Why we aren’t out of the woods yet

In fact, we’re deeper in the woods than ever. All the elements are in place for a continuation of the unthinkable becoming thinkable. For the past 18 months or so I’ve said we would have a sharp downturn highlighted by a battered dollar and inflation and malaise. I was careful to say I did not expect a full-scale meltdown. Now I am a lot less sanguine. I think this excellent article captures the heart of the question that’s baffling most Americans: “How do the failures of these financial institutions affect me? Why should I worry?”

The big unanswerable question, though, is what happens next. Hurricanes start out as a heavy breeze, and then get worse—and the preconditions for a financial hurricane are very much in place. If a real hurricane needs high ocean surface temperatures and warm humid air, a financial hurricane needs generalized nervousness and a general lack of liquidity. Once those are in place, a few failed trades are all that is necessary to precipitate a very nasty chain reaction.

…Lehman Brothers has more than $600 billion in assets that will need to be liquidated as part of its bankruptcy. That’s an order of magnitude greater than any bankruptcy the world has ever seen: No one has a clue how to even get started on something so huge, let alone what the repercussions will be. Is there $600 billion in cash sitting on the sidelines of the global financial markets just waiting for an opportunity to snap up assets on the cheap? No. So as Lehman’s assets get liquidated, asset prices in general, and bond prices in particular, are likely to be under a great deal of pressure

In turn, that’s going to hurt other players in the global financial system, from hedge funds and sovereign wealth funds to small- and medium-sized regional banks. Anybody who’s leveraged and who marks their assets to market is at risk of margin calls and possible bankruptcy themselves, depending on the volatility and risk profile of those assets.

The upshot is a state of radical uncertainty…There is a very, very long list of things that could go horribly wrong from here on out. The liquidation of Lehman is one; the possible collapse of American International Group is another. Beyond that are countless hedge funds and other financial institutions which, collectively, present significant systemic risk.

But the biggest and most obvious risk of all is the one associated with Lehman’s own debt, which is now trading at less than 35 cents on the dollar. That’s a big loss for the institutions holding it—but it also means an unknowably huge loss for anybody who wrote credit protection on Lehman Brothers at any point over the past five years. Those sellers of credit protection are staring down the barrel of billions of dollars in claims, and they’re going to have to raise that money quick by selling anything they can get their hands on—and that might well include stocks.

So you think that we’ve dodged a bullet with the Dow still above 11,000? Just wait. This thing ain’t over yet. In fact, it’s barely begun.

As imbeciles argue about lipstick and flag lapel pins and the latest silly gaffe of the day, many of us are at risk that we do not comprehend and that we think the government can hold at bay. They can’t. It’s too big. Maybe they can contain it until after the election, but I’m skeptical. The worst is not over (as everyone was saying after the Feds seized Fannie/Freddie). We may see some bargain hunting in the weeks ahead that makes it all seem fine, but that will be a mirage. We saw what happened with the dot-com disaster: stock prices kept going lower and lower, and those who jumped in thinking they were getting great bargains got flayed alive. Especially if they did so on margin. Anyone who trades on margin at this time, even for buying gold, is setting themselves up for ruin.

The very idea of electing to the presidency a dedicated anti-regulation, economics-averse war-mongering liar is insane. Insane.

Speaking of imbeciles, I found this quite amusing.

Update: A friend of mine who lives off of gold trading just wrote me the following:

I took a $150k hit in the PM slide but am quickly recovering as I have been purchasing more shares around the $750 level.

Gold/Silver have entered the Wave 3 up move which will be violent in its swings — both up and down.

As JS recommends: sell 1/3 on the very sharp, short up moves — and buy back shares on very sharp, short down moves.

I sell long term shares for tax preference capital gains and add new shares on sharp breaks.

The next several years are going to be the most amazing times of our lives with few social institutions surviving as we have known them.

To this I say: “Bring it on!”

A bicycle is a good thing to own in the emerging America ….

Yes, alarmist, extreme, hysterical. But is it really? if someone had looked you in the eye last year and said that within a few short days we would watch the demise of Fannie/Freddie, Merrill Lynch, AIG, Lehman and, a few months earlier, Bear Stearn, and that many more pillars of American finance were at critical risk as well, you’d have thought it was impossible, extreme, hysterical, totally unthinkable. Welcome to the unthinkable. We’re there.

As I said recently, maybe it would be best for McCain to win. He and Palin deserve this shitstorm more than Obama. Of course, I do want Obama to win because we can’t turn this around under the McCain platform of yet more tax cuts for the super-rich and more wars. Obama can’t turn it around, either, but he can, god willing, help take us in a new and better direction.


Taiwan to switch to Hanyu pinyin?

I’ll believe it when I see it but it is certainly about time. Source article here; the article they got it from, in Chinese, is here.

This is one of those super-sensitive topics in Taiwan, and whenever I asked my friends over there if they wanted Taiwan to standardize using dalu pinyin they nearly shouted at me, “No!” Thus one shop window is selling xiabu xiabu, another shabu shabu, another syabu syabu, etc., all on the same road.

If it’s true, it could be an important turning point as Taiwan faces reality and returns to the motherland.

Update: Just to be safe, knowing how hysterical some readers get: that last line is semi-tongue-in-cheek. Semi. I do think Taiwan has already faced the reality that it is tied to China in many ways, and that most of its people favor some form of reconciliation, if only to help shore up their woeful economy. Being something of a pragmatist, I would have to say that a joining of the two is a matter of when and not if, even if such a joining is not justified by history (and what a bitter debate that topic can ignite).

English description of the new legislation, from a message board and unverified at the moment:

Hanyu Pinyin will be adopted as the main transliteration in Taiwan, instead of the Tongyong Pinyin, which had been used island-wide for the last six years. The Cabinet approved a proposal by the Ministry of Education (MOE) Tuesday. Hanyu Pinyin is to help Taiwan’s internationalization and international competitiveness, said the MOE.

Now, onto simplifying the characters….


Obama vs. McCain on the economy

It’s all right here, and it’s short and strong. The way the two men approach problems is literally day and night. The blogger, remember, is with Pajamas Media and was a strong Bush supporter.

While you are there, scroll down and read some of the posts. Professor Cole has a keen eye for political BS.


The gathering storm

Gathering Storm
[This is the second or third TPD post with that title – any excuse to use that great picture. This time it is especially apropos.]

I’m convinced that most Americans simply don’t realize just how severe our financial crisis is. Some, like our own sagely president, won’t even acknowledge we’re in a recession, let alone a crisis. But when we look at the events of recent days with stone-cold eyes, there is no way – unless you are wearing lead-lined blinders – we cannot conclude we are in serious trouble. The kind of trouble that could actually lead to a collapse of our banking system.

Impossible, bogus, alarmist nonsense! I can hear the catcalls from the peanut gallery already. But let’s simply look at the facts. Bear Stearns collapsed six months ago. Last week it was Fannie and Freddie’s turn. Yesterday, Merrill Lynch got sold to Bank of America at a bargain-basement price. Today. Lehman Brothers announced it’s going under as well.

A crisis of confidence in financial markets on Wall Street culminated in a weekend of brinksmanship and failed appeals that caused the demise of some of the nation’s most storied financial institutions.

It began on Tuesday, just two days after the Bush administration took control of Fannie Mae and Freddie Mac, the mortgage finance giants. Fears began to mount in earnest on Wall Street that Lehman might founder — and that the government might not ride to the rescue this time. As stock markets around the world tumbled, Lehman’s shares were hit by waves of selling that wiped out nearly half its value.

Please read that article – it’s a real page-turner, like a whodunit. We are witnessing a melodrama, almost like a horror movie. Make no mistake, this is an historical moment. We have seen nothing like it in our lifetimes.

Reflecting on the collapse of one of our most esteemed financial institutions, a widely respected financial analyst put it bluntly:

“This is an extremely, and I stress extremely, rare event. It also speaks to the more general notion that, in today’s highly disrupted financial markets, the unthinkable is thinkable,” said Mohamed El-Erian, the chief executive of Pimco, the world’s biggest bond fund, based in Newport Beach, California.

At what point do we call it a meltdown? Is that too unthinkable to stomach? People breathed a sigh of relief at the government’s seizure of Fannie and Freddie because it seemed to bring an untenable disaster under control. But was rejoicing really in order? Maybe it was just the proverbial finger in the dyke. The structural flaws may be simply too deep. We’ll be watching as Wall Street struggles to remedy the latest catastrophe, but I believe the dominoes have just started falling.

One of my favorite investment sites sounds worried, almost as if they’re trying to convince themselves that Wall Street simply has to implement a safety net to contain the Lehmann collapse. But there’s another possibility – a meltdown. The uthinkable really might be becoming thinkable.

That said, a meltdown would benefit no one, and Wall Street has every incentive to avoid it — as we’re seeing in the shotgun marriage of Merrill and BofA. If people can keep their heads through the end of the week, this could turn out to be Wall Street’s finest hour since John Pierpont Morgan used his own money to save the day during the panic of 1907.

It’s a fluid situation, of course, as all the news stories are at pains to point out. But right now it looks like the best-case scenario is that Lehman goes bankrupt, with the rest of Wall Street playing a generally supportive role. And the worst-case scenario? You don’t want to go there.

“If people can keep their heads…” That’s a very big if, and I am not sure it’s possible – not if the house of cards keeps coming down at once. And that’s what we seem to be seeing (Fannie, Freddie, Merrill Lynch, Lehman Bros. all within a few days of each other).

Finally, Paul Krugman gives a clear-headed assessment of the disaster, and touches on what no one seems to want to admit: this never needed to happen. That bullshit of the “ownership society” made this all possible, the mentality that the government needs to step out of the way and let businesses run roughshod over the people with zero regulation – this mentality opened the floodgates for the sub-prime calamity; this cowboy attitude that businesses should be free to do whatever they want without oversight brought us here. Read the Krugman op-ed, and memorize its closing grafs.

The real answer to the current problem would, of course, have been to take preventive action before we reached this point. Even leaving aside the obvious need to regulate the shadow banking system — if institutions need to be rescued like banks, they should be regulated like banks — why were we so unprepared for this latest shock? When Bear went under, many people talked about the need for a mechanism for “orderly liquidation” of failing investment banks. Well, that was six months ago. Where’s the mechanism?

And so here we are, with Mr. Paulson apparently feeling that playing Russian roulette with the U.S. financial system was his best option. Yikes.

It may not be a pretty day on Wall Street today, though I suspect the full gravity of the mess won’t have sunk in. I almost wish McCain would win, because no one should be made to suffer what Bush hath wrought when it comes to an economy that eight short years ago was literally the marvel of the world. Fasten your seatbelts; the roller coster ride has just started, even though there’s no track up ahead around the bend. (And I’m ready for the chorus how of I hate America and we’re doing jim-dandy and we should give the GOP yet another eight years. Right. Sarah Palin will make it all well again.)

Update: Next on the chopping block, AIG? Yes, we’re doing just fine. These are America’s greatest, more venerable institutions.

Also, a Business Week article steals my headline, and raises yet more reasons why there is trouble ahead:

Until now, preferred stock has been a prime tool for daring investors to inject new capital into a company needing rehabilitation. The Fannie and Freddie deals indicated that preferred investors could lose big, along with common stock investors, in distressed takeovers. Both Merrill and AIG raised new capital early this year by issuing securities similar to preferred. Lehman also raised money from preferred investors, who are now likely to be wiped out in a bankruptcy. So now big issues of preferred securities may not be available to fill holes in balance sheets from new losses.

After a bad week, a working weekend, and a manic Monday, Wall Street can only hope the credit storm is at its worst.

In other words, nowhere to run, nowhere to hide. The big institutions brought this on themselves, but also on each of us, as we’ll be footing much of the bill, not to mention seeing the value of our homes decrease and living in recession/stagflation for years to come. What could we expect from the party whose slogans are “Drill baby, drill!” and “Borrow, baby, borrow!”?


Obama’s foreign appeal

[Please note that Richard has not approved this blog entry.]

I’ve decided to re-write an earlier post to make my views clearer. Raj

It is clear from many reports that Obama has a massive amount of appeal the world over. This is partly because of the annoyance with Bush and therefore Republicans and partly because of how Obama comes across – young, handsome and eloquent. His race, as much as he doesn’t want it to be an election issue, stands out and reflects well on him.

However, as much as I enjoy reading election commentary from around the world, a recent piece in the Guardian was a bit too much for me. In 2004 a columnist with the Guardian urged readers to write to Americans and suggest they vote for John Kerry – which probably on average harmed, rather than helped, his chances. Recently an opinion piece on why Obama should win was published on the website.

And, most depressing, many African-Americans will decide that if even Barack Obama – with all his conspicuous gifts – could not win, then no black man can ever be elected president.

Yes, that would be depressing – because it would show that America still hasn’t moved on in terms of race. If African-Americans (what about West Indian-Americans – are they backing McCain?) are voting for Obama purely on race then that’s not hugely better in my view than voters voting for McCain because of Obama’s skin colour. But I’m not sure that they would despair that much. Obama has many talents, but he is also inexperienced – and running against possibly the worst opponent for him that the Republicans could have fielded. Although the age difference had the potential to lose McCain the election, if he could get over that Obama was always going to have a real fight.

It is my hope that if Obama loses, black Americans who were backing him will look with hope to the future rather than assume that was going to be the only chance of seeing a black US president. Freedland should have remained as optimistic, rather than make rather patronising comments that mocked the ability of the black voters to weather an Obama defeat.

But what of the rest of the world? This is the reaction I fear most. For Obama has stirred an excitement around the globe unmatched by any American politician in living memory. Polling in Germany, France, Britain and Russia shows that Obama would win by whopping majorities, with the pattern repeated in Africa, Asia, the Middle East and Latin America. If November 4 were a global ballot, Obama would win it handsomely. If the free world could choose its leader, it would be Barack Obama.

Thinking back to the last Democrat president, I seem to remember (perhaps wrongly) that during Clinton’s terms in office, the criticism of America was that it “didn’t do enough” – many countries seem to see-saw between wanting the US to make military interventions and not. Some are better than others, but I wonder whether this “pendulum” will continue to swing. In any case, as much as many people would like to see Obama US president, they have to respect the choice the American people make. As much as I wanted to see Gore and Kerry win in 2000 and 2004 respectively, when I heard that Bush had won I shrugged my shoulders and hoped for the best. It’s also fair to consider the situation reversed – I doubt Freedland would respond positively to calls from the foreign media for David Cameron to be the next British Prime Minister, though it’s probably inevitable.

But what does that say about today’s America, that the world’s esteem is now unwanted? If Americans reject Obama, they will be sending the clearest possible message to the rest of us – and, make no mistake, we shall hear it.

I don’t think at all that America would ignore the world to spite it. But just because the world backs someone doesn’t mean it is the best choice for America – that’s what US voters need to decide on. I remember some years ago that Chinese people desperately wanted to see the back of former Japanese Prime Minister Junichiro Koizumi – despite the fact that he had pushed a reform agenda that Japan desperately needed. Did they care about whether his successors would continue that process or send the country backwards? No. They were focused on one issue – whether the Japanese Prime Minister visited the Yasukuni Shrine or not.

Similarly, even though the world as a whole doesn’t wish a US president who will cause harm to his country, the desires of non-Americans are mostly focused on the next president “not going to war”. If they thought a monkey in a suit would do that better, they’d be “backing Bubbles”. From my POV what people like Freedland see in Obama is a mere shadow of his true qualities, taking a selfish, snobbish, self-righteous view that doesn’t do the man a shred of justice.

I can’t say that I would vote for Obama if I was American, but if he wins, I would give him the benefit of the doubt and hope for a good presidency – if he loses, I would like to see him stand again when the time is right. But for me, unlike people like Freedland, his race, youth and good features are irrelevant. It would be nice if the world could appreciate Obama for his policies rather than his image. Otherwise there will be an even greater disappointment if Obama wins and then does not turn out to be everything they thought he would be.


Kidney Stone Infant Formula

Traveling again, but this translation was too precious not to share.

This is yet another gross insult against China made by the international anti-China forces. They have health problems with food in other countries as well, so why can’t China also have them? Why are they only condemning China?

Will non-poisoned baby formula solve the health problem for babies? Adults who don’t drink milk powder also have kidney stones. Therefore, the western system of non-poisoned baby formula will not solve the problem of kidney stones.

Don’t forget that the baby formula industry has been in development overseas for almost a century whereas it has only been several decades for China. The baby formula industry in China has progressed continuously during this time. China cannot be expected to arrive at perfection immediately. Gradual steps are taken to reach the non-poisoned condition, as appropriate to the existing conditions in China.

It goes on and on, and gets funnier and funnier, in a very black way. The funny (sad) thing is, commenters like Hong Xing actually write that way, and mean every word.


911 Anniversary

One of my very favorite bloggers (and sorry for repeating that description every time I link to him), living up to his reputation for creative use of visuals, shows us the tragedy of September 11th for its victims outside of America. Good use of words as well:

Another 9/11 anniversary. Three thousand dead. A terrible tragedy. A horrific crime.

Five and a half years into the invasion and occupation of Iraq, a million dead, give or take a hundred thousand or so. So much destroyed, so many dead they have to be counted by survey like voters in an opinion poll. No exact number. No real list. No one can read out the name of every dead man, woman and child each year the anniversary comes around. The architects of this crime aren’t being hunted down – they were rewarded. Reelected.

A million dead: Three hundred and thirty three 9/11s. More than one a week, every week for five and a half years

Whatever you do, don’t miss the visual.


FT: Nuclear India must end its China-bashing


An interesting article from the Financial Times on the recent agreement by the Nuclear Suppliers Group to approve a waiver for India of a ban on exports of nuclear fuel and technology to India.

But the media celebrations had an ugly side – China-bashing. Perceptions that Beijing had tried to block the deal from behind the scenes sparked outrage among commentators, who suspected China was championing the interests of its ally and India’s nuclear-armed rival, Pakistan.

“It is in times of adversity that one learns who one’s friends are,” the Indian Express wrote in a piece lambasting China. The main business daily, The Economic Times, went further. “Slimy dragon wants deal for mother of proliferators,” it said, referring to perceptions that China might call for an NSG waiver for Pakistan as well….

As for China, Yang Jiechi, the foreign minister, declared his surprise at the accusations in the Indian media, saying Beijing played merely a “constructive” role in negotiations at the NSG.

I came across a number of articles emphasising different points, but what is clear that on Monday an editorial was run in the People’s Daily stating (according to AP) that:

the U.S.-India nuclear agreement posed a “major blow” to international nonproliferation.

“Whatever the future of the U.S.-India nuclear agreement, the multiple standard that the U.S. has on the issue of nonproliferation has caused doubts in the world,” it said.

This was then followed later on by comments from Foreign Ministry spokeswoman Jiang Yu, who said that “China hopes the NSG (the 45-nation Nuclear Suppliers Group) can find a way to strike a balance between nuclear nonproliferation and (the) peaceful use of energy” and that China’s role had merely been “constructive”.

The Financial Times article is certainly persuasive in that the Indian media should not be so reactionary, given that China is further ahead in diversifying its energy resources and thus should not be concerned whether India has better access to civilian nuclear technology. That said another article, albeit from an Indian news website, gave a detailed explanation of what it said happened during the negotiations. That asserts that China was trying to block/delay the deal indirectly, rather than stand out as being totally opposed to the deal in public. As none of the diplomatic sources are named, it’s impossible to verify.

The waiver has been widely criticised as essentially rewarding a country for not signing up to the Non-Proliferation Treaty, though I have a feeling that Congress will approve it. Any thoughts on whether it might actually block it?

But what is unfortunate is that there is so little good-will in India (at least in the media) over China’s involvement in the process. If China really was trying to sabotage it then it should think twice before doing the same thing over another process – changing its mind at the last minute will only annoy India further. It would be better if it was open about its opposition from the start. If Chinese concerns over the process were taken too swiftly as a sign of “meddling” then the Indian media could do well to accept Chinese opposition to India’s position can be rooted in good-sense rather than just a desire to hamstring its rival.

Or am I simply too optimistic to believe that China and India can reconcile in the near future as equal partners?


Why criticize the CCP?

Philip Pan, in a discussion of his book, says criticism and the public pressure it generates is the most effective tool we have.

[I]n the long-run, I am an optimist. I do believe that individuals can bring about real change in China — because they already have. People in the book like Jiang Yanyong, the elderly surgeon who forced the government to end the SARS cover-up, and Cheng Yizhong, the newspaper editor who led the crusade that led to the abolishment of the shourong detention system, come to mind. But it’s even broader than that. People in China today enjoy much more freedom and prosperity than they did three decades ago. The party likes to take credit for this, but I believe these improvements have come despite the authoritarian system, not because of it. They’ve come because of individuals who have fought for them, and because the party has retreated in the face of such pressure.

Of course, the two names he mentions paid mightily for it, and no matter what he says, I can’t imagine anyone reading Out of Mao’s Shadow without feeling chronic depression throughout, with a few moments of optimism. In the interview, which you should read in full, Pan says he doesn’t quite see why people find the book so saddening. I urge him to reread his chapter about the totally innocent young lady writing her last words in her own blood from her prison cell, a victim of the 100 Flowers tragedy, and the sufferings of the man who tried to bring her story to light. I know, there are baby steps of hope, but their impact is still too fragile and tenuous to be a source of great optimism.

I like Pan’s point about the CCP taking credit for the reforms that came about only after the CCP failed in its fight against them. It’s important to remember as the CCP continues to mythologize its achievements.

Link via ESWN.


Election Linklets

What real disrespect looks like.

A good look at what Palin’s done for Alaska.

A marvelous set of questions Palin should be asked. Simple, relevant and fair.

Obama disappoints me yet again. The great orator had better learn how to stand up to the well lubricated Republican noise machine, or fail.

The radical left mouthpiece The Wall Street Journal questions the truth of Palin’s “Bridge to Nowhere” claim. Devastating. That should end that conversation. (Iglesias looks at the same article and makes an astute observation about how the GOP creates damning narratives that succeed in derailing their Dem opponents despite their being pure fabrications.)