Thursday, April 10, 2008

Orwell: When a False Belief Bumps Up Against Solid Reality

". . .we are all capable of believing things which we know to be untrue, and then, when we are finally proved wrong, impudently twisting the facts so as to show that we were right. Intellectually, it is possible to carry on this process for an indefinite time: the only check on it is that sooner or later a false belief bumps up against solid reality, usually on the battlefield."--George Orwell, In Front of Your Nose

Airlines Closed for Maintenance

Here we have yet another example of how BushCo's "deregulation" has in reality been exposed as simple "you donate to us and we won't enforce any regulation on your industry"-style corruption.

For the fifth(? Really, who counts instances of Bush Admin corruption anymore?) time in less than two weeks, another airline cancels thousands of flight to perform inspections that had been skipped before they were exposed. Reuters: American Airlines cancels over 900 flights
Whistleblowers tell of airlines failing to perform required inspections and when the inspectors attempt to report this up the chain of command, they are threatened with losing their jobs.

John Stewart had an interesting observation:
"It’s all sort of ironic, when you think about it. When you fly, you are inspected quite thoroughly. Whereas the plane itself is perhaps occasionally vacuumed. See, with this administration, if a passenger blows up a plane, it’s a failure on the War on Terror. But if a plane just blows up on its own, eh, that’s the market self-regulating."

Derivatives Not Worth Re-Possessing?

The Big Picture posits an interesting question: What if the amount of money required to determine the value of all these derivatives makes it to expensive and thus not worthwhile to do? Will they just be discarded as unsaleable?

There is an elephant in the room that I haven't yet seen discussed: The UnTradeables.

In our discussion last week on SFAS 157, there was a subtext not articulated: The broad category of items that are actually too illiquid to trade. These include "one offs" such as Dry Cleaning stores, non-chain restaurants, Mom & Pop shops.

They are untradeable because the amount of research into each item, relative to their market cap/size, makes it too inefficient. No one will spend $100k for the due diligence on a $200k store.

For a while, Pez candy dispensers were an UnTradeable -- until eBay created a market where these can be effectively bought and sold. However, the total value of all the Pez dispensers in the world wasn't measured in the trillions, or even 100s of billions. Even tho they are relatively illiquid, their small capitalization makes it viable. And don't forget, there is no leverage involved in any of the eBay items. Hence, no margin calls.

Now consider the size of the derivative marketplace based upon mortgages: Everything from RMBS to CDOs to CDC. It runs into the trillions.

If they cannot be effectively priced, are these products essentially untradeable?

Consider these factors:

• The price relative to the requisite cost of research/due diligence;

• The size of the market relative to the overall regular and ongoing demand for that investment product;

• The buyers and sellers with an expertise and knowledge of this paper.

This may be the crux of the issue with subprime/derivative problem: The paper is, or at least should be, Untradeable . . .

Tuesday, April 08, 2008

Presidency 2008 As Political Cartoon

Geez, I wish I had drawing skills. I don't, so I will have to rely on the 1,000 words.

The following scene came to me this weekend as I attempted to go back to sleep between bouts of cramps from a stomach flu. (I'm sure that had no bearing on the subject.)

Imagine that you are adrift in the ocean.

Rescue Option 1: USS Obama - US Coast Guard-ish vessel, moving slowly at first, but more swiftly by the minute. As she gets closer, you see that she's an old girl, with lots of recent battle wounds, but her decks are manned by your countrymen. They work steadily and eagerly to repaint the hull and decks, to repair battle damage, neglected parts and replacing outmoded equipement. As she nears you, a well-organized crew hurls a life-preserver your way. You're hauled aboard, given medical treatment and returned to shore swiftly.

Rescue Option 2: USS Clinton - The same vessel as above, but not much repair is taking place. Actually, most of the crew that's not involved in bickering, backstabbing or outright fistfights have relegated themselves to opposite sides of the vessel. On a bright note, there is one attractive deckhand that seems above the fray. It's the Chief Officer, Bill! He's expressing his desire to help you, but somehow gets distracted by a female deckhand and fails to do anything to help you as the vessel lumbers by.

Rescue Option 3: USS McCain - The hind-most portion of the vessel is a modern ship, but for some reason deckhands from every country seem to be fitting strange, wooden appendages marked "Made in China" all over the ship...they seem to be converting it to an 18th-century British Man O'War...

The few Americans you can see are manning the guns, which are firing madly in all directions while ship changes course erratically, giving a sense of having no clear target in mind. A few of the shells whiz by and you hope out loud that their firing doesn't kill you before they can rescue you.

As the ship occasions closer, you can see that the decks are lined with fat, white businessmen, lounging, telling jokes and smoking cigars. Occasionally, a business man will pick up a flaming $100 bill that has flown from the ship's stacks and uses it to light a new Havana Gold. The businessmen don't seem fazed by either the blasting of the guns or the smouldering mess of burning currency that flies from the stacks and litters the decks.

Large holes keep appearing in the hull. More businessmen, only smaller and thinner than those lounging on deck busily cut holes through the hull and have formed a thriving market of selling the pieces of hull to each other.

The ship's PA alternates between describing the yet invisible land ahead (a paradise to hear him tell it!) and telling you not to worry as God is going to save you.

As the ship draws near, you can that the bridge is lined with pictures of George W. Bush in royal attire. You hear someone mutter a profanity from the rear engine room ("So"?) but the figure disappears before you can make out his identity.

As the ship passes, the deckhands raise what appears to be an anchor, its top portion painted into the shape of a golden cross. They yell something to you, but you can't make it out (Spanish? Chinese?). Before you can deduce their meaning, they drop the anchor on you and the ship continues on.

Tuesday, April 01, 2008

Food & Energy Volatile

The reasons cited as to why food and energy are so often excluded when calculating inflation usually include "they're too volatile".

According to Jeff Matthews, they're correct:

Now that the Federal Reserve has grudgingly begun to acknowledge inflation—and how could it not, with oil over $100 a barrel, “beans in the teens,” and gold near $1,000 an ounce?—a different contingent of the Powers That Be may be forced to likewise pay attention to what’s happening with the food supply around the world.

That’s because rice is now in short supply. And that’s not even the bad news. The bad news is that a shortage of rice, unlike the recent shortage of corn in our Midwest, can, and is, causing political unrest.
Here are a few excerpts from the New York Times’ report this weekend.

High Rice Cost Creating Fears of Asia Unrest

Published: March 29, 2008

HANOI — Rising prices and a growing fear of scarcity have prompted some of the world's largest rice producers to announce drastic limits on the amount of rice they export.

The price of rice, a staple in the diets of nearly half the world's population, has almost doubled on international markets in the last three months. That has pinched the budgets of millions of poor Asians and raised fears of civil unrest.

Shortages and high prices for all kinds of food have caused tensions and even violence around the world in recent months. Since January, thousands of troops have been deployed in Pakistan to guard trucks carrying wheat and flour. Protests have erupted in Indonesia over soybean shortages, and China has put price controls on cooking oil, grain, meat, milk and eggs.

Food riots have erupted in recent months in Guinea, Mauritania, Mexico, Morocco, Senegal, Uzbekistan and Yemen. But the moves by rice-exporting nations over the last two days — meant to ensure scarce supplies will meet domestic needs — drove prices on the world market even higher this week.

There’s more—much more—to the story, including political panic in the Philippines and export reductions by Vietnam, India, Egypt, and Cambodia.

Good thing our Consumer Price Index excludes food as well as energy. Unfortunately, you can't adjust hunger for food, too.