from regulators’ fears that if the banks recognize a loss on the bad assets it will create a domino effect that will wipe out the entire financial system.”If that’s true we’ve got to get rid of capitalism,” he warns, “because if we can’t recognize losses in a capitalist system we have no future.”__________________________________________Is there an end to this madness? Contractor

The AlarmistNovember 3rd, 2009 at 2:44 am

It’s called insurance. If little Timmy doesn’t go to Goldman in a couple years, he’ll need a safety bank to fall back on, so he needs to keep all of his friends on the Street well financed.

JLarkinNovember 2nd, 2009 at 5:10 pm

Nouriel now saying that another bubble bursting is inevitable. Yet he espouses a U-shaped recovery. Maybe not a U-shaped stock market then? Risky assets will see a vV?Infrastructure, computers, telecom will continue to build out or upgrade all over the world. Nouriel also mentioned the possiblity of war; defense engineering will continue as well. The dollar won’t go to zero; industry and technology also won’t go to zero.

GuestNovember 2nd, 2009 at 5:15 pm

does anyone have a source or summary of the total amount of funds input by the US government into Goldman Sachs? also what amount was input into AIG to cover AIG’s obligation to Goldman Sachs?

The AlarmistNovember 3rd, 2009 at 2:58 am

The actual funds are less important than the fact that GS had an option to turn to Uncle Sam to avoid disaster. They repaid the loan, alright, but they hardly compensated the taxpayer for the value of that option. I say it is worth $200B, and GS should pay us in Gold.

11b40November 3rd, 2009 at 9:17 am

…and let’s not forget – they have a direct line to both the FED and the Tresury Dept. What do you think that is worth as they fire up their trading desks every morning? I sure wish I could listen in to those conversations. I might pay myself a record bonus if that were possible.Independent Contractor

PeterJBNovember 2nd, 2009 at 5:27 pm

Speaking of my thesis that, that which is occurring is a “leadership” crisis:”PeterJB might be right (I’ve struggled with this for some time), it’s a matter of leadership.”@ Guest on 2009-11-02 11:28:56There can be little questioning that in any dynamic there are changes; think about music for example or can you really walk a straight line; do sub-atomic particles not meander randomly, etc., and as such, it is clear that firstly, the population of the World has changed (think numbers: small and big); the education and health functions of societies have improved, that resources appear to have become stressed and that “technological” (as opposed to “scientific”) advances within society are advancing at a breakneck supra-speed.Hence I propose that our milieux is in an advanced state of flux (as in thermodynamics) and our life sheath dynamic, that we pretend to be civilization, is changing direction and I ask you to imagine here a flock of birds or a shoal of fish all changing direction, in the matrix of an ordered spectrum, in both cases).So it is my prime posit that the environment, nay, the milieux that impacts our Planet, and hence, we, both endogenously and exogenously, is changing.Enter, the political has-beens. Prime ambition 1, longevity of office 2, make as much as possible for self, 3, swim with the team and ensure status quo. Or to maintain recursivity through policy so that as much blood can be squeezed from the stone as possible. You may remember my snooker analogy with the red balls and coloured balls where the idea is to keep putting the red balls back even though the game is over. Cannot be done – simply due to the fact, that it is against the rules – or, in our case, against Universal Laws expressed as Parochial Laws within our earthly environment!Now please don’t tell me that anyone in “leadership” understands anything of integrity and or useful about “economics”. Get over it – they don’t know squat about socio-economics: I speak generally.So moving ahead, the “IDEA”, are energized filaments known to develop from seeds (are the seed) of thought that germinate throughout our global populace and as stupidity, knows no barriers and borders of race, ethnics, creed, religion or culture then, here be the future. The one who understands this comprehends “strategy” (as opposed to crude “tactics”).So given “change” is on the horizon and being gyrated globally, and I add, that the coming “change” is a major dimensional shift in human interactioning, technology and neurological ethics (loosly termed morality) or more importantly, human behaviour; I state that the evidence of this major shift is easily observable – if one dares to observe, that is.”Leadership” will do, as before and as always, everything possible, have done everything possible, to maintain the “status quo”; that is to say, maintain the recursive play, despite all the red balls having been play out, in an highly leveraged state. IOW, the game is now devoid of any integrity and resources.But this will not stop “leadership” with the 1. Priorities of self and team 2. Ignorance of future (any) events 3. a group neurological bent to follow their leader as long as they see self-profit,to maintain the most harsh constitutionalities, constraints and limitations on this coming dynamic; change; the change that will not be stopped by pious little men of faith-founded economics and self agenda. The Gods have spoken and will damned well be heard (special note: God’s Word is always felt before being heard – basic physics)As the Great Depression, the pain will be induced by “leadership” as a direct result of their efforts to stop change – at all costs!!! – and to maintain the status quo (a task which is tres impossible) – but the depression will be, is being, has been, induced as a direct result of the ignorance, stupidity, irresponsibilities and preferences of :er, “leadership”.This coming Dark Age, demographically expressed, will be a direct result of the ineptitude and corruptions of “leadership”, nothing more, nothing less. Hanlon’s Razor.You may like to argue that “we” elected them and thereby “we” are at fault; too true!Ho hum

The AlarmistNovember 3rd, 2009 at 2:48 am

You missed a key ambition, which is the naked exercise of power. These people get off on the fact that they control the destiny of hundreds of millions of people. Those stupid scripts for White-House oriented TV shows and movies, where the characters play up the fact that so and so is Cmdr in Chief and has his/her finger on the button are sprinkled in there by political consultants. I worked with those folks, and they really do think and talk like that. They get off on that, perhaps way more than the money, though they aren’t so shy about taking care of that side too.

GuestNovember 3rd, 2009 at 1:34 pm

Amen! We agree on the issue of power: and this should be the fundamental that we all strive to understand (the consequences of).

FEDupNovember 2nd, 2009 at 8:26 pm

good read! If NR is right, it appears our leaders have put us in a virtual checkmate with impending disaster whichever policy path is taken. I hope the historians put all their names along with their shortsighted, self-serving, moronic actions to this crisis in the final chapter of “The fall of the greatest democracy in the last 200 years” so that future generations may learn from the stupidity of others! Now, what do I tell my kids-yes we can?!

The AlarmistNovember 3rd, 2009 at 2:51 am

This one will go down in the history books like the description of the sack of Rome, where the Barbarians demanded all of the gold, all of the silver, all of the jewels, and all of anything that implied wealth, to which the Roman Senate’s representative asked, “But what will that leave us?” To which the reply was, “Your lives!”

Winston SmithNovember 3rd, 2009 at 8:55 am

yes indeed and it is good because it seems to be true. Some wise person once said something to the effect,” never underestimate the cunning of the powerful, they will go to any lengths, do anything to maintain power.” That dear citizens is a formidable foe.

GuestNovember 3rd, 2009 at 1:36 pm

But power blinds. And, nature doesn’t like competition; and, we know that Mother Nature always wins in the end…

gAntonNovember 2nd, 2009 at 8:00 pm

Is Ben Bernanke A Dismal Failure?The past fruits of Bernanke’s largesse to speculators whose favorite pastime is high stakes gambling with other peoples’s money (namely the poor US taxpayer’s money) included an almost simultaneous stock market bubble bust and a residential housing bust. Now we are waiting in line for another stock market bubble bust, a commercial real estate bubble bust, and an asset bubble bust. Which will be the first to pop? And it’s a double whammy–change dollars into foreign currency (and do what you can to weaken the dollar so that that the dollar loans can be repaid with depreciated dollars), and invest in foreign assets so that American imports are much more expensive.An interesting side effect of this is the almost unnoticed political and economic waning of the US as a global power over the past couple of years. For example, with gold market manipulation, the US had been able to penalize investors who threatened the dollar by buying gold, but it no longer has the power to do so, which puts another weakening strain on the US currency. Also, our recent actions that took advantage of the dollar as THE international currency has turned many of our past friends into very powerful anti-dollar enemies.While talking about negative assets, I would like to mention the expensive US military and CIA, which are little more than antiquated and absurdly useless money sinks in the modern world, and are much more a source of embarrassment and problems than of security.

GuestNovember 2nd, 2009 at 9:01 pm

While talking about negative assets, I would like to mention the expensive US military and CIA, which are little more than antiquated and absurdly useless money sinks in the modern world, and are much more a source of embarrassment and problems than of security.Little do people know how negative the CIA’s actions really are:Brought to You by the CIA

GuestNovember 3rd, 2009 at 5:59 am

remember meeting with Obama and Ben? Obama and Pelosi want cheap dollar policy to fund big government spending policy. Can Ben and Geithner say no? Plz blame the right people.

GuestNovember 3rd, 2009 at 1:38 pm

WTF are you talking about? You’re getting irritating! Put that on a sign and go stand out on a street corner, will ya?!

gAntonNovember 4th, 2009 at 3:05 pm

I Rest My CaseMy understanding of current economic systems problems and current monetary system problems is based on the work of the Australian economist Steve Keens. He argues that a debt caused great depression is inevitable, and that the amount of private and governmental debt is so great that the government does not have anywhere near the resources to prevent or do anything positive about this near future great depression. The cause of the problems were and are irresponsible borrowing and lending. We are going to have a great depression, an astronomical amount of government and private debt is the the cause, and creating more debt and destroying the monetary system is not the solution.If you want to cast blame for the magnitude of the debt and the oncoming great depression, you can blame most of the Presidents from and including FDR (the exceptions are Jimmy Carter and (it hurts to say this) Ronald Regan), all the FED chairmen, congresses, and a myriad of persons in both the governmental and private sectors.So why do I pick on Ben Bernanke? While the depression was probably as inevitable in 2005 as it is now, he has been making large amounts of free money available to speculators since than, and in so doing, he certainly hurried the process along. There was a great pressure to loan money, so, for example, you had paupers owning and living in million dollar homes.But the above isn’t what what bothers me. His first concern should have been maintaining the health of the monetary system, but rather in this time frame, he has done more than all others together to destroy it.In passing, I will say that the die has been cast, and the days of the US dollar are numbered. Also, Ben can either continue TARP-like gifts to his buddies until the money runs out, or he can stop before that. The choice is his–we can have our great depression now, or we can have a greater great depression latter. He or his successor at this time have essentially zero options.During the last great depression, the US had a reasonably healthy monetary system–in the coming depression, we will not have a health monetary system, thanks mainly to Ben Bernanke.

AnonymousNovember 2nd, 2009 at 8:31 pm

Thanks, Professor. I started reading your blog 4 years ago but I haven’t been checking it for ages because I started to think you’d been told not to express your true opinions. Thank you very much for your insight.

GuestNovember 2nd, 2009 at 8:51 pm

California is heading for absolute disaster…Option ARMs Enter the Eye of the Hurricane: The $189 Billion Recast Problem Targeted Directly at the California Housing Market. Of $189 Billion in Securitized Option ARMs $109 Billion in California.

It is rather clear that the option ARM issue is largely targeted to California. Given all the bailouts and moratoriums it is surprising that California is still in horrible shape. But what it boils down to is the fact that these loans will not benefit from current government programs. And they shouldn’t. These will continue to fail because if you haven’t noticed, the underemployment rate of California is now up to 22 percent. So now we are seeing big spikes even in prime loans. Until the job market stabilizes there is little reason to believe a housing turnaround is in store. Option ARMs will fail even if the employment market picks up in California.

It’s JP Morgan Chase who is mostly staring this in the face. Next bank to file for bankruptcy?

son of the paulNovember 2nd, 2009 at 10:44 pm

old stuff.I repeat: it is just a matter of money. In the USA, money is just a matter of printing…Trust me! and trust the guys from Goldman as well.

GuestNovember 2nd, 2009 at 10:54 pm

Govt won’t have the money to bail anyone out anymore, print or no print.Someone already has stated that it’ll be California that takes down the rest of the US. While this is unfair to pin it all on California, it’s clear that the first domino to fall will be California.

The AlarmistNovember 3rd, 2009 at 2:55 am

Nah. In a surprising shock to the concept of Federalism, Big O will nationalise California by guaranteeing its debt. It really is TBTF.

GuestNovember 3rd, 2009 at 1:39 pm

But that’s all virtual tape, it will not, can not, hold. Our pressures aren’t coming from any particular “political party” or ideology, it’s coming from Nature!

Pecos BankerNovember 2nd, 2009 at 11:17 pm

Roubini: “Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions.”Wow! If JPM and GS are the ones doing the borrowing, they will keep this up until it runs out of gas. Then they will distribute to the usual bag-holders–your pension fund, among others–and reverse the carry trade with their margin call nuclear option MCNO, as previously pointed out by London Banker, and profit enormously on the short side as values collapse. Hey, maybe we better get Glass-Steagal rolling right away! Wouldn’t it be great to have those entities unable to use taxpayer funds to short assets?

FEDupNovember 3rd, 2009 at 6:27 am

agree-GS must be playing both sides of this right under the noses of our regulators; if this is allowed to happen it could be the final nail in our coffin! Someone (NR and others) must scream loudly to remove this lethal bet from the casino table.

PeterJBNovember 3rd, 2009 at 5:01 am

With respect, I beg to disagree:”You missed a key ambition, which is the naked exercise of power.”@ The Alarmist on 2009-11-03 02:48:58I disagree on the basis that the “naked exercise of power” is the result, or effect, of the corruption arising from ‘power’ itself. And where, we also observe the strong tendencies of denial, misuse, abuse, malfeasance, ethics, ‘propaganda’, etc., etc., etc., to offset the obvious; that is to say, that “leadership” itself, is found wanting in all the respects /aspects, required of office; wanting and challenged in the necessary intellect, intelligences, skills, education, knowledge of governance, ideology, philosophies, human behaviours, socio-economics, mathematics, physics, the arts, music theory, etc., to that extent that their exposure would ensure that they are seen for what the really are, that is, nobodies; pretending to be responsible statesmen, when they don’t even know what these terms mean. And that is only the politicians who are voted in as to popularity in terms of multi-billion dollar PR and, as in the case of GWB the moron, “a cute butt”. That’s it folks!As for bureaucrats and academics, we are talking about persons who seeks, a priori, the risk free milieux where they remain unchallenged in an environment where they exceed in passing the buck as quickly as possible, or when opportunity arises with no risk to themselves, claiming credit for that which they have not achieved. I speak generally as always.The World needs a leader and one will arrive at the appropriate time but as I said before the last election, Obama is not it, and nor are any of the other contenders that are on the visible horizon.”The naked exercise of power” is indeed a most horrible and terrible corrupter and that, in itself, if acknowledged, identifies one of the attributes of the next type of leader, which is required of this planet. However, this acknowledgement also helps us in designing a new type of socio-economic system appropriate for the next near term epoch.The facts are at hand, but will we acknowledge them; that is the question?Strangely, this story has already been told.Ho hum

GuestNovember 3rd, 2009 at 1:43 pm

The World needs a leaderWhere in Nature does such at thing exist?You’re opening it up to all the religious whackos who believe in the Rapture.By focusing on a single person (or even a handful of people) that allows people to foist their responsibility outside themselves.

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Speaking of “leadership”:The three leading candidates for the EU presidency are Luxembourg Prime Minister, Jean-Claude Juncker, Dutch PM Jan Balkenende, and former Finnish MP, Paavo Lipponen are a triple yawn.But boring in politics may be a virtue. Most Swiss can’t name their federal president, yet Switzerland runs like a…Swiss watch. Maybe a competent plodder is just what Europe needs. It certainly does not need any more of the undead Mr. Flash.Copyright Eric S. Margolis 2009 of Roubini and the US carry trade:I think Roubini says a lot of outrageous things either to grab attention or because he doesn’t fully understand finance. Probably a bit of both. I don’t really pay attention to his commentary because I believe it’s nothing more than superficial analysis cloaked in headline-grabbing hype and an accent that makes him sound well-educated. hum

The AlarmistNovember 3rd, 2009 at 8:25 am

This from our friends at the WSJ …A Tricky Listing for London’s U.S. Embassy The U.S. plans to sell its embassy in London’s Mayfair as part of a move to new premises, a sale that wasn’t helped by a U.K. minister on Thursday slapping a preservation notice on the modernist postwar building, a prominent background feature of London’s Vietnam and Iraq war protests ….Catherine Croft, a director of the group, said she was “very pleased” by the listing, although she said that the modernist building, which was designed by Finnish-American architect Eero Saarinen, wasn’t necessarily appreciated by the public. “It’s an architectural masterpiece and an elegant addition to the square. I think that [buildings like these] will come back in fashion soon,” she said ….History aside, Ms. Hodge says the “architectural special interest” of the building was limited to the facade, entrance and the lobby. This means that Chelsfield will probably easily get “listed consent” to strip out the majority of any internal fittings in the building — and change the building to residential or hotel use ….The U.S. has meanwhile received outline-planning consent for a new embassy complex on a five-acre site in south London, to the disused and hollow power station in Battersea. It will submit detailed designs next year. It plans “groundbreaking” in 2012-13 for a move in 2016-17.#####################A power station in Battersea. Uh, OK. Something kind of poignant about using an industrial site to no doubt handle the vast bureaucratic machinery of the diplomatic corps.

The AlarmistNovember 3rd, 2009 at 9:28 am

Oh, and this is relevant because the US is selling a property in one of the priciest parts of London at what might be a localised peak in asset values in that area.You know, Hillary Rodham Clinton always did have a knack for making money in real-estate.

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