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Dear Aspiring Writers: The Worst Advice You'll Ever Read

A Literary Look at
I-State Lines

Spirited Away: Decay and Renewal

An American Poem
(Robinson Jeffers)

Taoist Chinese Poems

The Nelson Touch

"It's all about oil, isn't it?"

Kurosawa's High and Low

A Bountiful Mutiny

Howl's Moving Castle

Thailand's Iron Ladies

Trois Colours: Red

The Thin Man: Thoroughly Modern Movies

Why My Book Is Better Than the DaVinci Code

Iranian Films: The Mirror

Piratical Nonsense

A Real Pirate Movie: Captain Blood

2005-06 archives
2007 archives

Recommended Books

American Identity

American Identity Literary Contest Winners, 2006
(fiction and essays)

Hapas: The New America

Can You Tell What I am? Part I

Can You Tell What I am? Part II

Only in America


Your Tattoo in 50 Years

The American House and Frank Lloyd Wright

Cultural Commentaries
On Hatred and Anti-Americanism

Part 2

Part 3


Germany: We All Have Problems, But...

Kroika! Chronicles

This Blog Sells Out

Doom and Gloom Sells

The Kroika Mascot-"Auspicious Pet"

Wal-Mart and Kroika

Kroika and Starsbuck Take a Hit

Kroika Ad 1

Kroika Ad 2

Kroika Ad 3

Kroika Ad 4

Kroika Makes Bid for Oreo (April 1)

Unfolding Crises: Asia

China: An Interim Report

Shanghai Postcard 2004

Corruption and Avian Flu: China's Dynamic Duo

Exporting the Real Estate Bubble to China

Is the Bloom Off the China Rose?

China Irony: Steel, Marx & Capital

Curing The U.S. and China's Dysfunctional Relationship

China and U.S. Inflation

Trade with China: Making Out Like a Bandit

Whither China?

Will the Housing Bust Take Down China?

China's Dependence on Exports to U.S.; Is China About to Pop?

2005-06 archives
2007 archives

Battle for the Soul
of America

Katrina, Vietnam, Iraq: National Purpose, National Sacrifice

Is This a Nation at War?

A Nation in Denial

Why Is This Such a Tepid Time?

That Price Isn't Cheap, It's Subsidized

The Most Hated Company in America

U.S. Fascists Seek Ban on Cancer Vaccine

The Truth About Christmas

American Dream or American Nightmare?

2006 Sea Change

Obesity and Debt

Immigration Ironies

U.S. Healthcare: Working Toward a Real Solution

A Drug Industry Running Amok

Where There Is Ruin

2005-06 archives
2007 archives

Financial Meltdown Watch
What This Country Needs Is a... Good Recession

Are We Entering the Next Age of Turmoil?

Why Inflation Appears Low

Doubling Down on 5-Card No-See-Um

A Rickety Global House of Cards

Are Japan and Germany Truly on the Mend?

Unprecedented Risk 2

Could One Rogue Trader Bring Down the Market?

Worried about Inflation? Stop Measuring It

Economy Great? Bah, Humbug

Huge Deficits and Huge Profits: Coincidence?

Who's The Largest Exporter?

Three Snapshots of the U.S. Economy

Loaded for Bear

Comparing Nasdaq to Depression-Era Dow

Who's Buying Treasury Bonds? And Why?

Derivatives: Wall Street Fiddles, Rome Smolders

Financial Chickens Coming Home to Roost

Is the Stock Market on the Same Planet as the Economy?

The Housing-Recession-Oil-Healthcare Connection

Could We Have Deflation and Inflation At the Same Time?

What We Know, What We Can Safely Predict

Bankruptcy U.S.A.: Medicare, Greed and Collapse

Sucker's Rally

A Whiff of Apocalypse

Where There Is Ruin II: Social Security

2005-06 archives
2007 archives

Planetary Meltdown Watch
The Immensity of Global Warming

Sun Sets on Skeptics of Global Warming

Housing Bubble Watch

Charting Unaffordability

A Monster of a Housing Bubble

A Coup de Grace to the Economy

Hidden Costs of the Housing Bubble

Housing Bubble? What Bubble?

Housing Bubble II

Housing Bubble III: Pop!

Housing Market Slips Toward Cliff

Housing Market Demographics

Housing: Catching the Falling Knife

Five Stages of the Housing Bubble

Derailing the Property Tax Gravy Train

Bubbling Property Taxes

Have You Checked Your Property Taxes Recently?

Housing Bubble: Where's the Bottom?

Housing Bubble: Bottom II

The Housing - Inflation Connection

The Coming Foreclosure Nightmare 1

How Many Foreclosures Will Hit the Market?

Housing Wealth Effect Shifts Into Reverse

Housing Bubble Bust Will Take Down the Global Economy

The New Road to Serfdom: A Negative-Equity Mortgage

The Housing-Savings-Recession Connection

After the Bubble: How Low Will It Go?

After the Bubble: Rents and Housing Values

Why Post-Bubble Rents Matter

After the Bubble: How Low Will We Go, Part II

Housing: 10% Decline May Trigger Financial Ruin

How to Buy a $450K Home for $750K

Inflation and Housing: Calculating the Bust

The Growing Financial Risks of the Housing Bubble

Construction Defects: The Flood to Come?

Construction Defects
Part II

Who Gets Hammered in the 2007 Housing Bust

Real Estate Bust: The Exhaustion of Debt

What Happens When Housing Employment Plummets?

One More Hole in the Housing Bubble: Insurance

Financial Kryptonite in a "Super-Strength" Housing Market

Three Secrets to Unloading Property Today

Welcome to Fantasyland: Housing's "Soft Landing"

Why Is the Median House Price Still Rising?

Why Median Prices Appear to be Rising?

The Root Cause of the Housing Bubble

Housing Dominoes Fall

Twilight for Exurbia?

Phase Transitions, Symmetry and Post-Bubble Declines

Housing's Stairstep Descent

2005-06 archives
2007 archives

Oil/Energy Crises

Whither Oil?

How much Is a Gallon of Gas Worth?

The End of Cheap Oil

Natural Gas, Naturally High

Arab Oil Money and U.S. Treasuries: Quid Pro Quo?
The C.I.A., Oil and the Wisdom of Crowds

The Flutter of a Butterfly's Wings?

A One-Two Punch to a Glass Jaw

Running Out Of Oil vs. Running Out of Cheap Oil

2005-06 archives
2007 archives

Outside the Box
How to Make a Favicon
Asian Emoticons

In Memoriam: Winky Cosmos

The Wheeled Vagabonds

Geezer Rock Overload

Paying for Web Content

Light-As-Air Pancake Recipe

In a Humorous Vein
If Only Writers Had Uniforms

Opening the Kimono

Happiness for Sale: Jank Coffee

Ten Guaranteed Predictions for 2010

Why My Book Is Better Than the DaVinci Code

My Brand Management Stinks

Design Follies

The New Jank Coffee Shop

Jank Coffee, Upscale Tropic Style

One-Word Titles



Keys to Affordable Housing

U.S. Conservation & China
Steve Toma, Me & Skil 77s: 30 years of Labor

Real Science in the Bolivian Forest

Deforestation and Sustainable Forestry

The Solar Economy (book)
The Problem with Techno-Fixes

I Love Technology, I Hate Technology

How To Blow off Web Ads and More

2005-06 archives
2007 archives

Health, Wealth & Demographics

Beauty of the Augmented (Korean) Kind

Demographics and War

The Healthiest Cold Cereal: Surprise!

900 Miles to the Gallon

Are Our Cities Making Us Fat?

One Serving of Deception

Is Obesity an Inflammatory Response?

Demographics & National Bankruptcy

The Decline of Europe: A Demographic Done Deal?

Are the Risks of Obesity Overstated?

Healthcare: Unaffordable Everywhere

Medication Nation

The New Disease We Just Know You've Got

Can You Can Tell Which Pill Is Fake?

Bankruptcy U.S.A.: Medicare, Greed and Collapse

The 10 Secrets to Permanent Weight Loss

2005-06 archives
2007 archives

Selling the Landscape

The Downside of Density

Building Heights and Arboral Roots

Terroir: France & California

L.A.: It's About Cheap Oil
The Last Redwood

Airport Walkabouts

Waimea Canyon, Yosemite, Camping & Pancakes

The French Village Bakery

What Is Happiness?

Our Education System: a Factory Metaphor?

Understanding Globalization: Braudel

Can You Create Creativity?

Do Average People Know More Than Their Leaders?
On The Impermanence of Work

Flattening the Knowledge Curve: The "Googling" Effect

Human Bandwidth and Knowledge

Iraqi Guangxi

Splogs, Blogs and "News"

"There is no alternative to being yourself"

Is There a Cycle to War?

Leisure, Time and Valentines

Is the Web a Giant Copy Machine?

Science Matters
Anti-Missile Defense: Boost Phase Vulnerability

The Strolling Bones: Rock of Ages

Bad Karma: Election Fraud 1960

Hiroshima: First Use

All the Tea in China, All the Ginseng in America

Friday Quiz

Pet Obesity

The Origins of Carbonara

Organic Farms

Oil and Renewable Energy
Human Diseases

Wine and Alzheimers

Biggest Consumers of Chocolate

2005-06 archives
2007 archives

Essential Books

The Misbehavior of Markets

Boiling Point (Global Warming)

Our Stolen Future: How We Are Threatening Our Fertility, Intelligence and Survival

How We Know What Isn't So

Fewer: How the New Demography of Depopulation Will Shape Our Future

The Coming Generational Storm: What You Need to Know about America's Economic Future

The Third Chimpanzee: The Evolution and Future of the Human Animal

The Future of Life

Beyond Oil: The View from Hubbert's Peak

The Party's Over: Oil, War and the Fate of Industrial Societies

The Solar Economy: Renewable Energy for a Sustainable Global Future

The Dollar Crisis: Causes, Consequences, Cures

Running On Empty: How The Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It

Feeling Good: The New Mood Therapy Revised and Updated.

Recommended Books

More book reviews


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What's New, 2/03 - 5/05

 Weblog and wEssays

March 31, 2007

Readers On What Makes a Blogger Engaging

Two readers submitted thoughtful commentaries on what makes a blog engaging. First up is Darrell C.:

Your latest got me thinking more on what makes a blogger engaging.

You and I share a number of interests, and it seems, the life perspective of being in our earlier '50s. But it's something more about your writing.

It takes me back to a class called "Effective Communications Workshop" a couple of decades ago in a former career. It was an entire week, half on business writing, and half on presenting to groups. The latter was taught by an off-Broadway director making some real money as a corporate trainer.

I'll never forget how he described the ideal relationship between presentor and audience: Imagine you're sitting in your living room, talking with your best friend ... wearing a bathrobe. That level of intimacy! And obviously the opposite of the typical stiff business presentation.

I get that from your writing. It's like having a personal conversation with a friend -- even though I'm only listening and we've never met. You only know me from a couple of emails, yet I find myself writing another reply like I would to a friend.

Anyway, keep up the good writing!
Fellow writer E.A. addresses authenticity, creativity, and the effects of money on a blog--even donations. In my thank-you to E.A. for donating money to the site, I'd written: "if you have any comments about what you like best about the site, what could be improved, or topics you'd like to see covered, please let me know." His response got me thinking:

I think that's just the problem. The donations are already changing your site.

You're a writer: you know better than anyone that writing has to be what it needs to be, what it can best be, not what the public desires. Why do people read or go to movies? They most want the joy of expression, emotion, even by proxy. But the difference in the papers or in other blogs is that they do not have the joy of personal expression, either because they must consider money or because the originator doesn't have it in abundance to give. They are worried of giving, not free. ...Free.

You'll catch the most of us within 30 days. Blogging is different in that it's two-way bond. It's an extended circle of friends where one day, on a lark, one of the friends asked for money he didn't expect. Among friends, that is fine as a one-time or occasional thing, and entertaining for us to surprise you, but if it is regular it becomes a business relationship, which is different. Think of it like trading. You hit something that works, but it won't work all the time. It's like you asked for a hit to support your habit. Now go home and forget this ever happened. :)

A donation tab on the sidebar is great, where people can run into it from time to time and surprise them. If they are not surprised, it will be like a hit-up, a public-radio blogathon and be resisted. As your readership grows, it may even have modest income the way shareware does. But the writing is good because it is pure--did Hemingway say that? I'm not going to remember what book that's in. It is pure because it purely entertains you only. Changing that would change the contract, most especially to yourself, and change the blog, the atmosphere, and your life.
This really goes to the heart of several important issues. I've been worrying since starting the donations link about just these issues, and E.A.'s commentary crystallized my hunch that both being prompted for donations and doing the prompting is getting tiresome after 8 days. I think E.A. is right--the sidebar pitch for donations is enough. So unless I come across some amusing bit which lends itself to the donation link, it's in the background (sidebar no one looks at).

Since I keep a list of dozens of ideas, links and reader comments which would make interesting posts, I don't think this site's content or perspective has changed. But E.A.'s comments make me realise how subtly money--even in the form of donations--could diminish the very things which have drawn readers to the site.

Special note: don't miss our April Fools entry tomorrow.

March 30, 2007

Diets, Genes and Health

Thank you G.N. ($25), E.A. ($10) and G.S. ($25) for your vote of confidence and kind gifts. I am greatly honored by your support. All contributors are listed at the bottom of the page in acknowledgement of my gratitude.

I've received reader feedback on the diversity of human diet, the role of genetics and the common-sense habits of health. I've illustrated the entry with random photos of food I've taken (or made) at home or at friends.

First up is new correspondent Michael M. with two fascinating observations on human diet:

Here's a diet 'study' for you:

For a few years my stepfather resided alongside a couple in their mid-90s. Because the two were somewhat feeble, Ed routinely pulled their trash can to the sidewalk to await pickup by Waste Management. Ed also took note of the weekly contents: generally eight soup cans and three empty wine bottles...
Now that's a 'study' with the ring of truth.

If you are interested in another, here is one from Richard H. Dana's Two Years Before the Mast: A Personal Narrative of Life at Sea . Dana was working to stuff the hold of a single ship with 45,000 cattle hides. The memory is from 1836 at San Diego, California, well before beef became a staple of the American table.

"During all this time,--which would have startled Dr.Graham--we lived upon almost nothing but fresh beef; fried beef steaks, three times a day,--morning, noon, and night. At morning and night we had a quart of tea to each man; and an allowance of about a pound of hard bread a day; but our chief article of food was the beef. A mess, consisting of six men, had a large wooden kid piled up with beefsteaks, cut thick, and fried in fat, with the grease poured over them. Round this we sat, attacking it with our jack-knives and teeth, and with the appetite of young lions, and sent back an empty kid to the galley. This was done three times a day.

How many pounds each man ate in a day, I will not attempt to compute. A whole bullock (we ate liver and all) lasted us but four days. Such devouring of flesh, I will venture to say, was seldom known before. What one man ate in a day, over a hearty man's allowance, would make a Russian's heart leap into his mouth. Indeed, during all the time we were upon the coast, our principal food was fresh beef, and every man had perfect health; but this was a time of especial devouring;and what we should have done without meat, I cannot tell. Once or twice, when our bullocks failed and we were obliged to make a meal upon dry bread and water, it seemed like feeding upon shavings.

Light and dry, feeling unsatisfied, and, at the same time, full, we were glad to see four quarters of a bullock, just killed, swinging from the fore-top. Whatever theories may be started by sedentary men, certainly no men could have gone through more hard work and exposure for sixteen months in more perfect health, and without ailings and failings, than our ship's crew, let them have lived upon Hygeia's own baking and dressing."

Two Years Before the Mast (

Next, contributor Chuck D.'s commentary on his own experience shows the long-term value of moderation, gradualism, good habits and common sense in exercise and diet:

Congratulations! You and Nurse Dorothy have produced the most concise explanation I have seen regarding one of the major problems that contributes to our screwed-up health system in this country. The ideas you two have expressed have been in my mind in disorganized form for quite some time. You have organized them quite nicely for me. Thank you.

I'm going to risk sounding as though I am in a self-absorbed “me-bubble” as I go through this. I really am not. This summer (assuming that I have money left over after tax season) vacation is going to be a 700 mile bicycle tour through three states. This fall I will turn 60. Different? Yes. Crazy? Maybe. Impossible to do? Not at all. The reason is exactly what you addressed: self-responsibility. At this point in my life it's becoming obvious to me that it is payback time for all the responsible lifestyle choices I have made over the years of my adult life.

I will admit that I seem to have gotten good genetics from my maternal grandfather. When he was 80, he spent part of the summer digging by hand with a pick and shovel a hole big enough to set a septic tank in. (On the downside, if I am correct about this, I will probably spend the last years of my life dealing with failing eyesight and blindness, but that’s a story for another time.)

I've never smoked. I was asthmatic as a kid. Two cigarettes, and I can't breathe. I quickly decided that the pleasures of being able to breathe easily far outweighed any pleasures I might get from smoking. An occasional beer or a half a glass of wine before dinner is it.

I was a finicky eater when I was growing up, but I learned to broaden my diet in my early twenties. I can still tell you the exact circumstances when I was forced to confront broccoli, which I "knew" I hated even though I had never eaten it, and discovered that it actually TASTED GOOD! After that epiphany, I decided that there might be other things for which the same was true, so I started to experiment. I found out that it was true.

About the same time I decided to reform my diet. I had the intuitive good sense to realize I should change only one thing at a time. I cut down on meat, and increased vegetables and grains, cereals and pasta. At first I did this because it was supposed be healthful. I soon discovered that I simply felt better and had more inner vitality by eating this way.

A few years ago I discovered that I needed to downsize portions. I've always had a sloppy metabolism, so I could eat mostly as much as I wanted. (Good genetics again.) Over the years I had slowly put on about 20 pounds which I could get away with carrying. I would lose some of it over the summer biking, but I would put it back on over the winter. (I live in the Northeast where you can't ride in the winter, and I hate stationary bicycles.) Over a summer of riding I apparently cut down on the amount of food I was eating by probably 20% without realizing it. Toward the end of the winter I realized I hadn't gained the weight back and figured out why. So I repeated the same practice the following summer and winter, and the summer after that. I am now back to basically the same waist size I had my 20s.

This isn't rocket science, just common sense. I figured out how much food it would take to put 500-800 calories on the plate for each meal of the day. If I eat a bigger meal at noon, I eat a smaller meal at supper. On a day I exercise I eat more than on a day I do not.

And lastly there is the matter of exercise. You simply have to do it. It has to be important enough to you to do it in order to stay healthy that you will make the time for it. You have to find something that you enjoy. It took me a long time to discover biking. For what ever reason, God in his infinite wisdom made me both totally unskilled at and totally unteachable for anything involving hand/eye coordination and a ball. First I tried running, but it was a duty. Eventually I decided to try bicycling. And that was love.

Do I have to think about all this as I do it? Yes, but not much -- about three seconds at any given time. Like many things in life, once you get in the habit of doing something you don't have to think very much about it at all. You just do it.
Contributor K.K. points to the over-arching influence of one's genes in how we fare as we age:

We have talked about this before and I think it is unfortunate that we don't talk more about how people are genetically very different. To say anything other than "we are all the same" is politically incorrect and will get you in trouble, but the truth is that we are really different and some people can get away with eating total crap and still look great and be healthy while others can eat nothing but small portions of good food and still look like crap and have health problems.

(I have not missed a single day of school or work due to illness since High School and the last time I spent the night in the hospital was back in '65 the night I was born).

I have friends of French descent in the Circle de l'Union Club in San Francisco (a.k.a. "The French Club") and the kids (as in "kids my age" in their 40s) with thin fit parents of French descent tend to be basically thin and fit no matter what they eat or what they do...

My Mom gets mad when I compare everything to cars, but there are a lot of similarities. You can make a Cadillac go a little faster and handle a little better with premium gas and better tires but it will never be able to catch a Lotus on the track, just like a 245 pound 6'4" German guy can get a little faster if he trains, eats well and buys some nice running shoes, but he will never be able to catch a typical 145 pound 5'11" Kenyan guy in a race.

Some people age well just like some cars age well. Odds are that an Italian movie star with Latin good looks will still attract the ladies 40 years after his last movie just like a 40-year old Ferrari will still get a lot of attention. The 60-year old Italian guy that drove a bread truck in his 20's will probably not age as well and will get about as much attention in his 60's as a 40-year old Fiat.

I remember seeing a photo of supermodel Paulina Porizkova with her Mom about 20 years ago and her 40-something Mom was better looking than most 18-22 year old Sorority girls. I just saw some promo photos for "Dancing with the Stars" and the 40-something Paulina is (like her Mom) better looking than most 18-22 year old Sorority girls today...

Last up, a story from the Wall Street Journal on how workers "game" plans designed to encourage healthier habits, leaving already-healthy co-workers with no rewards:

Wellness Plans Reach Out to the Healthy (3/28/07, subscription required, or find it at your local library)

As more employers pay workers to quit smoking, take up exercise or lose weight, a growing number are under pressure to devise ways to reward another group of employees -- those that may already lead a healthy lifestyle.

The government recently finalized a thicket of rules governing what measures companies can take to induce workers to adopt healthier habits. The aim is to ensure that all workers are treated fairly in so-called wellness programs. As a result, employers who pay workers for giving up cigarettes, for instance, are increasingly offering non-smokers an alternative way to earn the same reward. Even nicotine addicts who can't quit are considered eligible for awards in some cases. This means that instead of being rewarded for success, many workers are earning extra cash or discounts on their health-insurance premiums just for participating in wellness programs regardless of whether they manage to change their habits.

One aim is to discourage the type of behavior Rockford Acromatic Products Co. encountered. The Illinois auto-parts maker used to offer $250 to employees who could stay smoke-free for several months. But some workers took up smoking just so they could then quit and qualify for the reward. The company stopped offering the incentive.
My own suspicion is that disincentives work, too--as in, all visits to the doctor cost you something which you will notice, such as $25-$50, and there is only limited coverage for lifestyle diseases and drugs. (You can be sure that anyone who has to pay $50 for a doctor's visit will not be running down to the clinic when they have the sniffles. I know because my own self-employed coverage requires a $50 co-pay for any visit. With no drug coverage, I am also not exactly pining away for fistfuls of outrageously expensive pharmaceuticals.)

I've run out of catchy reasons why you might want to
Your readership is greatly appreciated with or without a donation.

March 29, 2007

Are Blogs the New Newspapers?

Thank you S.F. ($5) for your vote of confidence and kind words. I am greatly honored by your support. All contributors are listed at the bottom of the page in acknowledgement of my gratitude.

Are blogs the new newspapers? Reader H.S.K. got me thinking about blogs and media in a new way:

Let me say that I have been reading your blog for several months now (as well as a few others). Your site stands out mainly because of the high degree of thought and creativity of content that you provide on a daily basis.

I think that because of the great quality consistently on your site that you, Charles, are what the post-modern newspaper will someday become. The newspaper business is going to change and people are already turning to alternate sources (e.g. Drudge Report) to get their news fix. (emphasis added)

H.S.K. quotes from the following story:

A roomful of journalists could not resist asking about the prospects for newspaper stocks. Buffett and Munger were surprisingly bearish on newspapers, a major investment for Berkshire through its large stake in the Washington Post Co. and its outright ownership of the Buffalo News.

After saying that he and Munger are "newspaper addicts" and that "it's still an unusually good business," Buffett struck a somber note.

"The economics of newspapers are very, very close to certain to deteriorate over the next 10-20 years," he warned. "I see nothing that will turn around the erosion from both the circulation and advertising standpoints."

-Warren Buffett at shareholder meeting in 2004
As newspapers around the world tighten their belts, consolidate and merge, and invest less in their newsrooms, it will be up to sites like yours to provide the content that people simply cannot get anymore from their local paper. How many reporters out there, due to budgetary constraints and restricted deadlines and a headline's "sexiness" quota, currently just go to the internet for their story, punch it up a bit and submit? I'll bet that this is becoming more common every day.

What you do is already very similar to what they provide today, but in my opinion greatly superior. The byline on the site does not have to be yours, you have access through your readers to a vast sea of collective knowledge of the highest caliber. You can offer their insights (and you do, generously giving credit where due) and your site is that much better for it!

I was reading this today: Bubble Markets Inventory Tracking . This is one of the better Bubble Blogs, and I will ask them soon to add your site to the list of blog links they offer. While the LA Times was not technically wrong, more investigative research would have uncovered the real story, which would have made far more interesting reading.

Charles, I believe that there are many of us who already have quit watching the nightly news with its "if it bleeds, it leads" stories and its complex issues that they want to boil down into 3 minute and 22 second sound bites that are explosively delivered by "experts" who are nothing more that actors playing the pros vs cons. Somewhat entertaining, but that is not going to solve the complex issues that our country faces over the next 50 years.

I think you are an "early adopter" of the newspaper format of the future, and although things most days don't look so good, your blog is a bright spot in the clamoring din coming from the professional corporate news machine. (emphasis added)

I also wanted to let you know that I received a special offer for the Wall Street Journal for a year (with on-line access) for $99, and I would have taken them up on it a few years ago, but today, I would rather spend that on 3 or 4 of my favorite bloggers who truly do provide our country with a great service.
Thank you, H.S.K., for the praise and the insightful commentary on the future of media.

Here is contributor Paul M.'s assessment of the mass media's weaknesses and the impact of blogs:

But I think the overall discourse, given the nature of the Internet and blogging, has this ripple effect that transcends the number of supporters who identify mainly with OfTwoMinds. Quality sites such as yours have a much greater impact than you might realize. So although some of the topics often are presented with highly technical analysis, the issues don't always lend themselves to simple solutions. Think derivatives. Zero discussion in the mainstream media, with the exception of the financial press, which appears to be exuberant cheerleaders one day and somber bears the next. And I am not saying the mainstream is without value. They just don't follow a logical progression sometimes.
Astute reader Phil M. comments on what differentiates blogs from the mass media-- the personal touch: (please pardon my reprinting of praise, something I don't do unless there's another point being made by the reader)

I forget how I stumbled upon your blog, but I am very grateful that I did. The blog phenomena are fascinating for many reasons, with great content and the allure of an emerging new media type probably chief among them. But what made me hit your PayPal button in an instant (okay, a couple of seconds) was that I've come to regard you as a sort of friend that I like to listen to, that lubricates my own thinking. Usually the loudest or most emphatic guy at the pub gets the most attention, but I wish it was someone more like you: sensible, compassionate, insightful, classy, witty and human.
These reader insights made me realize why this site attracts so many of the best and the brightest--it's you. The high quality of the readers' comments insures the quality of the dialog between myself as "editor" and you as reader and contributor is equally high. As HSK put it so well: you have access through other readers to a vast sea of collective knowledge of the highest caliber.

It made me ponder the weaknesses inherent in both the mass media and the blogosphere. In the mass media, readers/viewers are shoved aside onto "letters to the editor" unless they're an expert in academia or government who is known as an expert to the media. Anyone without these PR credentials is basically ignored.

The only vote readers have is to "vote with their feet," i.e. cancel their subscription. That's a pretty blunt tool for input.

As for "pundits," there are only a handful in the entire nation who get paid to pontificate as columnists, and unfortunately they generally are little more than ideological distillers: every topic gets mashed into a "Conservative" or "Progressive" diatribe, and frankly, that's about as entertaining (and useless) as "if it bleeds, it leads" journalism.

There's another serious problem with the major media, and many of you have written in to tell me you sense the same thing: the media simply isn't reflecting the realities we see around us. In general, the media coverage suggests everything is rosy with the U.S. economy, even as we see evidence to the contrary "on the ground." Some readers have gone so far as to suggest that they thought they were going crazy, as what they saw did not align at all with what the media "reports."

The blogosphere has its own inherent limitations as well.

There's the unfortunate tendency towards "cheerleader" sites which attract and reinforce those already possessing the same ideological views. If you "vote" for information which already aligns with your views, then is this truly "democratic"? Are you a better-informed citizen for reading materials which don't challenge your knowledge base or ideological bent?

Blogs offer plenty of opportunities for reader input--in fact, too many. Forums for readers to post comments and respond to each other and the host/writer can be interesting, but the problem with these is that they're huge time-sinks. On the rare occasion I read an entire chain of comments, I find myself exhausted by the expense of time and wishing that I could have read something with the same information condensed into a succinct format. None of us has time to read more than a handful of commentaries, so we want them to be succinct and fresh. This is the goal of professional journalism (or should be).

Then there's the problems inherent in anonymous blogging, where venomous or just plain idotic comments are posted with the same alacrity as thoughtful ones.

As I ponder the positive feedback I've received from so many of you, I am wondering what brings such savvy readers to this site. My guesses:

  • a variety of topics are addressed in depth, and some goofy ones thrown in for flavor. I try to mix topics so no one subject becomes pervasive.
  • Readers are treated with respect, as are their views. If you send in a commentary, you know I edit lightly, and let you speak for yourself. If you disagree with something I've posted, your views are given precedence, and you are credited as per your preference.
  • As HSK observes, we all benefit from the expertise of other readers--people who don't seem to get into the mass media depsite their knowledge and experience.
  • Since many if not most of the topics come from you, the readers, then the content is heavily interactive.
  • The content is not just a "link farm" and quotes from others; there is at least an attempt at original content--often courtesy of readers.
  • As a practising free-lance journalist with 19 years' experience, I try to keep the entries as short as possible. On complex topics, that can still be lengthy, but any less doesn't do justice to the subject's complexities.
  • Whenever possible, I try to substantiate facts with links and sources.
  • As editor, I try to select readers' comments which express a different view and try to edit (lightly) for length so a diversity of opinions are presented in a compact format you can read in a few minutes.
  • I avoid ideological diatribes because their practical value in solving real-world problems is generally nil. Furthermore, they insult the intelligence of those with opposing views.
  • Readers of this site are uniformly smart, curious, well-informed and smarter than I am. My most frequent comment to my wife is astonishment at just how smart and successful you readers are, and how amazed I am that the site draws such a diverse intelligence. It has been my very good fortune to learn from all of you, and to offer a modest forum for your thoughtful comments.

  • If I am off-base on all this, then by all means let me know.

    If I am an early adopter, as HSK suggests, then I am indeed fortunate, because I've somehow attracted one of the smartest readership on the web.

    (insert brilliant marketing line here which instantly causes erudite readers to)
    Your readership is greatly appreciated with or without a donation.

    March 28, 2007

    The China Syndrome--Financial Meltdown

    Thank you J.H. ($20) and P.&T. S. ($12, sent via mail) for your generous and quite unexpected donations. I am greatly honored by your support. All contributors are listed at the bottom of the page in acknowledgement of my gratitude.

    The 1979 film The China Syndrome took its name from the darkly humorous notion that a nuclear reactor meltdown in the U.S. would burn straight through the Earth to China.
    (wikipedia entry on The China Syndrome)

    Nowadays, the idea that a consumer-spending meltdown in the U.S. could trigger a subsequent slowdown in China's red-hot economy is a given. But perhaps "The China Syndrome" works both ways, and a meltdown of China's speculative financial bubble will trigger a meltdown in the U.S.'s debt-driven speculative bubbles.

    To give you a taste of just how frenzied the Chinese stock market has become, consider this Bloomberg story sent in by frequent contributor U. Doran:

    March 21 – Bloomberg (Luo Jun / Simon Pritchard):

    “Deng Yijun, a cargo freight agency manager in Shanghai, faced a dilemma last December. ‘I needed a car, but I didn’t want to use up my savings as the stock market was booming,’ she says. ‘So I used credit cards.’ Deng, 32, was eyeing a Ford Focus that cost about 200,000 yuan ($25,815), roughly equal to her savings. Maxing out three cards, she put 140,000 yuan on plastic and gained 56 days of interest-free credit….. Most of her remaining cash went into stocks… Deng is typical of Chinese who are using easy credit to fuel a stocks boom only briefly deflated last month by government threats to crack down on illegal lending. The willingness of banks to break the law to finance stock trades shows the blunt tools regulators wield as they try to manage China’s markets."
    ( source link-Prudent Bear)
    This chart illustrates the stupendous (and recent) rise of the Chinese stock market. It also poses three questions.

    1. Is this sustainable?

    2. How soon will it drop?

    3. What effect will a sharp decline have on global financial markets?

    Question Three is easy to answer, for the late February swoon in the Chinese markets immediately sent global markets tumbling.

    As for Question One, here's an article submitted by frequent contributor Albert T.:
    Hong Kong's stock market romance turns sour:

    "We like to buy shares, but when the nanny starts to give out investment tips, you know things have got a bit irrational," said Allan Chan, who like many Hong Kong residents likes to dabble in the market.

    Signs of Hong Kong's feverish romance with stocks and shares abound, with an upsurge of small punters enrolling in investment workshops.

    The abrupt turn in the markets last week was triggered by a 9% drop on the Shanghai stock market, its biggest fall in a decade. It should have been an insignificant event as Shanghai is a tiny, illiquid market, accounting for a mere 2% of global markets.

    But the Chinese sneeze was contagious. Wall Street lost more than 500 points, the FTSE fell more than 300 points and Japan's Nikkei surrendered all the gains it had made since the turn of the year, falling back below 17,000 today.

    Analysts said the fall in Shanghai had to be put into perspective of a 107% rise in the last 12 months and expressed surprise at its impact on the rest of the world.

    "China's stock market right now is relatively small and not very globalised. So it's not possible for it to have such an impact," said Shang Fulin, chairman of the China Securities Regulatory Commission (CSRC).
    Oh really? This statement is a laughably absurd denial of reality, for February's drop amply proved that China's markets can and will influence global markets. The reason is not the size of the Shanghai market or any technical reason; it's simply that the entire world knows that China has been the engine of global growth, sucking up vast quantities of raw materials, machine tools, consumer goods and capital. It has also been (along with Japan and the OPEC countries) the primary supporters of debt-loving American consumers' 6-year buying spree via the purchase of hundreds of billions of dollars of U.S. Treasury bonds, which has kept U.S. interest rates low and kept the dollar from plummeting even lower than it already has.

    If the party stops in China, it stops everywhere.

    All the strident babble in the media and in Congress about the dollar-yuan exchange rates fails to consider how deeply intertwined the U.S. and Chinese economies have become. It is nonsensical to think that an adjustment in the exchange rate is going to change much of anything; that would be the equivalent of moving a pawn one square forward on a 3-D chess board.

    While American politicos have focused on the trade imbalance to score easy points with confused constituents, they seem to have forgotten that the Chinese central bank owns at least $600 billion in U.S. Treasuries as well as other U.S. debt--including residential mortgage-backed securities: China's money woe: Where to park it all:

    go to source document
    Most central banks have invested them in U.S. securities, mostly Treasury bonds, but sometimes mortgage-backed securities as well. In recent years, these giant purchases have helped hold down interest rates that American home buyers pay for mortgages and the U.S. government pays to finance its budget deficits.

    If central banks move out of such securities, U.S. interest rates could rise. But moving into equities, which tend to earn higher returns over the long term, poses risks to stock markets.

    Chinese Communist Party officials have insisted that central bank officials be paid only civil-service wages, with the result that even fairly senior officials earn as little as $500 a month with minimal benefits.

    (Albert interjects: I do not really know how wise it is to underpay people who have control over billions of dollars or any other currency. Wouldn't they sooner or later just rig trades so that could get paid some other way?)

    "By contrast, the China Securities Regulatory Commission, the China Banking Regulatory Commission and the big state-owned banks are all permitted to pay wages that are competitive with the private sector, with salary and benefits totaling at least $1,000 a month and sometimes as high as $3,000. This has allowed them to lure managers from the central bank, as well as Chinese citizens returning from overseas with doctorate degrees in economics."

    The People's Bank of China has now been given permission to pay wages closer to market levels, but the rest of the central bank still struggles to hire China's best and brightest, said Victor Shih, a China banking specialist at Northwestern University in Evanston, Illinois.
    Albert T. also sent over this link to a story on China's slowing economy:

    Pace of Chinese growth 'to slow'

    The pieces are in place for a meltdown of China's speculative market. A speculative bubble in which people are betting credit card debt on a market which has jumped 200% in less than two years is clearly vulnerable to reversal.

    Underneath the speculative bubble, the real economy is slowing as officials seek to restrain risky lending and inflation.

    For an in-depth analysis of Chinese policy-makers' moves to control the runaway stock market, see The Shanghai Bubble by Gary Dorsch, courtesy of correspondent U. Doran.

    As China has expanded its U.S. debt holdings to include mortgage-backed securities, it has unwittingly exposed those holdings to the meltdown currently underway in the U.S. housing and mortgage-backed securities markets. Its vast horde of U.S. dollar-denominated Treasuries further exposes it to a decline in the dollar. And the entire $1.3 trillion portfolio is managed by woefully underpaid civil servants.

    On the U.S. side, our speculative markets are vulnerable to the slightest tremors in the Chinese markets, and to any re-shuffling of their dollar and Treasury holdings. It may come down to whose speculative financial "reactor" melts down first. The idea that one country's debts and bubbles can melt down without effecting the other is wishful thinking.

    As for question Two, How soon will the Chinese market drop? Consider this chart of an eerily similar bubble--the NASDAQ circa the dot-com era.

    If this had any value to you. . .
    Your readership is greatly appreciated with or without a donation.

    March 27, 2007

    An Ounce of Prevention Is Worth...?

    I'd like to thank K.K. ($20), C.S. ($15), T.T. ($10), R.SJ. ($10), A.I. ($15), I.D. ($5) and J.M. ($20) for their unexpected and generous donations. I remain deeply honored by the support being offered by readers. All contributors are listed at the bottom of the page in acknowledgement of my gratitude.

    Knowledgeable correspondent Nurse Dorothy had this thought-provoking response to a recent entry on managed care in the U.S.:

    This is in response to the March 14th blog about managed care. In particular I would like to address the issue of preventive care. It is not really our lifestyle that needs to change but our culture. Culture is what drives lifestyle. As an example, being a nurse I meet many people from all walks of life, rich to poor. Whether poor or rich, both sides tend to work long hours, have high stress, lack exercise, and eat poorly all of which leads to chronic disease. Why, because whatever extra money Americans make is spent on stuff.

    Our culture’s idea of a "good life" or "quality of life" is based on the perspective that the more "stuff" you have the better off you are. Who’s got the biggest house, latest fashion, nicest car, newest electronics, etc. In America we work our behinds off for a 5000 square foot house with granite counter tops, a flat screen television, and leather sofa where we can sit for hours eating fast food, getting fat and stressing out about how to pay next month’s mortgage, new car loan and credit card bills all the while popping anti-depressants like candy. That’s the American culture which drives our lifestyle.

    As an example, I recently had a conversation with a single friend who makes a very good salary. We discussed the benefits of organic food and her response was that she would love to eat more organic foods but she can’t afford it. Meanwhile, she just traded in her 2-year old BMW for a new one "cause it’s so cool," purchased a 3500 sq. $400,000 home two years ago with a three year ARM coming due next year, and is thinking about having breast implants.

    A culture based on high quality (not quantity) living would value financial stability via savings, leisurely enjoyment of high quality food with friends and family, any extra time spent on physical activity or enjoyment of hobbies, etc. This type of culture leads to better overall health. As an example, the French diet is very high in fat yet their rate of heart disease is less than ours because they eat freshly cooked, low processed foods in smaller portions, they take a long time to eat with friends and family, and are more physically active. (Wine of course has a beneficial affect as well.) Our insane lifestyles lead to the intake of highly processed, low quality foods which are fast and convenient because our culture views time as money and not time as precious.

    Dorothy also added a comment "from the front lines" on socialized medicine:

    In regards to the March 19th entry: In the past I worked in the operating room for many years and had many citizens from Canada and the UK come for surgery here in the US (combining surgery and a vacation) because the waiting lists were too long in their home country. (Now the trend is to go to developing countries as they are cheaper than we are). It is because of that experience that I often tell others who want socialized healthcare that it is not the best alternative.
    Dorothy gives voice to something I felt but could not express as well as she has here: that the obsession with who's going to pay for the skyrocketing costs of marginally effective drugs, operations and care is sidestepping the real issue, which is becoming healthier as a nation. What we should be obsessed with is the prevention of every disease which is preventable via lifestyle changes and diet-- i.e. a significant percentage of the disease we suffer.

    The revolution would have to be of values, specifically, personal responsibility. It would no longer be the role or responsibility of society or medicine to "fix" the damage which we inflict on ourselves.

    We live with a curious paradox of values: if you drink yourself silly and smash your car into someone, you will be arrested and charged with a crime. No one steps up to pay for your "cure" or for your attorney. Those are your responsibilities.

    But if you smoke and get lung cancer, or drink excessively and destroy your liver, or eat to excess and end up carrying 187 pounds on a 5-foot, 5-inch frame and are prediabetic at 21 years of age, then "somebody" is supposed to "fix" you, and pay for it, too.

    Does anyone else notice the disconnect here? Just because we can be struck down with diseases over which we have no control, such as brain cancer or mental illness, then we're off the hook entirely for all the diseases we can influence or control? It doesn't make sense.

    Human beings respond to incentives and disincentives. If you know someone will magically save you from the consequences of your actions, you respond differently than if you will suffer the consequences, and you will respond in yet another way when the consequences start hitting home. This story by a 21-year old prediabetic is a real eye-opener:

    Sugar isn't sweet for her anymore; She's one of 54 million with prediabetes.

    When connected to the trend of obesity, these plague-level stats are enough to make news headlines regularly. It's hard to ignore a figure like 74 million, the total number of Americans with prediabetes, Type 1, and Type 2 diabetes.
    There is another way of living, of course, a healthier way, and it appears to be centered around exercise. While we obsess over diet, the active, alert 90-year old I know ate a standard mid-century European diet of white bread and sausage. What differentiates him from millions of others is not some astonishingly complicated "healthy" diet and dozens of obscure supplements but his daily routine of long, vigorous walks. Here's an article which substantiates this view:

    You Can Stop 'Normal' Aging; New research reveals surprising facts about our changing bodies.

    So where do we stand on personal responsibility and health? The young writer with prediabetes mourns the loss of her "carefree" self who could binge on junk food and guzzle six cans of soda a day; when did self-destruction become confused with freedom? When did visibly unhealthy excess become "normal"? Did you really feel great after the 5th or 6th can of sugar-water? Somehow I doubt it.

    Perhaps what the writer mourns is her loss of the current hallmark of being American: the ability to indulge in excess without consequences. I can't be the only one who sees a direct link between "judgment-free" debt binging and "judgment-free" food binging, for the idea is the same: I should be able to get everything I want and eat everything I want now, without future consequences, without discipline, without limits and without judgment, i.e. being challenged.

    Our health constantly challenges us all. None of us are immune from temptations and the various conditions we are dealt by genes and our environment, and I certainly don't want to minimize the difficulties in staying healthy and fit. I had to lose 10 pounds last year and need to shed a few more because I have borderline high blood pressure (which I've lowered via lifestyle changes, as described here before). I won't bore you with a roster of my aches, pains, chronic conditions, etc. because that's just normal life.

    We all have to manage our physical and mental well-being, and adopt routines which get us where we want to go rather than create roadblocks and more problems. It's like all the other disciplines required by life. If it was easy we'd all look like models, just as we'd all be millionaires if making money in the stock market was easy.

    It is a stunning indictment of our culture that fully 25% of our entire population of 300 million people is at risk of what is largely a preventable lifestyle illness. Throw in heart disease (ditto), smoking (ditto), abd various other addictions and the total easily exceeds 50% of the population. And we wonder why medical costs are skyrocketing?

    It is difficult not to conclude that the loss of wealth and health we face is an unfortunate but apparently necessary step we must collectively get through to restore some semblance of common-sense values to our culture.

    Oh, and there's one more tiny little problem. We are rapidly approaching the end of the line in our ability to pay for the nation's bloated, inefficient and mal-adapted medical care. When the money runs out--that is, when the Chinese central bank and the Saudis stop loaning our government hundreds of billions of "free money" via buying Treasury bonds, then we'll rediscover the one great truth of prevention--it's so very much cheaper than any cure.

    If the site hasn't annoyed you too terribly yet. . .
    Your readership is greatly appreciated with or without a donation.

    March 26, 2007

    The Subprime Mess: A Personal Account

    First let me thank P.W. ($5), C.M. ($30), S.V. ($10), S.H. ($30), J.D. ($5), K.C. ($12), R.H. ($20) and T.R. ($5) for their generous donations. I've listed all contributors at the bottom of the page to reflect my ongoing gratitude.

    I received the following personal account from J.M. about the demise of their subprime mortgage and impending loss of their home. We all know this is an increasingly common story. I have illustrated this account with an actual mortgage ad I scanned last year--the key phrase in the ad is "It's almost impossible not to qualify!"--and a graph of the probable shape of the housing bubble decline. I suspect this chart might be generous, as my own past analyses suggest a full retrace to 1996 prices is entirely possible. (Please see the "Housing Bubble Watch" entries in 2005-6 archives).

    Here is J.M.'s unfortunate story:

    I happened to catch the Senate Banking hearing last night on C-SPAN and I am writing as one of the unfortunate homeowners caught in this Subprime nightmare. I thought I heard mention of assistance being offered to help homeowners stay in their homes and I am seeking some assistance if there is any assistance being offered. I am days, possibly weeks (if I am lucky) away from eviction from my home which I have owned for less than 2 years. I have filed for bankruptcy protection and my life is in shambles; no money, credit trashed, savings gone, low paying job . . . a mess.

    I will be 53 years old next month just shortly after my world implodes on me. I have been a renter all my life, always dreaming of homeownership. In June of 2005 I was moving back into the State of California from Arizona and I happened to see a cute little home for sale (1200 sq. ft), perfect for me. On a whim I went to take a look at it knowing that I probably could not afford it, but I went anyway and fell in love with it, so, encouraged by my agent I placed a call to her mortgage broker and during our brief communication he assured me that I could buy the home so we placed an offer ($609,000).

    Now, again, I was moving back into the state, no verifiable source of income. I did have a substantial deposit being made into my checking account ($85,000). My tax returns or previous W-2's, check stubs, nothing was pulled to see if I even came close to earning the $12000 per month that I was told we would need to state on the application to make this work. Three weeks later, I was a homeowner. $609,000, 100% financing, 2/28, interest only, prepayment penalty, payments, no impounds, payments $4200 per month. Fremont S & L funded this loan and sold one loan to GMAC and the other to Homecomings.

    So, I began using my savings to make these payments while trying to establish my business to support my home. I have been unsuccessful in doing this. So, my savings drained, I took a job in an administrative support position with a mortgage broker, salary plus bonus ($1600 per month plus $500 per closing), based on my origination and I am not an originator, I was hired as support personnel, so $1600 per month income, $4200 per month mortgage. My employing broker suggested that we refinance the house (9 months after I purchased it) to cash out some equity to hold me over until "my" bonuses kicked in. Stated income ($12000 per month - She knew what I earned because she paid me), 100% financing, interest only, $655000 loan amount, payments now $4700 per month, no impounds, 40 year term with a balloon payment. I borrowed $37000 more than I purchased the home for and my net cash out ws $9900. (Resmae funded this loan) and promptly sold them to Saxon who is now foreclosing on me.

    So, my question continues to be . . . What happens to me and other borrowers like me now?? 1 in 200 or 1 in 15 I believe is the new statistic. These one in 15/200 borrowers who just wanted “The American Dream” of homeownership . . . who were told they could afford “The Dream.” What happens to them/me? Is anyone going to address our tragedy? Has anyone thought about the lives of people being evicted from their “Dream?” Bankrupt in many cases . . . foreclosure . . . property values declining . . . no equity . . . no money . . . savings gone . . . credit trashed . . . facing homelessness because the reality is who is going to rent to us??? We are not good credit risks??? Some of us will never recover from this heartbreaking and humiliating event. What do we do now?? Where do we go??

    Personally, I will never recover from this. I am over 50. This was my first home, my dream, perfect in every way . . . I was a renter my whole life and all I ever wanted was a home. What do I do now??

    I am weeks, maybe days away from foreclosure and eviction. I filed for bankruptcy to erase my debt so that I can attempt to pay rent (that is, of course, if someone will even consider renting to me and if I can find an apartment that I can afford that will take me and my two little dogs).

    So, I will restate the question that I want an answer to and that is: What happens to me and the more than one of every 200 U.S. mortgage borrowers whose lives are in shambles? How do we recover from this???? What happens to us?? Does anyone have the answer to this looming question? Have any of the fat cats who participated in and allowed this to happen thought about the fallout of their decisions to line their pockets?? We are NOT statistics, numbers to be reported. We are real people, real families, with real lives with a real, serious, HUGE problem . . . Who is stepping up to help us??? WHAT HAPPENS TO US NOW . . . ???
    Before I begin my own response, I'd like to reprint another reader's suggestion for a topic, which can be expressed as one of personal responsibility:

    Got a topic suggestion for you. Why do we now reward the losers as a society? Didn’t buy insurance? That’s ok, gov will make it up. Made a poor financial decision? That’s ok, gov will make it up. Spent 10 years on college loans to get a degree in anthropology and wonder how you are going to pay that back? Don’t worry, gov will make it up. Meanwhile, those of us who make smart decisions, save our money, live cheap, etc. continue to pay more and more in taxes to make up for the people who made poor decisions. And of course, the poor decision people never have to face the consequences.
    My response to J.M. was more or less as follows. Buck up--many of us have been wiped out financially and we recovered by keeping our expenses lower than our income and saving money for a few years. I too am 53, and am paying down debt and accumulating savings/assets in order to buy real estate at bargain prices in the 2011-2014 timeframe. My income is low (though I'd be delighted for it to rise) and I pay horrendous self-employment taxes, humongous health insurance premiums and astonishingly high property taxes, even though we bought this property 15 years ago.

    The self-employed among you are very likely nodding your head saying, "Me too!" The list of "entitlements" forgone to be self-employed is long, but to those of us who choose this path the trade-off is worth it. So, no complaints. But next time you want to complain about taxes, try paying 13% of your net right off the top for Social Security. Then pay the Fed and State taxes, the property taxes, the local taxes, and see how much is left. Amen, Brothers and Sisters, it isn't much.

    Many hardworking people were wiped out in the Great Depression, as were many wealthy people. Both types survived and eventually prospered. I knew guys who'd lost it all in the 1959-61 downturn. Many people were wiped out in the 1981-83 recession (me being one of them). Others were wiped out by the dot-com bubble bursting in 2002-2001. I know many stories of honest, hardworking people sinking their entire 401K retirement nestegg into the NASDAQ right near the top, and having their savings from decades of labor wiped out. In other words, getting wiped out financially is part and parcel of capitalism. This may sound brutal to those of you with a certain ideological bent, but business and investing is and will always be Darwinian.

    I also suggested that a bailout wouldn't work because the discrepancy between J.M.'s income and expenses was simply too great. Over the course of just a few years, the discrepancy would total tens of thousands of dollars. This is what is called "Putting good money after bad." In other words, when you make a poor financial investment, you just have to exit the position, and learn from your mistake.

    I think it's also important to be honest that buying a house in those circumstances was a form of speculation--speculation that income would quickly rise to meet expenses, and that the house would rise in value fast enough to pay the mortgage with equity extraction. Like many speculations, this was a long shot, and it didn't come in. As someone who's been burned with margin (borrowing against stocks in one's portfolio) and the inevitable margin calls, I know the appeal of speculative fevers "when everybody is else is making money effortlessly." (Note: I don't use margin anymore, though judging by statistics that total margin debt now exceeds its peak in 2000, not everyone agrees that it's risky.)

    I also told J.M. that I may not be the best person to ask, because compared to the loss of one's health or mental health, then financial losses just don't seem that bad--and I speak from experience in all three categories, as no doubt do many of you. I'm also very upbeat about being 53, and don't think being 60 is that old. So working 7 years and saving money and clearing a bankruptcy doesn't seem too onerous to me. I like working and have no expectation of retiring, and no desire to retire per se. Even retiring at 75 would be OK with me, and that's 22 years away. A lot can happen--and be saved--in 22 years.

    So in all sincerity, J.M., as someone who's on occasion been down to less than $100 to my name, who's lost all his money and been left in debt on two occasions, I reckon the lesson learned is worth the loss, and you can bounce back in short order if you simply keep expenses lower than income--whatever that may be.

    I have a sneaking suspicion that many readers of this site have experienced financial travails in the past, and overcome them with hard work, some ingenuity and a bit of creative scrimping and saving. I know this because financially successful people contribute gardening and other tips to save money and eat healthier on a regular basis (see entries on March 21 and 24 below) not because they have to but because it's what they value.

    And though it may sound sappy to those who've never been wiped out, I personally found periods of loss to be great learning experiences. And I don't mean some brief period of modest poverty in youth, I mean losing hundreds of thousands and selling off my house to make good on debts incurred by my business--serious hurt and serious money. But I paid off my debts--a close thing, until we got a contract which allowed us to make a few bucks--and exited stage left with the moral satisfaction that no one ever lost money in trusting us or doing business with us.

    Since one of my many jobs was property manager, I also reassured J.M. that with some positive personal references, she'd be able to find a small landlord with dogs (or who likes dogs) who would rent to her, regardless of bankruptcy. Landlords just want a responsible, quiet tenant, and if you can show some evidence that you're that person, you'll always find a landlord willing to rent to you--in my experience.

    As for the institutions which failed to rein in this rampant excess of lending, and the companies which profited from selling subprime and Alt-A loans--of course there will be no redress. The menagerie has left the barn, and closing the barn door now--to the accompanying moral indignation of politicos who stood by doing nothing back in 1996-2002, when they could have made a difference--will accomplish next to nothing. In other words, politics as usual.

    I am a poor dumb writer who continues to learn from losses, financial and otherwise. Would I trade the wisdom gained for the riches lost? No, for without wisdom the riches will always be lost sooner or later.

    So what happens to those who will lose their houses? I suggest, with all due respect for the pain of financial losses, that they will declare bankruptcy, learn a lot from their mistakes, and move on to better decision-making in the future. (Granted, bankruptcy is now far more costly and onerous thanks to the reforms shoved through by the banking industry.) I don't think there is any other way to go about rebuilding one's prospects, and I say this as someone who has lived through both the loss and the rebuilding.
    But if you're down on your luck, then by all means, keep your money to eat and enjoy the site for free. You're sure to find something of interest in our 2007 archives. Your readership is greatly appreciated with or without a donation.

    Bonus joke of the day: A homeowner seeking a fixed-rate mortgage was about to enter the banker's office when the banker's assistant took the homeowner aside. "Mr. Graves has a glass eye, and I advise you not to stare at it."

    The homeowner shifted nervously, asking, "How can I tell which is the glass eye?"

    The assistant whispered, "It's the one with the glimmer of warmth in it."

    March 24, 2007

    Saturday Pot Pourri: Ads, Donations and Gardening

    Now that I've accepted donations--thank you, A.B. ($15), P.H. ($50), M.A. ($20), S.K. ($25), P.M. ($12), C.G. ($15), P.G. ($15). P.V. ($25) and A.C. ($20) for your gracious support--I've also been thinking about advertising and free markets.

    find out more about Zombiestra now!! Advertising and marketing are so ubiquitous that we seem blinded to their pernicious effects on our quality of life. It used to be there were ads in supermarket windows; now there are ads on the shopping carts, on the floors, and even on the small plastic dividers used between customers' groceries at the checkout.

    Websites and blogs have followed commercial television in the strategy of interweaving "content" with distracting ads. The "user" or viewer has supposedly agreed to this trade-off: we get the content for free in exchange for sitting through (or being bombarded with) ads. In the alternative "pay per view," you buy content such as The Wall Street Journal--and you still get bombarded with ads. Hmmm.

    The general view is that web surfers just ignore the ads, so "everybody wins"--the advertisers get their service/product in front of millions of eyeballs, the blogger gets a few bucks for splashing ads all over their page, and the viewer gets content for "free."

    My view is: everybody loses. The advertiser's ads are ignored, the blog is cluttered with ads which distract from the content and the "customer" / user / visitor gets another dose of marketing, whether they like it or not. (Yes, there are programming tricks which delete the ads; I've described some here before.)

    There is a cost to cluttering our lives with advertising and marketing--it just doesn't carry a price tag in dollars.

    In a truly "free market," wouldn't we all have the opportunity to pay for ad-free content? Yet we don't. Even content we pay for is smothered in ads.

    The Third Way is the PBS model, in which ads are clustered between programs and customers/users are cajoled/badgered into donating to the station twice a year. While I understand the necessity of "pledge drives" in this model, I also truly loathe them. In lieu of the programming I like--NOVA, etc.--I am subjected to aging pop rockers or some "financial expert" or "diet guru" extolling some terribly obvious common-sense for hours on end. Yikes!

    Here's another take on the "free market" in websites and blogs. I am free to post content which I reckon has value, and if no readers find any value in the content, then I have no regular readers. That's about as free as you can get.

    If I sell ads, then you the reader have no choice (without using some programming tricks) but to have your reading--the reason you visit the site in the first place--cluttered by ads you did not choose to view. Even if you ignore the ads, in placing ads I have removed a key freedom from you, the customer/reader: the freedom to choose ad-free content.

    But any original content takes time and money to create and host. We all know this, so there is an unspoken contract which you are free to honor or not: in exchange for the content, the customer/visitor offers something in exchange. You visit or not, based on your assessment of the value of the content. If the value is high enough to spark your goodwill, then you choose to honor the content with a donation, the size being entirely up to you. If you can't afford to donate or choose not to, the site remains free to you and everyone else with an Internet connection.

    This model puts the onus on the "business," i.e. the site/blog creator, to not only provide content which visitors will find valuable enough to spark their desire to honor the value of the content, but to ask the visitors to do so. It's the model used for shareware software, and it relies on this unspoken contract that enough users/customers will decide of their own free will to honor the content with money that the programmer/creator can survive to create more content/software.

    Whether this model is sustainable remains an open question. Believe me, the easiest thing for a content provider (what a clunky phrase!) /creator to do is put some ads up. You don't need your customers/visitors' approval, and you're saved from the indignities of asking for visitors to honor your content with hard, cold cash, even if it's one dollar.

    But I've decided I like the direct honesty of this approach. I can't see charging for "premium content" or a "for paying customers only" model, though I understand the appeal to creators seeking a steady income. Why? Because then I might hesitate to post some worthless absurdity like a 1,000-foot bamboo tower being built by an imaginary Chinese cookie company, or a review of a 40-year old film or a goofy ad spoof. And I need the freedom to create the variety of content which interests me--and hopefully, you.

    In conclusion: that's why this site will remain ad-free, and why I will humbly continue posting this "tip the poor dumb writer" link, should any of you choose to honor the content with a donation. For some of you, $5 is a lot of money; for all of you, $12 or $20 (or Lordy-Lord, $50) means foregoing something else of value which you could have bought for yourself. Knowing this, I am both humbled and honored. For those not moved to send in a donation, that's okay, too, because it's a free market here: you don't have to visit, and I don't have to create content. If I don't originate any content, I miss out on the joys of that process; and if you don't donate, you miss out on the satisfaction of participating and on the gratitude of the recipient.

    In other words: the world is a tiny bit better place because this is an ad-free zone, and because readers/contributors are an integral part of its success as a forum for ideas: as contributors of topic ideas, comments and questions, and also as contributors of their hard-earned money.

    On to another gardening book recommendation, this one by knowledgeable reader Brian H:
    Regarding gardening and self-sufficiency: All it takes is time.

    My wife and I can TONS of stuff and try to build from scratch, amazing how your food costs go down and taste comes back when you are cooking from scratch.

    Pizza: $2

    Spaghetti: $1 (for easily a meal for 4), because we can all our own sauce, etc, all you pay for is pasta (ok, you could make that too, but we don’t)

    Bread: 50 cents


    This is THE BEST book on just about anything in a rural setting (and you choose by what you mean rural):

    Storey's Basic Country Skills: A Practical Guide to Self-Reliance

    We have used that more than just about any book I can think of. Tells you everything, we now give them away as Christmas gifts, etc, always become a valued contribution to whatever family we give them, too.

    Take a look, you’ll be impressed.
    Thank you, Brian, for the recommendation. As for myself: I better get some seeds in the ground before the weeds get started.

    Hi, I'm Charles, and I'll be one of your servers of content today. . .
    Your readership is greatly appreciated with or without a donation.

    March 23, 2007

    My Sincere Gratitude, and a Look at Gold

    When I posted a Paypal donation link yesterday, I reckoned one or two generous souls might send in a buck or two as a gesture of support. But holy moly, over a dozen of you surprised the heck out of me by sending in serious donations. I am humbled by your generous and unstinting support of this modest site.

    To maintain privacy I am listing only the initials of my kind benefactors. Many have also contributed essays and information to the site, for which I am doubly grateful:
    A.S. $20
    W.H. $30
    P.M. $12
    D.E. $5
    C.A. $24
    V.P. $12
    C.M. $10
    L.N. $12
    B.M. $50
    R.T. $20
    R.D. $12
    K.M. $20
    S.T. $12
    K.G. $15
    D.P. $12
    R.S. $12
    J.A. $15
    D.S. $20

    Thank you, spontaneously supportive benefactors. It's wonderful to have readers, and even more wonderful to have correspondents and benefactors. According to my weblogs, this site is visited about 50,000 times a month (and rising), and on occasion I receive so much email I can't respond promptly. I have learned so much from you, esteemed readers--and I say this most sincerely.

    As a footnote, I also take your financial support as a vote of confidence in the mix of eclectic subjects covered here, and in an ad-free environment. My wife says nobody looks at web ads anyway, but I find them a distraction and always breathe a sigh of relief when I happen upon an ad-free site. This is and will remain an ad-free site (except for my own spoofs, of course).

    And now on to today's subject: gold. Glittering, beguiling, an ancient store of wealth--and a remarkably consistent store of value since late 2000:

    Just at first glance, we notice that gold remains in a strengthening uptrend. We also note that it tends to stay in a channel or wedge formation for a year or so before breaking out to a new high.

    We have to be careful here, of course, for wedges can break to the downside, too. One of my old friends asked me last year: are you a gold bug? I answered no. Meaning, I am not particularly wedded to the notion that gold is the only investment to have, or the best hedge against inflation or deflation, or any other "story."

    But anyone looking at the 10-year chart has to ask: what changed in the financial world in late 2000 which caused gold to enter a multi-year uptrend? I don't have an answer, but I suspect it was a sense of unease with global imbalances in trade, debt, monentary expansion, energy and the election of an aggressively neo-conservative President backed by both houses of Congress.

    Now let's look at a one-year chart:

    What we see is a compression of the 50-day and 200-day moving averages and an uptrend in the MACD. Now conceivably the HUI could break the wedge to the downside and drop back to support at 280--or it could finally vault through the triple-tested resistance at 363. We would be remiss not to note--but not over-stress--last year's seasonal strength in the April-May period, which lies just ahead.

    As usual, this is not investment advice; do not base your decisions on what others say, make up your own mind up based on all available evidence and your own financial situation, etc. etc. etc. These are charts, dang it, not advice. There is a difference. Charts can be interpreted various ways, and these are offered in the spirit of a beginner's observations.
    Your donation, however small, is an honor, a recognition of value and a vote of appreciation. Thank you to everyone who has sent their hard-earned dough as a tip. Your readership is greatly valued with or without a donation.

    March 22, 2007

    Sub-Prime Meltdown and the Derivatives Fiasco To Come

    This is a tall order, but I'm going to try to explain how the sub-prime meltdown will trigger a fiasco in the $360 trillion global derivatives market--with unknown consequences.

    You experts out there may find some fault in my simplifications, and I do not claim to be anything but an interested amateur.

    But since the coming derivatives fiasco will affect us all one way or another (your 401K blowing up, your pension fund blowing up, etc.), then it behooves us to try to understand a purposefully obscure and arcane subject.

    For a window into the making and marketing of derivatives, please read the book Fiasco: The Inside Story of a Wall Street Trader (recommended by correspondent Cheryl A.).

    For a description of the mortgage derivatives market, I recommend Barrons Just How Sub Is Subprime? (a good explanation of mortgage derivatives).

    Here's how it works. Let's say you're an "investment" banker type (little inside joke there--"investment," hahahahaha, because your real job is palming off risky speculative bets as if they were low risk "investment-grade" securities) and you've been offered some real garbage sub-prime mortgages--the real toxic stuff that everybody knows will go into default sooner or later.

    Hmm, this presents a problem, doesn't it? Who will be dumb enough to buy a loan which is destined to blow up and vaporize a big chunk of assets? How about a big dumb insurance company, state pension fund or non-U.S. yield-chasing behemoth in Japan, China or Europe?

    OK, so now that we have the mark (grifter-speak for sucker) in our sights, we need some serious lipstick to dress up the pig. Here's why we make millions, folks--because we're so danged smart!

    First, we get some AAA-rated mortgages--the gold standard stuff, 30-year fixed-rate from low-risk borrowers--and then we mix in some toxic sub-prime garbage into a "trust" which collects the principle payments into one income stream (called a tranch) and the interest payments in another. Now we get a credit rating outfit like Moodys to give the trust a AAA rating because hey, the majority of the mortgages packaged into the trust are AAA. (Another ploy is to get the principle rated AAA and leave the interest--which everyone knows will never be collected in full--unrated.)

    This is important because the marks--the pension funds, insurance companies, and bond funds-- can only buy AAA paper--at least on the books which are shown to investors.

    Congratulations--we've created a residential mortgage-backed security (RMBS). Now the real fun begins. Next, we create a CDO, a collateralized debt obligation, which buys up whatever sub-prime, Alt-A or otherwise risky garbage mortgages we weren't able to palm off in the RMBS. CDOs are credit based, of course, as are some spin-off derivatives called Synthetic CDOs, which are synthetic because they have nothing to do at all with the underlying debt (i.e. mortgages). Now we sell the CDOs to the marks because the yield is a point or two (1% or 2%) higher than low-risk paper. And the marks are happy to buy. Why?

    Let's say you're the fund manager at a municipal or other public pension fund, either in the U.S. or elsewhere. All of you have the same problem globally--low yields on safe investments like U.S. T-Bills and other high-rated bonds. Most of your assets are in Treasuries and TIPS and low-yield corporate bonds--stuff paying 4%. Now you can buy something with a 6% yield, effectively raising the yield of your portfolio by 50%. Hey, you're now a superstar. Your managers love you--look at these returns! Wow, if we can keep this up, maybe our underfunded assets will actually keep ahead of our pay-outs. Our political bosses will love that because they can then divert tax dollars from the pension fund to their pet pork projects.

    Everybody wins. At least for a while. But we're not done making money off all the toxic garbage mortgages we packaged and sold. Now we sell you, our favorite marks, some derivatives to protect you from the risk we just sold you. Like a nice credit default swap: for a fat premium, you're protected against a default in the RMBS we just sold you.

    Buying some "insurance" against defaults looks smart, and we pocket a fat fee. But wait-- there's more. Since you can own derivatives "off balance sheet"--hey, everyone does--then we also sell you some interest rate contract derivatives, because hey, what happens if interest rates rise? Then the book value of all those mortgages we sold you goes down.

    Did we mention that if interest rates drop your derivative melts to zero? I'm pretty sure we disclosed that to you in that 128-page document you signed. Our lawyers say it's in there somewhere, and do you really want to take on a huge Wall Street firm over a lousy $10 million loss? Suck it up, pal, you knew what you were doing--didn't you?

    Because you did notice that you were making a complicated bet that the yen would drop along with the dollar, and that the euro would rise, didn't you?

    And we did explain how you earned 6% instead of 4%, right? A little thing called leverage. Well, on the downside, now that those sub-prime mortgages blew up, taking some Alt-A and supposedly AAA-rated FHA and VA loans with them, well, your $100 million CDO is worth exactly $30 million. Sorry about that. Will it ever go back to being worth $100 million? Hahahaha.

    Now you can paper over the gigantic loss for awhile--after all, these assets are not traded on any exchange, so who even knows what they're really worth?--by keeping the book value at $100 million. And the derivative losses are "off-balance sheet" so it will take a full audit to find them, and you can quit and take another job before that happens.

    And that, folks, is how billions are being lost and the losses are being papered over even as I type. But the real losses will come out in the wash, and the scale of the losses will be staggering.

    For more on the sub-prime mess, check out this Wall Street Journal piece (subscription required):

    Subprime Mortgage Woes Are Likely to Spread.

    And for a spirited defense of just how wonderful and secure derivatives are making the financial world, read this article recommended by contributor Cheryl A.:

    Why the Economy Needs Vastly More Derivatives, Not Less.

    Was this explanation worth $1 to you? What, you think it's chopped liver? Much to your dismay, no doubt, a kindly reader who took pity on my impecunious stupidity suggested I accept donations via Paypal. I am suggesting $12 a year for the reasons listed in the right sidebar. Now if 100 of my most loyal and amused readers were generous enough to slip a $12 tip into the pot here, then I'd had the annual income of. . . a poor dirt farmer in central China! And that would be tremendously exciting. So be a part of the excitement and click on this link to donate $1 or $12 or whatever spare change is rattling around in your checking account. Or keep reading the extra-special valuable information here for free. Your readership is greatly appreciated with or without a donation.

    March 21, 2007

    How Does Your Garden Grow?

    Responding to the theme of self-reliance, several readers offered gardening-related contributions. To illustrate the topic, I offer a photo of newly budding cherry trees in Brentwood, Calif., a prime orchard area which is rapidly being paved over with stucco McMansions.

    First up is long-time correspondent Victoria S. on what it takes to reclaim depleted soil--and a culture depleted by a "buy and flip" speculative fever:

    There may be many housing developments where the soil is SO barren (or even toxic to plants) that it is not worth the effort to attempt a garden. I grow some plants in containers and buckets, but I've learnt from experience at this location that getting a new type of plant from the garden shops and putting it in the ground generally fails. The limited amount of sunlight is a factor, but...

    I know of some people that moved to the boonies (beyond northern VA) and started fixing up an abandoned farmhouse. They leased some of the acreage to a neighbor, who barely managed to have farm income equal farm expense with his corn and cattle. They experimented a few years ago with "we'll try growing something in the bottom", but that didn't work. It turned out the land was so worn-out that it took the chemicals the farmer used to grow that corn to make that happen.

    Enter thought. The local farmers had an excess of cattle waste, and were happy to sell it to the city slickers, who got themselves a tractor (a baby tractor, which big agribiz would sneeze at) and tilled it in, then ordered up seed and REALLY got to work. After three years, the muck started turning into treasured trays of canned vegetables (they learned how to can too).

    But this took years of patience and effort. In the recent past, housing moved from "buy and hold" to "buy and flip". What time was there for the flipper (scurrying to do the improvements and flip the house so they could afford to send the baby to private school) to take to grow a garden or teach a kid how to do it?

    Contributor Cheryl A. offers a description of gardening suitable for an urban setting:

    After seeing the 0.8% increase in food prices last month, I thought I would pass along the following - I didn't know if you pass this type of information to your readers. Some background first: We both have "black" thumbs, and tried for years to grow things. We even managed to kill a cactus. We couldn't grow corn when we lived in Iowa, even after spending enough money to feed a family of four for a year. Then last year we stumbled upon the Earthbox..a miracle. We placed it on the deck of our townhouse and by the end of the summer we had over thirty pounds of tomatoes. My husband was more excited than when he received his medical degree.

    This truly is an incredible invention! It is being used by a division of the United Nations to teach children about the science of growing plants and to grow food in places where soil is poor and water limited.

    The initial investment of ~$65 may be expensive for some, even though the soil, etc is meant to be reused for many years (only the fertilizer strip and cover need to be replaced annually). In this case I have included the URL for a do-it-yourself earthbox that costs approximately $10 to make.

    We recently purchased two more earthboxes and will make two do-it-yourself models in preparation for the spring planting season. Food prices are only headed in one direction - hopefully this will help alleviate some of the pain.

    do-it-yourself instructions for constructing an Earthbox

    Cheryl also offered a description of an automatic watering system:

    The water reservoir in the earthbox needs to be filled at least every other day. This presented difficulties in the past if you were going to be away for an extended period of time. However, Earthbox recently developed an inexpensive automatic watering system.

    Essentially, it consists of an adapter with two sides -- one side screws onto a spigot (like a hose) and the other side has a small gauge flexible tubing attached (~1/4-inch). The tubing runs to the earthbox and is connected to an insert that is placed directly into the watering tube of the earthbox. The insert is essentially a solid plastic tube that has a "float-valve" attached to it. This unit is long enough to reach the water reservoir.

    When the spigot is turned on, the water runs through the tubing and solid plastic tube with the valve, filling the earthbox reservoir with water. As the water rises, the float also rises and shuts the valve, stopping the water flow. Then, as the water is absorbed by the plants, the float drops, the valve opens thereby allowing the water to refill the reservoir. Using this system, there is no longer a worry that one forgot, or was not home, to water the plants.

    The system can be purchased from the company and can be set up to water multiple boxes simultaneously. With a little skill and patience, one could build his or her own watering system using PVC tubing and a rubber ball for the float.
    And for a general-purpose book on gardening, Our U.K. Correspondent provides a recommendation:

    If any of your readers would like to get up to speed on gardening and increase their self-reliance I can recommend the book

    Gardening When It Counts: Growing Food in Hard Times by Steve Solomon.

    In spite of the title it is not really a survialist tract. Although there are some interesting digressions into what and how to plant if you really need the result to work out, the book is primarily an excellent discussion of how to cultivate a really effective and efficient organic garden. This is not a fluff book - no pictures of cute plants - only pencil diagrams when necessary. Overall the tone is set for the intelligent layman and is packed with 300+ pages of really useful information. I found the book by digging around on the internet - and this book was consistently recommended on more sites than any other.
    Thank you, readers, for a variety of excellent resources/stories on growing food. There is a primal satisfaction in growing and harvesting even modest amounts of one's own food, and I've recently spent quite a few hours working on our own small patch of dirt. The travails of our peach tree--badly damaged by leaf curl last year--will await a future entry.

    March 20, 2007

    The Financialization of Oil

    BusinessWeek ran a short but critically important interview back in January which I excerpt below on the Financialization of Energy Markets.

    What this means is a stupendous proliferation of trading financial instruments (derivatives and futures) which are based on the actual commodities (oil and natural gas). There has long been a futures market for oil, but now that the large investment banks and hedge funds have "financialized" the market, there are trillions in derivatives being written which carry vast amounts of risk.

    As Mr. Fusaro explains below, this financialization is just in the first inning. The current energy derivative market which he pegs at $3 trillion could expand up to an $80 trillion market--20 times the market for physical oil and gas.

    One energy-trading hedge fund blew up a few months ago, losing $6 billion in a matter of days. This kind of speculative trading is now heavily influencing the price movements of oil.

    To illustrate this, I've marked up a chart of a major energy ETF (XLE). Note that there have only been two crises which had the potential to affect markets: the Iraq War starting in early 2003 and Hurricanes Katrina and Rita in late 2005. The rest of the time, there was a background noise of "geopolitical tensions." Note how oil moved up with modest volatility until 2005, at which point wild swings in price became the norm. Yet other than the hurricanes--which affected perhaps 2% of global oil production--there were no events in the physical world to explain or trigger such wide swings in price.

    Here are some excerpts from the interview:

    A Fast New Financial Game Called Energy:
    Energy consultant Peter C. Fusaro, chairman of New York-based Global Change Associates Inc. and co-founder of the Energy Hedge Fund Center, was among the first to notice the growing role of hedge funds and other financial players in the energy sector two years ago. He talked to Washington correspondent Lorraine Woellert about how the trend is contributing to price fluctuations and where it's going next.

    Is the surge in oil futures trading exacerbating the market's ups and downs?
    The Commodity Futures Trading Commission and New York Mercantile Exchange put out a study saying hedge funds weren't causing more volatility. That's nonsense. Traders are attracted by volatility. In the 1990s we had pretty flat markets. We didn't have a lot of trading volume. Now we're seeing bigger price moves, $2 a day. We never saw that before.

    What kicked off this trend?
    The trigger was availability of talent. Enron went down in 2001. Utilities started exiting energy trading. You had this meltdown of natural gas and power trading. Some of these folks started their own hedge funds, and some were hired by hedge funds. You had this pool of talent.

    So interest in the energy sector is moving away from owners and consumers?
    This is a financialization of the energy markets, and it's immature. (emphasis added) We size it at $3 trillion, compared to, say, $26 trillion in interest rate swaps. Energy is the world's largest business, at $4 trillion. It should trade at 6 to 20 times the physical market. The growth potential is enormous.

    Banks and insurers also are in the game.
    Banks are really the biggest player in this market. (emphasis added) They have the capital base, the global positioning, the traders. They have the relationships, they're in project financing.

    What's the downside?
    Risk, risk, risk. Energy is a risky business. You've got headline risk, weather risk, geopolitical risk--it just goes on.

    What about volatility?
    We saw a big hedge fund go down--Amaranth Advisors. But that's only 1% of the market. There's no risk to the financial marketâ...but [hedge fund investing] is too risky for small investors. This is big money that should know the risks and afford to lose it. Energy trading is a zero-sum game. When Amaranth lost $6 billion, somebody made $6 billion on the other side.
    I also drew some green lines on the chart to show the long-term uptrend in price, and the diverging downtrends in MACD and RSI. This should give us pause about the sustainability of the uptrend.

    Beneath all the price swings in the chart lies the issue of Peak Oil. Production is peaking, creating the inevitability that supply will not meet demand in the near future, causing massive price increases.

    Analyst/contributor U. Doran has supplied a number of in-depth stories on the decline in both Saudi and Mexican super-giant oil fields. I recommend all these links. The BusinessWeek story accompanied the above interview; the rest of the links are courtesy of U. Doran:

    Barrels Of Confusion: Where crude prices go next is anybody's guess, so companies are learning to live with volatility--and Wall Street is cleaning up (BusinessWeek)

    Association for the Study of Peak Oil & Gas-USA--list of papers from Oct. 06

    Sample ASPO-USA presentation--the Hubbert Awards for 2006

    Author Matt Simmons presentation-- Is The World’s Energy Supply Sustainable? ( Best summary of global energy realities I've ever seen in only 40 slides

    Low Oil Inventories Ease Opec’s Job and Add Further Upside Oil Price Risk (UBS Investment Research)

    A Nosedive Toward the Desert (saudi oil production decline) (

    Saudi Arabian oil declines 8% in 2006 (

    Pemex celebrates 69th anniversary, but problems loom Depleted reserves, crumbling pipelines, outdated technology and billions of dollars in debt.... (Houston Chronicle)

    Peak Oil Update--February 2007 (

    March 19, 2007

    The Healthcare Solution: A Proposal

    Long-time readers have seen this chart before, for it perfectly captures the pressing need for true, long-term reform of the U.S. "healthcare" system. (Long-term readers know the quotation marks indicate my view that it is actually a system which profits not from preventive medicine but from ill-health.)

    New contributor Peter sent in a cogent summary of the possible solutions which I encourage you to read all the way through. This is perhaps the best analysis I've read of national healthcare systems:

    There are actually three models of health care used in the developed world: the HMO model, of which the UK model is a variant, the US model, and the European model or social health insurance. They fall neatly onto a two by two matrix, like surprisingly many things in life. One dimension is who provides insurance, the other who provides the actual care.

    In the HMO model, you pay a fee to the HMO, and they do their best with this income to look after their population, delivering care in facilities they run. In the UK variant of this, subscription to the state HMO is obligatory, the delivering organisation is your local Strategic Health Authority, which is also your insurer, and what they consider to be the best varies from region to region. In this model all care delivered is included in the premium, but the interesting twist is that you cannot always get the included care delivered. And there is an all-or-none condition. You cannot take out supplementary insurance for treatment the state cannot or will not deliver, nor can you pay a supplement. And you cannot be treated by anyone else.

    This model actually combines two functions. There is an insurance function, and a delivery function. The UK variant ties them together. It is a bit like a car insurance company with a chain of garages. The only people it will allow to work on cars it insures are its own mechanics.

    In the UK variant, the SHA spend budget is fixed. Since the level of illness and demand is not, this means that if too many people present with the wrong kind of illness, they don't get treated. Thus we have in the UK random denial of drugs, both by region and by time of the fiscal year, postponement of procedures, frantic efforts to achieve 100% bed occupancy which leads to one of the highest rates of hospital infections in the OECD, and the use of waiting lists as a means of rationing care. It has emerged recently, for instance, that most SHAs have minimum wait times for common surgery such as hip operations. Yes, it seems incredible that a compulsory membership HMO could really have minimum, not maximum, wait times, but it does. A hospital in Ipswich was refused funding by its SHA because it was doing too many operations too fast, in defiance of the minimum wait time.

    You may wonder whether in such a case you could just pay for the surgery or the drug. The answer is no. You can pay for private medical treatment, but then you have to switch to total private provision. If your local SHA, for instance, has stopped providing Herceptin as a budgetary measure, you cannot just pay for a course. You have to leave the State system, find a doctor, pay him/her privately again for consultation and tests that you have already had, and then pay for the drug. A doctor in the State system is not permitted to prescribe drugs or deliver surgery other than when funded by the State, and if the State has money for consultation but not for treatment, that is what you will get. In the same way, if a drug or procedure is not carried by the State system, you cannot get it while being treated by the State.

    In short, the UK health care system can be characterised as a form of insurance fraud, in which the contribution is compulsory and defined, but the benefit is discretionary, and you can never know in advance whether you will be covered for a given illness and treatment. The risk of financially catastrophic illness is transferred back onto the insured party. So we have large numbers of people in the UK having paid once to the National Health Service for health coverage, then either taking out additional medical insurance, or in some cases taking out second mortgages on their homes to pay for surgery. Old ladies confronted with pain and disability and multi year waits for hip operations often do this. In private industry people go to jail for running schemes like this, but the UK Government tells everyone this scheme is the envy of the world.

    In the US model, insurance and provider are both generally private sector and independent (Medicare excepted of course). You find your insurance provider, and if you require treatment, you have a defined range of treatments that are covered, and you select a provider to deliver them. The difficulty with this method is that the health insurance is very expensive, and the relative pricing power of the health care providers very high. The health insurance is very expensive partly because it costs more to deliver, because of the great efforts the providers have to make to screen out bad risks - people with expensive conditions. The result is that in the US health insurance has become unaffordable for large sections of the population, and those for whom it is affordable often only get it as a benefit of employment, so that it vanishes on layoff. Healthcare costs are therefore, not surprisingly, one of the leading causes of personal insolvency in the US.

    The European model is probably the best and most rational. Unlike the UK model it splits the insurance and provision functions. It consists of compulsory insurance operated by the state, with a defined set of illnesses and treatments which are covered. This insurance costs very little to administer because it makes no efforts to screen. The insurance typically does not cover 100% of all conditions and treatments. There is a scale of what is covered to what percentage. Some things, such as private rooms, are covered to zero percent. It is possible to pay privately or to buy supplementary insurance to be covered to 100%. In Belgium there are Mutualities, some of which are state funded, and they will give discounted supplementary coverage on a means-tested basis.

    In the UK model, health care provision is operated by the State, and the British health service is the largest employer in the OECD. I think only the Chinese and Indian Armies are larger, in the entire world. The consequence is that it is has one of the strongest unions, and consequently basic discipline is totally lacking. Successive campaigns have failed ever to persuade nurses to wash their hands between treating patients. This lack of discipline accounts in large part for the infection rate.

    In the European model, by contrast, patients take the state insurance to the provider of their choice, and there is great diversity of supply. The consequence is more control of facilities by clinicians, higher hygiene standards, and far lower infection rates. The providers have no reason not to treat everyone who presents as promptly as they can, so there are almost no waiting lists. Everyone knows in advance what he or she is covered for, and the risk of too many of the wrong kinds of illness happening is not borne by the last people to get ill, but by the State insurer. As is normal in insurance. And if something is not fully covered, you can still get it by paying or drawing on supplementary insurance.

    This is, in short, a health care system which works. It has the State doing the only part of the process where it has comparitive advantage - the provision of insurance. It ensures a competitive and varied provision sector. In Belgium, for instance, hospitals are run by religious foundations, universities, charities, corporations, municipalities. But one with UK infection rates, or US charging rates, would go bust in a month, because patients have to choose to be treated there. It also meets the basic goal of social acceptibility. No-one is denied care because they cannot afford health insurance.

    The recent reforms in Britain have only illustrated more clearly than ever the benefits of the European model. The UK used to be able to claim that their model was enormously cheaper to run, even if it did suffer from long waiting lists and rationing. However, the effect of the recent reforms has been to raise costs to or above European levels, while not lowering the waiting lists, and not allowing people to know what they are covered for, or giving them entitlement to any particular treatment. The money has basically gone into an army of unionized adminstrators.

    It is important to think systematically about this issue, because both in the US and the UK, we frequently find people talking as if there were only two choices, the US or the UK models. People maybe have an excuse for this in the US. But in the UK, the National Health Service model is commonly defended by the argument that we should not go to the US system, as if there were no other way. But there is.

    There are two ways that don't work. One is fully private sector health care provision and insurance. The other is health care and insurance as a nationalised State industry. There is one other model which does work, and can be inspected whenever you like anywhere in Northern Europe. It consists of State insurance and private care provision.

    Peter added this note in a later email:

    Patients miss out as NHS cash floods in; Salaries soaked up new funds, reveals damning report

    By a curious coincidence, this appeared today in the Guardian/Observer - a report of a Kings Fund study, showing that indeed almost all of the recent increased funding has gone on administrative salaries, not on patient care. The classic result of throwing money at an organisation too big to be managed properly, too unionized to be accountable, and too powerful to be changed - because its government. Those in the US who wish for 'socialized medicine' should beware. If they got their wish, they would like it even less than what they have now.
    Thank you, Peter, for the careful analysis of various healthcare models.

    March 16, 2007

    Self-Reliance II

    Yesterday's entry on self-reliance and life skills drew a number of remarkable responses from readers. Since I'm too lazy to find any art to illustrate the theme of self-reliance, I've thrown in two photos of a fence I built a year or so ago--a simple enough project, but carefully planned and assembled. I cut all the gate pieces with a Skilsaw because I'm a Skilsaw kind of guy (i.e. not a craftsman).

    First up is mechanic/remodeler/correspondent Anton L.:

    I'm 34 years old. Born in the nadir of the 'baby bust' in 1972, I have fewer peers than most who came before and after. One thing that they have in common with the older generation is the (more of less) ability to DO things.

    Although I will admit to a self-selection bias, having little patience for people who aren't capable of some minimum level of self-sufficiency. I can do anything within reason, I finally bought a house and have been doing electrical, plumbing, demolition, framing, and a wee smidge of design.

    Many people I've talked to about this house have said "Why aren't you paying to get all this stuff done?" Well, I've always wanted to do some of these things, and I am willing to trade some work income for 'life' income as it were. So far it's been great. I have my little brother the contractor to keep me from going completely off the rails, but it's going well.

    I've read both books, though I'm more of a "left the bookmark in p21 of 'Gravity's Rainbow'" type. Pirsig leaves me with a bit of a 'man of his time' feeling, as seemingly everyone in the 70s was finding his or her self, with some of the boomer ego showing in the self-help books of the day... That said, Zen and the Art shows a level of connectedness with your surroundings that is sadly lacking in todays technically insulated world.

    The fact that even in hippie-leftover Berkeley (as a lifelong resident I can snipe freely) the idea that food can be grown and prepared by schoolchildren and doesn't just magically appear at the farmers market, and is seen as a somewhat revolutionary concept, shows me just how clear the divide has become.

    I can sympathize with your baby carriage repairer, though I would have welded that sucker up myself. Which I learned how to do not too many years ago in a public High School! 'Ag Mechanics' was a fairly popular class in my foothills of California school, now long discontinued for liability reasons. Which would be another rant that I'll address at some point, but it's amazing to me now that children were encouraged to learn how to be self sufficient and understand the workings of the machinery that powers quite a bit of the unseen infrastructure. That made possible the harvest and transport of that bunch if carrots to the aforementioned farmers market.

    Next up is polymath reader Darrell C.:

    Your latest on self-reliance really resonated, Charles. That was me in high school in the late '60s, taking shop because it was what I enjoyed and broke up the rest of the day's math, history, etc. (I disagree with dropping shop from schools that are trying to be only academic.)

    That was me as a student at Berkeley in the '70s; when a sauce pan handle broke off I went to a friend who worked in the shop of a science building who could spot-weld it back on.

    That was me doing much of the work (self-taught from Sunset and Fine Homebuilding magazines) remodelling two houses, including wiring, plumbing, and tilesetting. (It gives you a special appreciation of taking a shower when you've crawled under the house to solder its pipes!)

    And that's me now, refining my skills in Dreamweaver and Photoshop as volunteer webmaster and co-chair of Friends 4 Expo Transit ( here in Santa Monica.

    Ironically my son, now 23, went a different direction. Maybe because Dad always knew how to do house things, he became more athletic, social, and business-oriented.

    Keep up the great writing. I read it daily. This one felt like an extra-personal conversation that needed a reply.
    Astute reader David recalls a childhood of extreme poverty, and speculates--as I do, and perhaps you do, too--on what will happen should hard times ever spread across our fair land:
    Charles - Cook, clean, repair something............please that is all beneath me! I pay people to do 'those things'! I am kidding but that is the attitude of most of the people I know. I have seen adult men call a tow truck to have their flat tire changed.

    I think most of this attitude started along with 'faux luxury'. I am a sucker for Prada suits, made in Italy. Today people pay huge prices for a Calvin Klein shirt made in Hong Kong or Macau. It is the name not the quality. There was an great article in the Wall Street Journal about garment makers losing margin on men's suits so they decided to sell more upscale suites. That didn't mean increased quality of the fabric or tailoring --- it meant simply raising the price!

    I knew things had changed when I saw a family ordering $35 worth of coffee at a Starbucks. The father had a workshirt on indicating that he probably worked at a lawn service company. I say this because I grew up as poor as it gets!

    I know poor! My mother made a salary of $2500 a year! We would get one Coke a year. We never ate out. Maybe one 25 cent movie a year. Poor meant you did without. You repaired stuff when it broke. You took care of your stuff because it would take years to replace it! I have class photos when I was in grade school and the toe was worn thru on my hard black shoes.

    America changed but it looks like we will be back to eating mustard sandwiches within the next couple of years. What scares the hell out of me is that I don't think this 'entitled' generation is going to like being destitute...........'upscale poverty' maybe?

    I told a girlfriend one time my mom's favorite saying was 'just chew on your fingers' when we would complain that we were hungry! She just couldn't fathom extreme poverty.

    I met this very attractive, professional woman several years ago and after a bit of conversation I found out she had just replaced the clutch in her car - herself! This became a joke among my male friends that we knew we had found the perfect girl if she 'knew how to hang sheetrock'! Most of the women we knew didn't have any basic life skills....................sad.
    Correspondent Mark P. checked in with a short commentary on parental responsibility:
    From my experience as a parent, I believe that many parents are abdicating their responsibilities to teach children about how to do things. People of my generation know how to do these things. but they have given up on many of these things due to either modern day conveniences or just plain laziness. They let their kids run wild and barely even discipline them properly.

    I have taken my kids out to the garage many times to teach them how to do car repair (something I did in high school) or any of a number of things. I hope at least I will be able to teach them how do the things they need to support a household for minimal costs. My ultimate goal is to teach them how to learn the way college did for me. I believe that many parents are doing their children a disservice teaching them how to reach for a phone to solve all of their problems.
    Thanks for all of the good reading,
    Frequent contributor Mark. D. provided an insider's experience of the decline in craft:
    My stepson Jeremy works for Milguard windows. In 3 mos, he went from a know-nothing punk to reinstaller, QC (quality Control inspector. There are basically two companies who do most of the windows in construction in the Bay Area, milguard and anderson. Jer says NO ONE knows how to frame what used to pass for square, since it really costs about 30% more to make things square. But these days it isn't even close. On his word, windows are yanked and windows and doors reframed. Lawsuits are common due to workmanship and the sealer used even when a disclaimer is signed by the construction company. Special extra workmanship is required on some windows, yet the builders waive it. He even reinstalls windows after they are stucco'd because they are popping.

    Another construction problem unnoticed is the settling of ground. Ground isn't given enough time to settle and/or compacted enough, and the house settles, yielding huge cracks on 2 story span houses like in the entry way of the house. Also, the drywall shifts and you can see the seams. this is even a problem when construction begins to soon after the wet season. It absorbs the moisture. Most people are too ignorant to know there is even an issue. I was at my sister's house yesterday comparing the stucco on a 1925 house next to hers which was completely redone. Cracks everywhere on hers, particularly around vents, doorways, windows etc. On the old house, nothing. She commented it was probably due to the elimination of chemicals we can't use anymore. i don't know, but it was pretty dramatic. Think how many earthquakes that house has been through. My sister's, none since rebuilt. I'm sure some builder will be able to comment on this.
    As a former builder, a number of causes come to mind: many houses are framed with green lumber which warps as it dries; the stucco is simply not as thick as it was in the 20s-40s; as the flat land got covered, then housing moved to sites with fill (as Mark notes, often not compacted), and lastly, the overall quality of the framing is so poor that settling/separation affects the stucco.

    Knowledgeable correspondent Cheryl A. (to whom I am indebted for recommending the book Fiasco, described in my March 9 entry) provides a valuable point of view: that of mate/family member:

    I read today's blog with feelings of happiness for myself and sorrow for others. My husband is a self-made man. He paid for all his own schooling, sometimes holding down up to 5 part-time jobs simultaneously. His father taught him how to wire a home, do plumbing, etc. He also helped his mother cook. (Such things are often an indication of men who make good husbands.) As a result, he does many of the repairs around our home - I draw the line at the roof! In addition he is a fabulous chef!! I feel sorry for others who are at the mercy of repair people and dining establishments.

    Thanks for all your insights!
    And correspondent Chuck D. offers a wide-ranging response to both life skills and literature:

    Loss of craftsmanship. This is been going on for a long time, particularly through the second half of the 20th century. I suspect both the cheapening of materials being used and the loss of skilled craft in handling them reflect two things - the development of mass markets where everything becomes fungible "product", and the attempt to hold down the price of materials and labor in the face of rising costs.

    Some of these changes are clearly the result of improved technologies. Anyone who has ever looked at the complexity of the box gutter sees why it was immediately replaced by extruded aluminum spouting the moment technology made aluminum spouting possible.

    Craftsmanship is simply expensive because it is labor intensive. And because it takes so much time, you can't produce a lot of whatever it is the craftsman makes. This is the reason pipe organs in churches and concert halls are so costly and limited in number. Much of the design and construction still has to be done by human hands despite centuries of evolving technology in other areas.

    Lack of life skills. I think this is mostly a reflection of our times. People have become accustomed to believing they no longer need to know these skills. In the prosperity of the last 50 years they are used to living in, they are used to having money to pay somebody else to have these skills for them.

    I agree with your rant about the loss of gardening skills and what it means. But I think the real point is this: why does Alice Walters or anyone else think anybody is going to invest the time and energy into growing their own food when they "know" all they have to do is drive down to their local outlet of the big-box 700-store grocery chain and buy their 3000-mile Caesar salad or their can of beans right off the shelf?

    The crunch will come for these people if/when the grocery store supply chain breaks down or they no longer have the money to buy food. People in Appalachia may have been poor during the Great Depression but they generally had enough to eat. In a time when money was scarce, they didn't need it to buy food. They grew their own or bartered with their neighbor for it. For the people you describe, if times become tough and they no longer have the money to pay for these things, they literally may be too dumb to live. And they very well may not.

    In this situation the tragedy may be for those folks living in cities who literally have no land or backyards to grow anything in.

    Decline of literature. We can actually broaden this to include the other art forms beside literature.

    First let's concede that some periods of time simply produce a dearth of great artists and great art while others produce more than their fair share. How much this may have to do with what people (audiences) of that time want to hear or see, I don't know. But I suspect it is quite a bit. We may simply be in one of those times of dearth.

    however, in our time I suspect there are at least two causes for this decline.

    First is the ubiquity of American popular culture. Along with creative financial products, this is what we have sent around the world. In this country it risks overwhelming many other forms of cultural expression. The problem with popular culture is that it is essentially an object to be consumed like a meal or a soft drink and then replaced with something else that becomes the next meal or soft drink. Creating something of quality or lasting value is not a concern here.

    The mid-19th century and the Civil War era are full of wonderful popular songs and music which are now totally forgotten. And see how many teenagers or 20- somethings can tell you who Clark Gable, Gary Cooper or Cary Grant are.

    Second is something I think is often missed. Sometime in the 1970s the US Supreme Court let itself be persuaded that so-called commercial speech (think advertising, TV shows for example) should be given the same First Amendment protection that political speech always had. Not too surprisingly, one of the side effects of this seems to have been a cultural race to the gutter since that's where the most money can be made. If you don't think there's anything to this, consider how quickly "artists" say "protected free speech" whenever someone takes offense at their perceived crudity or whatever.
    Thank you, guys and gals, for an amazing range of commentaries. Thank you, Bill M., for suggesting the themes of quality, self-reliance and popular literature.

    March 15, 2007

    Zen and the Art of Motorcycle Maintenance

    Correspondent Bill M. recently penned the following observations about the demise of quality, and referenced a book of the mid-70s which found its way into practically every adult readers' hands at that time, Zen and the Art of Motorcycle Maintenance: An Inquiry Into Values.

    Bill is a craftsman, carpenter/builder and artist. As an example of his work, here is one of his recent creations, the U.S. Constitution Chime of which he has made a set of 13 (the number of the original states). Other chimes are displayed on his website.

    Long-time readers will anticipate that Bill's comments on craft and self-reliance resonated very strongly with me:

    I just briefly read a piece by Martin Weiss talking about the Quality over Quantity mindest of the Japanese versus the Quantity over Quality American mindset or something along those lines. I read Pirsig's book while on the North Shore (of Oahu, Hawaii) in my early 30's. I was moved by it. But since I was still fairly young and single just hanging out surfing and mountain biking it really did not have the upfront impact.

    Now that I am in full blown middle age with the family to support and seeing all that I am seeing now it has come to be in the front of my mind, after 15 years. I find myself going nuts at times over the quality in the construction trade and pretty much life in general. It is so horrible what I see being passed off as work it makes me really flip. I learned the trade along time ago from so unbelievable skilled old Italian dudes in Jersey to who I am forever in debt.

    After my /our generation passes there are going to be so few skilled people left. I am going to teach my kids every thing I have learned and make sure they work with me a few years before they go to college so they really have the skills to succeed in any environment. I guess the quality of life/work/products is in direct proportion to the quality of money.
    I too worry about the decline of craft and self-reliance in this country. Lest you think I am just an old hippie carpenter who should be deploying (rant) (/rant) tags, read this story: Dark side of the housing boom: Shoddy construction.

    Bill's post touches on two important themes: the decline of common literature and the decline in life skills. Of the two, the latter is of course of purely practical concern. Let me relate some anecdotes to suggest the severity of the problem. As a resident of a university town--one of the top-ranked public universities of the world and a town with a storied history of progressive/wacky innovations-- many of my neighbors are highly educated students completing advanced-degree studies.

    Here is an example of their grasp on actual life: to repair a broken weld on a baby carriage, the guy wrapped packing tape around the axle. As an emergency repair, this is OK, but even a piece of wire tightened with a pair of pliers would have been a semi-permanent fix. The same fellow asked me to replace the light bulb in his hallway, I guess because he couldn't figure out how to remove the globe.

    You might be tempted to dismiss this as a typical "head in the clouds academic" story, but then there are many stories about young non-academic people who have no cooking skills, can't balance their checkbook, etc.

    One of the town's most celebrated residents, Alice Waters of Chez Panisse fame, has made a big splash around the country with her latest "revolutionary" idea: that school kids tend gardens on campus and then help prepare the vegetables grown into healthy lunches so they learn to connect growing actual food with what they eat.

    Rant tags deployed.(Rant) When did having a garden and learning how to prepare real food with fresh vegetables become "revolutionary"? If there is any indicator of just how low we have sunk on the self-reliance scale, I think this is it. As diseases of unhealthy diet run rampant (Type II diabetes, virtually unknown just a few decades ago), threatening to cripple tens of millions of young Americans, then a simple garden and healthy lunch scheme launched in wacky Berkeley, Calif. is considered an astonishing innovation in U.S. education.(/rant)

    What I wish young people understood about the early 70s is the value which was placed on skills and self-reliance. The so-called hippies seem to be remembered now for the gaudier aspects of "peace, love, dope", but the core of the Counter-Culture was self-reliance and learning to do things yourself so your dependence on The Establisnment (now called PTB, the Powers That Be) was limited.

    Thus, everyone with a Volkswagen Beetle bought a copy of The Idiot's Guide to Volkswagen Maintenance and tuned up their own car. We (Counter-Culture types) also planted gardens, baked bread (yes, I did), learned to cook, make furniture (clunky, but it worked), brew beer (sometimes it blew up, oh well) start our own businesses, build our own houses, play in our own bands, and learn a host of other life skills which seem nearly forgotten in urban America, if not all of America. Self-sufficiency and life skills were admired and sought after, not viewed as menial work reserved for poor immigrants.

    I have commented before on the cultural decline of respect for trades and craft; thus, refineries and other industries essential to "modern life" are having trouble finding young people to work in "dirty" skilled-labor trades; everyone wants to be a bond trader or programmer or Internet start-up hero, work in a clean cubicle and make tons of money pushing a few keys and staring at a monitor all day. The fact that you know nothing of actual living is rarely noted or even decried. yet the astonishingly poor health of young people is directly related to their ignorance of growing actual food and preparing actual food. This seems rather obvious, but very little is said about it. Is that because self-reliance and preparing actual real food is simply not profitable?

    On to popular literature. Every decade has its "must read" books; recently, it's been The DaVinci Code. In the mid-70s, it was Zen and the Art of Motorcycle Maintenance, an Inquiry Into Values and Pynchon's Gravity's Rainbow. While I am not a fan of Pynchon--of the hundreds of thousands of copies of Gravity's Rainbow sold, most still have bookmarks on page 21, for it is an inpenetrable thicket--it is considered a "post-modern" classic with many fans. Pirsig's Zen and the Art of Motorcycle Maintenance, meanwhile, though it has dropped into a form of cultural obscurity, continues to sell even better than Gravity's Rainbow, at least on

    While quite different, these books were definitely about ideas. I don't think you can claim the same about the last decade's "must-read" books. Bless her heart, Oprah has done an amazing job of re-introducing Americans to difficult classics of American literature by authors such as Faulkner, but she has also encouraged an entire literature of victimhood and redemption. This script--intensely dramatic escapes from abuse, miring poverty, and drug addiction via some flavor of spiritual redemption--is certainly gripping for awhile, but it's also as limited and tiresome as boy meets girl, boy loses girl, boy regains girl.

    This decline in the literature of ideas has many causes, but certainly critics have to shoulder some of the responsibility. Books like Gravity's Rainbow have received inordinate amounts of unstinting praise. While this critical praise attracts buyers it does not attract readers. I have worked my way through many modern classics in the past 10 years, including Moby-Dick and Lolita, two famously difficult texts, and found rewards for the effort required. I cannot say the same of Gravity's Rainbow, which is akin to James Joyce's Ulysses in its labrynthine and purposefully obscure language and structure.

    Despite my distaste for this "post-modern" style (that's another topic for another time), it is certainly true that popular literature once included books of challenging ideas. Many such books continue to be authored and published, but they are largely ignored.

    Which books of the past 50 years will still be read and savored 100 years from now? Very few, of course; how many books published in 1907 still attract readers? No one alive today can predict what those titles will be. These two immensely popular books of the 70s are still in print: "Zen" is ranked 2.099 on, while the basically unreadable self-consciously obscure Gravity's Rainbow is ranked 18,104. In other words, each still attracts readers, over 30 years after publication. This is no mean accomplishment.

    Will anyone read Gravity's Rainbow or Zen and the Art of Motorcycle Maintenance, an Inquiry Into Values 100 years hence? I think not, for the simple reason each is too embedded in its own time. But perhaps I'm wrong about this. Though Gravity remains a critical darling, I would place my bet on Zen just because it will remain readable and cogent in a way Gravity is not (and never will be).

    What we can know is that no one will be reading The DaVinci Code, or anything else which rocketed to popularity in the past decade or so. Lachrymose tales of woe and redemption will always be popular, as will thrillers and mysteries, but 100 years hence there will be a newly published shelf of such books for sale, and no need or desire to read 100-year old hastily-scripted novels of past woes and redemptions.

    March 14, 2007

    In 'Managed Care,' Who's Doing the Managing?

    According to a recent Parade Magazine piece, healthcare is Issue Number One with Americans. No wonder. As costs spiral ever upward, people struggle to pay the bills and insurance premiums even as questions arise about the quality and efficacy of the medications and care being provided for the $2 trillion we spend on healthcare.

    Correspondent Paul M. raises an important question about the latest "solution," managed care: exactly who's doing the managing, and to what purpose?

    I saw the CSPAN Democratic candidates forum recently held in Carson City, and listened closely to each one's remarks on health care. Only Dennis Kucinich plainly stated that the high cost and low coverage aspects of the current system are guaranteed (and welcomed) under a private insurance based model. This recent article reaches a similar conclusion:

    Profit for Some or Care for All.

    If private health insurers really believed they could compete against a Medicare-style government alternative, you'd think they would be endorsing such a system, which John Edwards promotes. But they can't, and they won't. Instead, they will continue to generate more smokescreen, which many of your own readers subscribe to, much of which sounds like: "The government is against alternative therapies", "The government is restricting freedom of choice". "The government wastes money on delivering health care", "The government promotes unhealthiness by its failure to ration health care based upon lifestyle choices and behaviors", or "I can cut a better deal with private providers if only the government would allow me to", etc., etc.

    Left to the free marketplace, why would providers charge any less than what emergency rooms today charge? That's where the 47 million uninsured Americans get their primary medical care, and if you look at a typical bill from one of those encounters, you will immediately see a need for managed care. But the question now is who manages?
    Excellent question, Paul, and let's get right down to the heart of the matter: who benefits in any "managed care solution," and who controls the levers of money and power?

    In so-called private enterprise (I say so-called, as much of it is actually paid for by the government), the motive for providing competitively priced, excellent care is profit: if you do a better job for less than your competitors, then you gain customers. This seems to work with computer parts and DVD players, but as many others have noted, it doesn't map over to healthcare very well.

    Let's say I have a heart attack and need surgery immediately. Hmm, let me go shopping among providers. Gee, this one is only $120,000 for the operation and a week in intensive care. Too bad I only have $5,000 in cash.

    The biggest distortion of the "profit motive" is that health is unprofitable; it's illness, medications and surgery which generate the big bucks. Let me tell you a brief story about a common chronic disease called hypertension, otherwise known as high blood pressure. This condition has been tied to increased risks of heart disease and strokes, and affects tens of millions of Americans.

    I have an interest in the condition because I was diagnosed recently as "pre-hypertension," i.e. with blood pressure readings of 140/90 or so rather than 120/80 or lower. My doctor at Kaiser (a non-profit HMO, for which I pay my own insurance premiums) told me hypertension was largely genetic, that blood pressure increased with age and that there were many medications to control the condition. Fair enough.

    Not being a big fan of medications, I looked into other ways of lowering my blood pressure. The standard advice is: lose weight, exercise, eat healthy, and watch your salt. In many cases, this advice seems routine, i.e. what you're supposed to hear before they prescribe the heavy-duty meds. But it seems to me that these lifestyle changes should be the only prescription you get until you've done all you can to control the disease yourself.

    Frequent contributor U. Doran was kind enough to send in this link to a book on the role of salt and potassium in hypertension:

    High Blood Pressure Solution

    To my dismay, I found it rather difficult to find a potassium salt substitute on the shelves of America's stores. Walgreens? Nope. Long's Drugs? Nope. Interesting, isn't it, that the pharmacies of these chains are stocked with expensive hypertension medications, but there's no $2 salt substitute on the shelves for people who want to control their disease via the simple method of substituting potassium for salt in their diet.

    (I have succeeded in bringing my pressure down to normal range with stress and salt reduction and a few other common-sense lifestyle changes.)

    To me, this situation neatly sums up all that is terribly wrong with "healthcare" in this country. Nobody profits from eliminating the excessive quantities of salt in the American diet, or from insisting that "patients" (otherwise known as responsible adults) control the disease through lifestyle changes. (Note that eating less salt and walking around a park don't generate any fees whatsoever. Yikes!)

    What difference does it make if it's a government-run clinic or a "private enterprise" if the prescriptions for often-ineffective drugs are distributed in lieu of actual healthcare, which starts with the patients' diet, lifestyle and frame of mind? A close friend who is on medication to lower blood pressure reports that his doctor told him the meds lose effectiveness over time so he'll have to switch to newer meds. Is this considered a "solution" or merely a "profit center"? Can we no longer even tell the difference?

    Of course not all illnesses can be resolved with lifestyle changes. When a cancer can be removed via surgery, then the patient needs surgery immediately. The inefficiencies of deciding who pays for what portion of this surgery should be the first thing we as a nation address. This should be the first step in any "managed care" solution--eliminate the 30% (estimated by studies) of "healthcare" costs spent on shuffling papers between bureaucracies. As for who manages the actual care, I think the answer is obvious: the doctor(s) and the patient.

    My own conclusion is that the Kaiser model is the only workable model for a national healthcare system. It is a non-profit business, which means that its income must cover its expenses, so it's operated as a business. The doctors are well-paid but do not profit from unnecessary care or procedures. The organization promotes wellness via classes and self-help, for the simple reason that if patients start taking care of their own health, costs are lowered throughout the system. With a co-pay (mine is $50), patients have a disencentive to come in to complain about trivial issues; if you're really ill, then you find the $50. Yes, there are inefficiencies, as there are in any large organization, but I think Kaiser "gets it right" in all the big issues: patient responsibility for their own health, doctors in charge of care, patients pay a fee for visits and tests, and there is no over-riding profit motive to generate needless surgeries, prescriptions or other "care."

    In a national plan, then everyone would pay something--perhaps a percentage of their income. Without co-pays, the system is ripe for abuse. Those with no income would have to be subsidized-- but as Paul points out, if you consider the outrageous costs of emergency room care, then Kaiser-like monthly premiums start looking like a bargain. I myself don't have drug, dental or eyecare coverage; it's too expensive. Perhaps the subsidized insurance premiums could be equivalent to my own coverage--basic healthcare, where if you're ill you can see a doctor for $50. (Or $10 if you're unemployed--but everyone has to pay something.)

    Could there be three or four Kaisers competing with each other? One would hope so. If it's a "good business," then there will be. Kaiser has been around for 60 years, so it is obviously a good business in the sense of being a sustainable business model.

    Thank you, Paul, for raising an important issue.

    Stock market update: The market responded to my "Devil's Advocate" post by falling through the floor, revealing the downside of playing games with the Devil of market prognostication. Knowledgeable reader James C. was kind enough to send in the following rather ominous chart, the lesson of which is this: charts from different time frames can tell different stories, and it's wise to look at monthly, weekly and daily charts before deciding your investment strategy:

    The MACD rolling over suggests a downtrend is in force.

    March 13, 2007

    The Bull: Only a Flesh Wound?

    Back on February 26 I posted some charts to support the view that the market was ripe for a sharp fall, which occurred the following day. So is the Great Bull Market fatally wounded? On March 5 I posted some charts to suggest that maybe this was the start of decline which would take a month or three to reach a real bottom, a la last year's May-June downleg. Just to play Devil's Advocate, here is a chart which suggests the downturn might only be a flesh wound.

    The problem with predicting market behavior, of course, is that as soon as the consensus prediction becomes known then the market refuses to comply. I am seeing a lot of stories calling for another sharp leg down after this current bounce runs out of steam, and this certainly has plenty of history to support it. But look at this chart with unjaundiced eyes:

    I promised to work other topics other than the stock market but it seemed churlish not to mention that the market looks like it may have already hit bottom. Long-time readers know I (along with many others) expect the global markets to blow up at some point-- probably when the $370 trillion derivatives casino blows up. But until that explosion occurs, the market looks like it might shake itself off and head up to new highs.

    If you look at RSI (relative strength) and MACD (there are dozens of indicators, but these are easy for me to follow), then it's pretty obvious they've hit extreme lows--more or less on par with the lows of recent market drops/corrections. It's certainly possible to hang around these "oversold" extremes for some time, or fall back down in a "re-test". And perhaps this will happen. If it were easy to tell what the market will do next, we'd all be millionaires.

    Previous corrections took the SPX below its long-term trendline of the 200-day moving average. This drop never even got close to the 200-day MA. As for the uptrend: the steep uptrend from last July's lows was broken, but if you look at the 2-year chart, you can see that the uptrend, while damaged, isn't definitively broken.

    Maybe this downleg won't be over until the 200-day MA is tested. Several correspondents have speculated that the market will continue its bullish ways until the September-October timeframe; others have suggested the S&P 500 will run to 1445, drop back to 1325 (breaching the 200-day MA) and then run to a new high around 1550. Such as "sawtooth" pattern is typical, and so this is also plausible. As we all know, the trend is your friend--until it isn't.

    Are the speculative forces supporting the global bull market rotten to the core? Yes, absolutely. But as I have been learning, though charts don't reflect the whys and wherefores, they do help us discern the trend. Just as the charts suggested a sudden break in the trend on February 26, and a hesitancy on March 5, they also allow for a return to the underlying bullish trend--at least until evidence suggests otherwise.

    March 12, 2007

    Kroika! Tower: World's Tallest Bamboo Structure

    I am proud to announce that a building I sketched out on a napkin--Kroika! Tower, the world's tallest bamboo structure--is under construction.

    Long-time readers know that this site generates no advertising revenue because it doesn't have any ads. To support the staffing and overhead costs (don't forget the back offices in Xiangxi, China and Bangalore, India), I have a long-term "creative content" contract with Kroika! Cookie and Biscuit Company in Xiangxi, China (among other clients such as Jank Coffee and Astra-Zastra Pharmaceuticals).

    In a recent conference call, the marketing bosses at Kroika! were bemoaning their lack of a "signature" headquarters. Every other company in China seems to be building 100-story highrises which fairly shout out their glossy global future. But alas, Kroika! is HQ'ed in relatively obscure Xiangxi, and doesn't have the capital to finance a $100 million tower, much less a $1 billion tower.

    Though only an amateur designer, a stunning brainstorm struck me like a lightning bolt: why not build a tower out of bamboo? I rapidly sketched out a design for a 1,000-foot tall tower, with Kroika! emblazoned in neon at the top. Even as I noted the astounding engineering challenge such a tower would pose, my bosses were confident that the engineering talent required to design such a monstrous structure was as close as the nearest technical college.

    Darned if they weren't right, as a handful of newly graduated engineers quickly came up with a design based on an X-pattern lattice of tightly bundled bamboo structural beams. The marketing possibilities set my mind racing, for I soon realized this wouldn't just be the world's tallest bamboo structure--it would also be the world's largest "green" building. Imagine an entire skyscraper constructed of a renewable "green" material like bamboo. The meager, pathetic attempts at "green building" in the U.S. (bamboo flooring in the kitchen, woo-hoo) would pale beside this vast "green" building.

    Bamboo is not only incredibly strong, it is flexible. In a severe wind storm, the young engineers reckon the top of the Kroika! tower will sway about 50 feet--but slowly and majestically, giving anyone clinging onto the top a never-to-be-forgotten ride.

    I hasten to point out that the Kroika! Tower is not habitable. This isn't The Swiss Family Robinson on a monumental scale; there won't be a bamboo elevator and bamboo cubicles, although the concepts were closely considered. Weight factors require the tower to be a tower only, not a highrise with 50,000 workers.

    But that doesn't mean you can't climb it. One of the marketing ideas which came to me in my fevered excitement was the daredevil appeal; every extreme sport enthusiast would be wanting to prove themselves by climbing Kroika! Tower. And with liability-based lawsuits virtually unknown in China, if some daredevil did fall to an untimely death while attempting the hazardous climb, tough cookies. Or as we say at Kroika! Cookies, "That's the way the cookie crumbles."

    Several financial and construction innovations have kept the cost of Kroika! Towers very low. Kroika! was able to secure a small, cheap plot of land in Pudong, across the river from downtown Shanghai, via bribes to helpful Party officials. The concrete foundation is being poured piecemeal, as concrete trucks with a cubic yard or two of leftover concrete from other jobs arrive at odd hours and dump the remains of their load in exchange for a cold beer or hot tea and a quick bowl of noodles.

    The bamboo structural members are also innovative. Large uniformly sized lengths of bamboo are tightly bound with #4 reinforcing steel rods and then the hollow interiors of the bamboo are bored clean and filled with 3,000 PSI concrete-- effectively making the bamboo into a form of external reinforcing. (In normal structural concrete, the reinforcing bars are inside the post and concrete is poured around them.) As the building increases in height, the bamboo will be tightly bound by spiraling lengths of rebar but not filled with concrete, thus reducing the overall weight of the higher structural pieces.

    Although some may reckon it "cheating," a light steel framework supports the first 250 feet (75 meters). To cut costs, the steel frame is a hodge-podge of leftovers from other completed steel-frame highrises, but the crafty young engineers have calculated that it is more than sufficient to support the dead-weight load of the bamboo structure above and around the steel frame. Depending on field testing of the large bamboo X-struts and posts described above, the engineers may cap the Kroika! Tower at 500 feet rather than try for 1,000 feet. If the bound bundles of large-diameter bamboo meets the onsite load tests, then the project will aim for the full 1,000 height. Even if the Tower is halted at 500 feet, it will still be a monumental accomplishment--and one achieved on the very modest budget of a cookie company.

    Labor is of course very cheap in China, with illegal immigrants from the countryside willingly scaling the formidable heights of the Tower for $150 to $200 a month. Many express great pride in their role as builders of the world's largest bamboo "green" structure--a very big feather in China's cap, to be sure.

    Needless to say, as a result of this project, my own star is rising rapidly in the Kroika! global enterprise. Although I can't say this will make me rich, it does enable me to continue providing whatever it is I provide here, dear reader, at no cost to you.

    In case you missed my previous entries on Kroika, here's a sampling:

    This Blog Sells Out (Note: monthly visits to this site now average about 45,000)

    Why I Love the Most Hated Company in America

    Starsbuck and Kroika Take A legal Hit

    Kroika Makes Bid for Oreo--Nation in Uproar

    My Brand Management Stinks

    Kroika Ad 1

    Kroika Ad 2

    Kroika! Ad 3

    The Best Kroika Ad Ever!

    March 9, 2007

    Fiasco: The Derivatives Market Explained

    An astute reader highly recommended Fiasco: The Inside Story of a Wall Street Trader (even offering to send me a copy), and I can now report that the recommendation was fully justified: if you want to understand what derivatives are, and how the derivatives market will unravel, erasing trillions in wealth, this is the book for you.

    Even though the author's account was written in the mid-90s, the basics of how derivatives are constructed, sold and unravel are the same; indeed, the author's (a former derviatives trader/salesman at Morgan Stanley) description of derivatives meltdowns in 1994 (Procter and Gamble take a $100 million loss) and 1995 (the collapse of Barings Bank) are eerily prescient of the risks facing the $360 trillion global derivatives market.

    Of the many revelations in this book, I'll mention just a few.

  • Derivatives are unbelievably widespread. Gibson Greetings Cards Company suffered a derivatives meltdown in 1994, along with Procter and Gamble (talk about an appropriate name); you have to wonder, what were a greeting card and consumer company doing with derivatives? It's understandable that a global company like P&G would have currency hedges, but complex derivatives? Even back then, when the derivatives market was a tiny percentage of what it is today, name-brand firms such as Chrysler owned $2.5 billion in derivatives, as did small midwest insurance companies, mutual funds and teachers pensions funds. One has to wonder who doesn't own derivatives. And don't expect to find any mention in a company's or a mutual fund's financial statements; the derivatives are held "off-balance sheet." In other words, you as a shreholder will never know the extent to which your supposedly safe insurance company, pension fund or mutual fund is leveraged.

  • Many derivatives are so complex that even the banks who package and sell them have a difficult time assessing their value. A typical derivative might tie bonds priced in Mexican pesos with three currencies; depending on what each of the three currencies did (rise or fall) and the value of the underlying Mexican bonds, the derivatives could rise in value or fall to zero.

  • Most of the buyers of derivatives have a poor grasp of the risks. Here is the really pernicious part of a low-interest rate environment: supposedly conservatives institutions like life insurance companies and pension funds are so desperate to earn more than 4% on their money that they're easy prey for derivatives promising even a "point" (1%) higher return.The downside--a 100% loss--is naturally glossed over as "unlikely." A nice thought, but if the geniuses in the banks earning tens of millions in fees can't price the derivative value without complex computer programs, then how is a pension fund going to calculate the true risks buried in their derivative portfolio?

  • There are myriad obscure tripwires lurking in derivatives. This is how the global derivatives market will blow up: the Swedish Kroner (for example) will unexpectedly fall or rise, causing some obscure derivatives to blow up. The sellers have to dump other assets to cover the loss--other derivatives, stocks and bonds--which trigger further fluctations in currencies and bond values which then trip up other derivatives. As these complex financial instruments start to unravel, owners of derivatives who thought they were "hedged" (insured) against fluctuations find instead that they're victims of permutations they never properly understood.

  • If you've ever wondered exactly what a derivative is, or what all the fuss is about, then read this book. There may be better explanations of the derivatives trade, but I haven't come across any others written for the layperson. If you know of any, by all means let me know.

    Note: I've devoted a lot of space recently to the stock market, as that was a major story the past few weeks. Now that it looks to be in a new upcycle (yea!), I'm returning to coverage of other topics next week.

    March 8, 2007

    Market Manipulation

    Knowledgeable reader Rick R. sent in a question which occurs to all of us who trade stocks: Is this stock being manipulated?

    I have long suspected widespread manipulation in the equity markets and have a question for you. This evening I noticed something I've never seen before in my many years of trading. The afterhours charts of many market moving NASDAQ issues are painted with extreme readings - in all cases, wildly moving, impossible to trade movements that effectively render technical indicators useless. I've enclosed two charts as examples - note the range of the price channels in each. Other charts look much the same across the NASDAQ landscape.

    Any ideas as to why this would be happening now?
    Since many readers (including Rick R.) are far more experienced traders than I am, I sent the question to frequent contributor Harun I. for his comments:

    The fact that these bars appeared in multiple securities at the same time could mean the vendor’s software may have had a problem. Also check what kind of volume was trading, during light trading the markets are easy to push.

    Manipulation and stop running are trading facts of life. No government agency nor any amount of legislation is going to stop it. Skillful manipulators move an instrument enough to draw others in and liquidate into strength as they uncover stops. This is chess; we didn’t invent it; our job is to understand the game so that we can win.
    I then sent Harun's comments to Rick, who confirmed that the peculiar chart action did not appear to result from software errors:

    I spotted many charts - both NYSE and NASDAQ with the same patterns. For several, I drilled down to 5 and 15 second intervals, looked at the tape, and they appear to be valid trades. However, I have contacted my vendor (e-signal) as I trade quite a bit and I've never seen this activity before.

    Assuming the charts are valid, there were many gaps up today and my best guess was that 'da boys' might have done their best to prep the market for today. Also, I suspect today's activity is a trap as we haven't hit major fib levels for a solid 'bottom'. But hey, who knows. As Bruce Lee said, "Be like water". Flow with it.

    FYI - I've attached a 15-second interval chart of Apple. (not shown here--CHS) It's a close up view and is representative of what happened with many securities yesterday after 'closing'. If valid - and not a glitch - this was a well orchestrated effort that began and ended at the same time for many securities. (emphasis added)
    Here is my two cents (adjusted for inflation, 2-tenths of a cent): I too have noticed some very high-volume after-hours trades recently in biotech stocks I follow. Over 10% of the daily volume traded hands AH, 150,000+ shares, where normal AH volume is a few thousand shares, if any. Suspicious? Consider the chart of the BTK, the biotech index:

    Nice little downtrend--especially if you're accumulating positions. My own sense is this: an established biotech rises in the course of trading, and then BAM, it gets slammed after-hours on no news. It opens weak, hitting stops (pre-established "sell" orders), allowing "smart money" to continue building a big position at bargain rates. The weakness keeps the price just below levels which traders are keyed on--support, resistance, Fibonacci retraces, and so on--so traders stay out of the stock while the "smart money" builds a position.

    Then, once their position is complete--let's call it 2 milion shares--then the "nudge" goes the opposite direction. Our "smart money" loads up on call options, alerting traders that something bullish is at work; if the bid/ask is $20 and $20.05, then our SM puts some big buys at $21, then $22, and $23. The bid and ask quickly jump up, lighting up trading screens everywhere because resistance has been overcome and a "bullish move" is now obvious.

    Now the uptrend feeds on itself. Traders looking for momentum moves spot the stock, and their buying pushes it to $25. Short sellers start covering, adding a rush of new buyers, and as the stock pushes up various trading triggers--Fibonacci levels, bollinger bands, money flow, and so on--then more "momo" traders jump in. Our SM waits until the stock pushes up against its previous high--let's say it's $30--and then "paints the tape" at the close with some big buying in the last few minutes of the day, pushing the price to a nominal new high.

    The next day, the SM repeats the exercise, pushing the stock to a new high, even if it's only a few pennies. After three days--traders look for three days of up or down price action to set a trend--those who look for breakouts to new highs (the Investors Business Daily crowd) now jump in, and the stage is set for the SM to begin unloading the calls and stock position--"distribution." Once they've dumped the 2 million shares--slowly, so as not to move the market--then they short the stock--buying shares they don't own, to be covered later at lower cost when the stock falls of its own weight. Manipulated up, manipulated down--the game works in both directions. Pity the poor "investor" who naively believes in the transparency of markets.

    Doesn't happen? You bet it does. In Harun's succinct summary:

    How many retail traders are willing to buy an inactive security? The fact that the public often gets aboard late in the game ( the speculative phase or worse, the distributive phase (top)) should at least help explain some of this game. For strong hands that bought (accumulated) the stock, to realize any gain the stock must move in their favor to be sold (distributed) at a profit. From whom did strong hands buy, when and why? And to whom are they going to sell, when and why? People need to think critically about the terms accumulation and distribution.

    They also need to consider critically why an issue changes price. Who started bidding higher and why? And, if its so great why are people willing to sell it? Does anyone stop and think why Morgan Stanley is willing to sell 100,000 shares of XYZ. Why does the market rise and fall on sympathy related to one or a few issues regardless of the fundamentals of the sympathetic issues? If you were MSFT and wanted to do a buy-back of your stock, wouldn’t it make sense to send every trader you have down to the floor to beat it down?

    Since it would be impossible to know all of this unless you are an insider, Technical Analysis helps as we can see behavior repeat itself and formulate the probabilities and therefore have an “edge”. In my opinion without an edge one is not playing the game but is being the game. And while being the game (fodder for the pros) may satisfy some unconscious desire for self-flagellation it is financially unproductive. Once again I recommend everyone who invests or trades read Reminiscences of a Stock Operator. It is entertaining and educational with lessons about the market that are timeless. (emphasis added)
    Thank you, Rick and Harun, for your commentaries on this important topic.

    As a lagniappe, here is a succinct article on the PPT, the Plunge Protection Team, forwarded by astute reader H.S.K.: Juicing the Stock Market-- The secret maneuverings of the Plunge Protection Team.

    March 7, 2007

    Who gets Burned in the Subprime Meltdown? Everybody

    Much of the current "relief rally" in the stock market is based on the heavily hyped view that the subprime mortgage meltdown currently underway will be safely quarantined to those unlucky souls who are losing their homes and the lenders who own the "distressed mortgages". Nothing could be further from the truth.

    We start our drill with who owns what in the U.S. I am indebted to the excellent website Wealth, Income, and Power by G. William Domhoff for this data, although it is also available from other sources as well (such as the U.S. Census).

    The reason we start here is straightforward: those who own no assets to speak of cannot lose much when derivatives, mortgage-backed securities, shares in mortgage lenders and the banks which are linked to them, etc.--all the cornered victims of the subprime meltdown--decline.

    As we can see in this chart, the vast majority of financial wealth and net worth is held by the top 10%:

    So exactly how much do the people who took on subprime mortgages stand to lose? Very little, because they have few assets which are vulnerable to foreclosure or bankruptcy. As the following chart reveals, most of the assets of the 90% "underclass" (yes, I am a proud member) are concentrated in pensions and life insurance (which cannot be pillaged by bankruptcy proceedings) and principal residence--which in the case of subprime borrowers in the past few years, is unlikely to be much given the recent decline in house values. The 90% underclass has one concentration worth noting: that of debt.

    In plain English: the top 10% own the assets, the bottom 90% "own" the debt.

    Wealth distribution by type of asset, 2001
     Investment Assets
    Top 1 percentNext 9 percentBottom 90 percent
    Business equity57.3%32.3%10.4%
    Financial securities58.0%30.6%11.3%
    Stocks and mutual funds44.1%40.4%15.5%
    Non-home real estate34.9%43.6%21.5%
     Housing, Liquid Assets, Pension Assets, and Debt
    Top 1 percentNext 9 percentBottom 90 percent
    Pension accounts13.3%47.0%39.6%
    Life insurance12.5%33.5%54.0%
    Principal residence8.9%28.0%63.0%
    Next up: the distribution of income. The key point here is that the wealthy rather naturally draw a huge chunk of their income from assets: dividends, capital gains, interest payments, hedge fund gains and so on. If the subprime meltdown hits lenders and stocks, then both assets and the sources of asset-based income will decline.

    Distribution of income in the United States, 1982-2000
    Top 1 percentNext 19 percentBottom 80 percent
    In other words: since the wealthy rely so heavily on capital gains and other asset-based income, the destruction of those assets and gains will impact them far more than Joe and Suzie Sixpack who earn virtually their entire income from working at a job. Here is an excerpt from the above report which describes the relation between assets owned and income:

    The most recent findings on income inequality come from the New York Times' analysis of a November, 2006, Internal Revenue Service report on income in 2004. Although overall income has grown by 27% since 1979, 33% of the gains went to the top 1%. Meanwhile, the bottom 60% were making less: about 95 cents for each dollar they made in 1979. The next 20% - those between the 60th and 80th rungs of the income ladder -- made $1.02 for each dollar they earned in 1979. Furthermore, the Times author concludes that only the top 5% made significant gains ($1.53 for each 1979 dollar). Most amazing of all, the top 0.1% -- that's one-tenth of one percent -- had more combined pre-tax income than the poorest 120 million people (Johnston, 2006).

    A key factor behind the high concentration of income, and the likely reason that the concentration has been increasing, can be seen by examining the distribution of what is called "capital income": income from capital gains, dividends, interest, and rents. In 2003, just 1% of all households -- those with after-tax incomes averaging $701,500 -- received 57.5% of all capital income, up from 40% in the early 1990s. On the other hand, the bottom 80% received only 12.6% of capital income, down by nearly half since 1983, when the bottom 80% received 23.5%.
    Frequent contributor U. Doran forwarded this brilliant exposition of just how dependent the wealthy are on the "plankton"--the 5% of recent home buyers who couldn't really afford to buy a home but did so with "liar loans," subprime mortgages, Alt-A mortgages, ARMs and other risky debt:

    The Plankton Theory Meets Minsky (PIMCO Bonds website):

    The ongoing meltdown in the sub-prime mortgage market would not matter, except for those directly involved, except that it marks the unraveling of Ponzi finance units that, on the margin, were the plankton of the bubbling property sea of recent years. As the bubble was forming, riding on first-time homebuyers with first-time access to credit on un-creditworthy terms, and first-time speculators riding the same with visions of bigger first-time fools to take them out, all looked well. But as Minsky warned, stability is ultimately destabilizing, as those who require perpetual asset price appreciation to make book are forced to sell to make book. Such is reality presently in the U.S. residential property market, which has flipped from a sellers’ market on the wings of buyers with exotic mortgages to a buyers’ market of only the creditworthy.

    Which means that the bigger fish in the domestic and global economic sea are going to be living on leaner diets. It also means that any given level of central-bank enforced short-term policy rates will become ever more restrictive with the passage of time. That is nowhere more the case than in the United States, where mortgage originators’ orgy of Ponzi finance stifled the Fed’s ability to temper irrational exuberance in housing with hikes in the Fed funds rate.
    Contributor Doran also recommended this article which indicates just how widely the damage being inflicted by U.S. subprime meltdown is distributed around the globe: Barclays carrying $1bn of exposure to sub-prime lender:
    Barclays faces being caught up in the US sub-prime lending rout as it emerged that it has a $1 billion (£520 million) line of credit to one of the biggest and most tarnished players in the industry.

    Barclays has the exposure to New Century Financial Corporation, which late on Friday said that it was in danger of breaching loan covenants. Its shares crashed by 63 per cent to $5.48 yesterday — a tenth of their value two years ago.
    So who loses in the subprime meltdown? The 5% of the population who couldn't afford a standard 20% down, 30-year fixed mortgage, of course, and everyone who's chief asset is a house; and finally, the wealthy, for it is they who are invested (via hedge funds and their own accounts) in the derivatives, CDOs (collateralized debt obligations), shares in financial companies, REITs, etc. which are going to take the ultimate hit as toxic subprime mortgages trip a domino-like series of losses.

    If you look at the chart above, you'll note that much of the bottom 90%'s assets are in their residence. What this means is: as housing declines in value, the chief asset of the middle-class--the home--is directly reduced. Not quite as visible but just as important is the damage which will be inflicted on pension funds and life insurance companies as the losses ripple into their holdings. It is an open secret that these supposedly conservative fund managers have loaded up on risky assets in recent years, seeking higher returns.

    So what happens to the other great middle class assets--life insurance and pensions--when pension funds and life insurance companies start admitting huge trading losses? Outright bankruptcy of such funds and companies is not at all unlikely.

    For more on the risks posed to homeowners, lenders and holders of mortgage-backed securities and derivatives. please read my previous entries on these subjects:

    Foreclosures and Financial Ruin: How Bad Will It Get? (April 26, 2006)

    How Many Foreclosures Will Hit the Market? (May 1, 2006)

    Housing Bubble Bust Will Take Down the Global Economy (May 8, 2006)

    Housing: 10% Decline May Trigger Financial Ruin (May 22, 2006)

    Mortgage Lenders on the Precipice (September 1, 2006)

    Derivatives and the Real Estate Bubble (November 8, 2006)

    On an unrelated note: I added some analysis to my "The Healthiest Cold Cereal" entry.

    March 6, 2007

    Bonds, Interest Rates and Gold

    Since calling for a downturn in equities and gold on Feb. 26 (woo-hoo), I've been busy throwing doubt on the cheerleaders' next favorite consensus: that the Fed will have to lower interest rates, thereby sparking a new frenzy of cheap borrowing which will re-start the sinking real estate and equity markets.

    To those of you who find charts tiresome: please bear with me. If, as I have long suggested here, the housing, equity (stocks) and bond markets all enter long-term declines, then that will have an enormous impact on every citizen in the nation: tax receipts will plummet, pension funds will sink, 401K retirements will be savaged, "the wealth effect" (rising home and stock values make people feel richer) will reverse, gutting the consumer spending which has propped up the "debt prosperity" of the past seven years--just to name a few possible effects.

    Frequent contributor Harun I. was kind enough to share some charts of the U.S. Treasury Bonds. I have been careful to note which interpretive comments are mine, as I wouldn't want Harun to be mistakenly held accountable for my interpretations of his charts.

    Keep in mind that the value of a bond is inverse to interest rates; when interest rates peak, bonds drop in value. When interest rates fall to their nadir, bonds rise in value. It works like this: if a $100 bond pays 5% interest today, and interest rates jump to 10% tomorrow, then who wants to buy a bond paying a lousy 5%? Nobody, so the bond drops 50% in value. In reverse order: if you own a bond which is paying 10%, and interest rates drop to 5%, then your bond will command a premium (rise is value) because everyone wants yesterday's higher interest. Let's start with a long-term look at U.S. Bonds, with comments and trendlines by Harun:

    Note that bonds and gold displayed a rough correspondence through about 2001, rising and falling in near-unison. But since 2002, the bond-gold ratio has displayed a widening divergence from this historical correlation. What does this suggest? Only that such divergences tend to eventually revert to historic means: either gold has to rise or bonds have to drop--or some of both.

    Next up: a chart of the U.S. Treasury Bonds Composite which I marked to show a wedge formation--which tends to break sharply up or down--and the rise in speculative interest in the bond market. Such a rise in open interest might well provide the fuel for the kind of big move which the wedge predicts.

    In this short-term chart of the Bonds Composite, Harun noted the decline in MACD, which diverges from the rise in bonds. (A similar divergence in MACD presaged the current decline in stocks.) I added red trendlines marking a resistance level, which suggests that bonds may well "top out" at that ceiling. This further suggests that pundits hyping "sure thing" reductions in lending rates may be mistaken. The second red line shows the uptrend running smack into this resistance--forming the sort of wedge which often breaks sharply to the downside, especially when MACD has been declining.

    The interesting thing about charts is that they don't tell you the proximate cause for a change in trend--they simply suggest the odds favor such a reversal. Thus my entry of Feb. 26 (yes, the day before the meltdown--not to congratulate myself too much for a pleasant coincidence) was based not on a reading of the Shanghai market (that came the actual day of the reversal) but simply on the type of divergences noted on the charts above.

    In other words: those foreseeing lower interest rates always turn to some "fundamental" reason, like the faltering economy will force the Fed to lower rates. But fundamentals don't always offer much in the way of accurate prognostication. So while I can't tell you the reason why interest rates appear set to rise--will it be a collapse in the dollar, a massive reduction in liquidity, a politically-inspired sell-off of U.S. Treasuries?--the charts don't offer much support to the view that interest rates are set to plummet and bonds to correspondingly skyrocket.

    The upshot: be careful about acting on "sure things."

    March 5, 2007

    Barrons Says "Buy:" Is This Really The Bottom?

    The latest cover of Barrons announced: "Stick With the Bull." A not unexpected reassurance from the cheerleading media, but you have to wonder: based on what? Rather than rely on a lot of hope--if the housing market holds up, if interest rates stay low, if China stops sneezing, if the yen doesn't rise too much, if corporate profits stay strong, if oil doesn't rise above $60, and so on--let's look at a chart. All the U.S. markets are tracing similar patterns, so let's look at a one-year chart of the Nasdaq.

    There's no law which says market declines have to follow previous patterns, but it's worth looking at last May's swoon just for comparison's sake. I've drawn a line indicating the approximate parallel point in the May decline to the current decline: where RSI drops below 50, and where the MACD is dropping rapidly toward a negative reading.

    The bullish pundits are announcing "the bottom" and "the correction has run its course" after a mere week; is there any evidence in the charts to support their claim? While the market could bounce, as it did twice on the way down last May and June, the actual bottom was about two months out from the point we seem to have currently reached. It seems a wee bit premature to be screaming "buy!"

    Elliott Wave enthusiasts will recognize a classic 5-step pattern: 3 lows and 2 counter-trend rallies. The market seemed to bottom twice, but each time it quickly fell to new lows. MACD did not turn positive (bullish) until mid-August. With RSI below 50 and MACD below 0, there is virtually no technical support for the idea that the market is about to rally and erase its losses.

    In all fairness, few if any technical analysts called last week's sharp decline, and no doubt many will hesitate to call for a definitive scenario this early in a decline. But the basic possibilities are limited to about three scenarios:

    1. Last week was merely a hiccup, and the market will quickly recover and resume its steady upward climb. (Go team, go! Yea, Bulls!)

    2. The long-awaited Bear Market has finally begun. Yes, there will be counter-trend rallies, but the trend has reversed--for months or even years to come.

    3. The markets are in turmoil, and they'll decline until the economy proves itself capable of supporting increased corporate profits, higher employment, benign inflation and lower interest rates. If these conditions still hold in a couple months, the market will resume its euphoric climb; if they don't, then the decline will enter a new stage.

    Which is the most likely? Based on the above chart, #1 is unlikely, and #2 cannot yet be known; #3 would more or less follow last year's decline as a template.

    March 3, 2007

    Readers' Insights

    I received a number of insightful commentaries from readers, so let's get started with Aaron K.'s look at the gauges of inflation:
    A critical little primer on the PCE vs. the CPI by yours truly: PCE vs. the CPI
    Contributor Bill M. checked in with a timely speculation on the possibility that this unwinding was engineered to avoid a much greater catastrophe down the line:
    Do you think Paulson and the boys engineered this little sell-off as a warning shot across the bow to maybe start a somewhat orderly unwinding of the derivative trades? If they pulled the plug they would not be caught too off guard and could step in to catch it.
    Correspondent Bob D. offered a suggestion for quality financial coverage on the tube:
    Your recent posts about the market and economy have been great! To those of your readers who are 'fed-up' with the MSM, I can suggest the following website out of Canada: ROBTV

    Report on Business or ROBtv out of Toronto is the one and only business channel I watch. I am lucky that my family has a summer home in Canada and so I am able to subscribe to StarChoice satellite out of Canada. They allow "Canadian residents" who have motor homes or winter homes in the U.S. to have a dish in the U.S.

    Why is this important? Because ROBtv reports on the U.S. economy about 80% of the time. They often express their very negative view of how 'we' do business here and are not afraid of showing pessimism about the Canadian economy or the U.S. economy. Canadians have a realistic view of economic times, and their guests reflect this. They also spend a huge amount of time talking about Oil and Gold. Personally, I am heavily invested in the Kitco Gold pool, and have been for two years. As Marc Faber has said: Americans who want to own Gold, should own it outside of the U.S. and Kitco is based in Montreal.

    Anyway, I highly recommend watching ROBtv . . AND . . anyone can subscribe to streaming video and watch it all day should you desire.
    Astute reader Michael S. provided an excellent challenge to my supposition that interest rates will rise:

    I am a fan (and regular reader) of your web site, and wanted to write in with some comments on your recent posting on interest rates.

    For the most part, I have been in complete agreement with your “I wonder” speculations, but the suggestion that interest rates might be set to rise is one I find really hard to fathom. Your argument seems to be simply that a possible asset value collapse will leave too little money sloshing around the world to prop up US treasuries. However, if appetite for emerging markets, equities, commodities, real-estate, and precious metals evaporates, then the remaining pool of global wealth might still be substantial enough to fund US Treasuries. In fact, the sovereign debt of developed nations (i.e. the G7 countries) might be the only thing people would want to invest in. Precious metals might behave very much like all other assets that have been rising due to the credit bubble, just look at how quickly gold has been falling along with equities this past week (which shouldn’t be a surprise seeing as how Gold has risen right along with stocks over the last few years).

    In short, if investors do decide to flee to safety, US Treasuries might well be one of the major beneficiaries. The bond market seems to be telegraphing this trend already. T-bills have been persistently sought after, even when the Fed has raised rates. Moreover, the market downturn of this week has led to a substantial increase in T-bill demand. Maybe this is giving us but a taste of what is in store with even deeper declines in gold, stocks, and real-estate.

    Lastly, if the US does go into a recession, I wonder very much if government spending will stay as high as it is. I can certainly envision taxes being raised substantially, but I am not so certain that even greater deficit spending is automatically foreordained. I am not at all certain on this point, but it is something I wonder about.

    P.S. Have you ever thought about adding a forum, or talkback, system to your blog? I, for one, would comment regularly if there was a facility on the site to do so.
    Thank you for the cogent comments and suggestion, Michael. I will look into a forum via my website hosting company. I have avoided it for fear than monitoring the dialog would take time I don't have, as I would have a zero-tolerance policy for flaming, swearing, or any form of abuse, even snarky comments.

    As for interest rates: Michael succinctly states the case for interest rates dropping. My question: What if losses in derivatives and massively margined stocks force people to raise cash? What will they sell? fast-dwindling stocks, or Treasuries, which have actually risen a bit in value? The Treasury market could be suppressed by massive selling.

    Another possibility is that investors will sell their Treasuries to "make their losses back" in speculative trading. If that sounds far-fetched, read this story recommended by frequent contributor U. Doran: Seeking Risk. This is a very insightful article--I recommend it highly.

    Contributor Fastwater sees evidence that the markets could be in for another a serious downleg, due to the unwinding of liquidity:

    After watching the markets over the past three days, and then seeing your article tonight... I'm not sure how to put this. You are right on. Sure looks to me like liquidity is fading.

    My hunch is that the 300 point 'air pocket' in the Dow Wednesday was a trading program blowup. It took them a whole minute to get the program shut down. The implication is that the market went unstable. Wish I knew more. This one intrigues me.

    In a nutshell, I think it is time to be short. ( Timing is important. Mine is often poor.)

    Still, there is reason to be cautious. I was watching QQQQ trade again today. Am I missing something or did someone turn Nick Leason loose with another unsupervised account??? The chart is ugly looking. I mean, it looks like a Silver style correction is in the works - straight down. Looking at the candlestick chart, experience tells me a big (fast) drop is coming. The long wicks often hint at that.

    As I write I see the Nikkei selling off again. As an afterthought, I can't help wondering if we will see some derivitive induced blowups in the near future??? Lots of instability this week, almost across the board. Lots of chart gaps.
    Thank you readers, for your thought-provoking commentaries. Again, my thanks to everyone who emailed me recently. Our household is a chaotic mess at the moment with several sets of family visiting. It's all I can manage at the moment to post this quick entry. I will catch up on correspondence next week. In the meantime: your contributions are greatly appreciated.

    March 2, 2007

    "I Wonder". . . If Interest Rates Will Rise

    To complete this week's theme: I wonder. . . if interest rates will rise rather than fall. As housing and the economy weaken, the consensus is certain the Federal Reserve will cut interest rates to "prime the pump" for another orgy of consumer and speculative borrowing. But I wonder what could happen which removes the "cut interest rates" punchbowl from the Fed's party.

    I wonder what happens if the current "liquidity squeeze" removes so much wealth and appetite for debt from the global economy that no one has any more money to invest in new Treasury bonds. Recall that the Treasury has to issue hundreds of billions in new bonds to fund the deficit and old debt which has to be rolled over. If nobody lines up to buy the bonds, the interest rate has to rise, regardless of the effect on the economy.

    Recall also that the U.S. has long been dependent on foreign buyers of Treasuries to prop up our low interest rates. Some speculate that U.S. buyers will rush to the safety of Treasuries, replacing foreign buyers; but I wonder what happens to that scenario if investors have lost trillions in a declining stock market and derivative losses. Maybe the pool of capital available to buy Treasuries will have been reduced by losses to the point there isn't enough capital floating around to buy all the Treasuries being auctioned.

    This may sound far-fetched, but look at this chart, which suggests interest rates are in a long-term rising trend. What could cause such a rise--I wonder:

    Department of Corrections and Comments: Astute readers Karl N. and R.M. pointed out that the GDP is adjusted for inflation, so the anemic 2.2% rise in Q4 GDP was actual expansion. Karl puts the larger issue in excellent context:
    I believe GDP figures ARE already deflated using the PCE (overall, not just core). So the 2.2% number is a real (inflation-adjusted) figure. Now, given the governments fuzzy math with inflation and GDP, there's probably 2% of "fluff" subtracted from actual price changes and who knows how much added to GDP ( e.g., imputed rents), so in reality we might already be in recession starting in Q4 if price changes and GDP were measured the "old-fashioned" way.
    Thank you, readers, for setting the record straight. So let me rephrase my question: how can 2% growth--nearly noise given the welter of statistical legerdemain-- drive profits up 15% per year for another year or two?

    Contributor James C. responded to my critique of the media:
    I just read your March 1st post and wholeheartedly share your frustration with the mainstream media. I gave up on TV ten years ago and have avoided all mainstream media for the last year of so due to this bias in reporting that you talk about today. I have come to the conclusion that the reason we see such bias is because we are not really dealing with reality here, we are dealing with a Ponzi scheme and the only way to keep it going is to keep up the hype.

    Ownership of the mainstream media is very concentrated now by a few large corporations that have a vested interest in maintaining the status quo, i.e. a constant flow of money into stocks, thus keeping the Ponzi scheme from collapsing. I feel certain that this whole game will come to an end at some point and there will be hell to pay, but I also have no doubt that the mainstream media will devote endless pages to explaining how no one could have possibly seen it coming.
    Frequent contributor Aaron K. (and proprietor of the increasingly popular Mortgage Lender Implode-o-Meter) offered some explanations for the media's bullish bias:
    I have become fascinated (and infurated) with this phenomenon lately. I think there are a number of causes.

    One is self-interested and financial: the press wants to say things that make their readers happy -- this sells more issues (or ads). This is akin to consistently putting only extremely beautiful people (one might say /more/ than humanly beautiful given all the touch-ups) on the covers of popular, non-economic magazines. It's obviously unrepresentative of reality, but it makes people feel good and impulsively buy. The potential and likely conflicts of interest of course start to get more ominous when you consider the level of real estate advertising in the MSM (60%+), or trading/investing "support" services in the financial press.

    Another is the chilling effects of government interference and connections between Wall Street and the government (which by now should be obvious, with our Goldman-CEO/Treasury Secretary). The media was bludgeoned and intimidated into submissiveness especially after the 2000 and 2004 elections, after those who "got it wrong" were shamed. This increased the wholesale acceptance of "official" government information and parrotting of what other media sources had already said. This behavior probably extends out from election coverage to economic reporting, because it is a cultural change in the media. The treatment of economic reports is now practically kindergarten-level in sophistication and understanding, with only a few rays of light in the form of some editorialists (such as Krugman at the NYTimes or Caroline Baum at Bloomberg).

    I also suspect that the "recession fake-out" in 1995, which turned the majority of the economic press into "recession perma-bulls", plays a major part. Of course, the aversion of this recession was probably pulled off not naturally but engineered by the one-time gimmicks of ZIRP in Japan and the abandonment of reserves requirements in the US, which I discuss in my article "What (Really) Happened in 1995?".
    Thank you, readers. I am behind on replying to my email, so if you sent me a note, I apologize for the delay in response. I have family visiting and am pressed for time. I appreciate your comments and your patience.

    March 1, 2007

    "I Wonder". . . If the Media Has Accurately Represented the Risks

    The media is constantly being challenged as politically biased (liberal), but no one ever seems to mention its blatant Bullish bias. Do you have any doubt that the financial press (newspapers, web portals and TV coverage) is consistently, obviously and rigorously Bullish?

    After a day (Tuesday) which should have set off alarm bells that something was wrong with the global market and perhaps the global economy, the mainstream press--both the light-weight sites like Yahoo Finance ad CBSMarketwatch and the respected financial press like the Wall Street Journal and Barrons were full of fluff "reassurance" stories: Fed Chairman reassures markets. . . Asian shares rebound . . . stocks which are now bargains . . . Greenspan backpedals furiously, saying, U.S. recession "not probable". . . and so on, ad nauseum.

    As an occasional free-lance journalist, I know that editors demand a skeptical or "well-rounded" perspective--one that seeks out opposition or what might be wrong with a happy-happy picture. Features (main stories) which cling too closely to a "party line" of any kind are sent back for re-write.

    Except, it seems, when the subject is the economy or stock market. As a journalist, if this were a political event, I would be asking: who benefits from trying to maintain the status quo, and by repressing skeptical or investigative stories? What efforts at "damage control" are being made, and by whom? If there's an orchestrated feel to the media campaign, then who's doing the orchestration? And if it appears the media has rolled over and become a lapdog on this issue, refusing to ask the hard questions, then why?

    Just as a "for instance": my first question would be: are there any parallels between Tuesday, February 27, 2007 and the weeks leading up to the stock market collapse in 1929? Did you read any stories like this yesterday? No, but you should have, for the weeks prior to the final meltdown in 1929 were rife with just the sort of wild ups and downs between fear and reassurance which we are now experiencing.

    Everyone with a nominal interest in technical analysis knows that for the past 50 years, stocks hit 4-year cyclical lows in October of mid-presidential cycle years like 2006. The market blew right past the 4-year cycle, thumbing its nose at that tradition as it rocketed higher for 7.5 straight months. But an objective inquiry should be asking: what if that important cyclical low was simply put off for five months?

    How many articles have you read in the mainstream press about Elliott Wave analysis or Kondratieff cycles? How many about the "business cycle has been repealed"? There are cycles in finance, just as there are in the rest of nature, and it clear to even a cursory review that we're at the end stages of an exhaustion: of easy borrowing and liquidity, of the housing boom and equity lines of credit, of the easy savings from having everything made in China, of foreigners buying Treasury debt to finance the U.S. government's deficit, and perhaps even an exhaustion in the culture of the "hot new toy" driving massive waves of consumer spending: to wit, Microsoft's Vista operating system and Apple's iPhone.

    Yet how many stories do you read in which a bearish or skeptical view is mentioned in passing only to be knocked aside by reassuring "experts"? As I mentioned here previously, I scanned the media Monday after posting my own warning, looking for any dissenting voices honest enough to suggest "the end is at hand" for the stock market's euphoric rise. I found warnings about subprime mortgages and so on, and some warnings of a possible recession later in the year, but none saying something which goes against the grain of the happy-happy confidence/complacency such as "the recession has started" or "the market will collapse in March" or something suggesting a near-term blow-up.

    While these critical issues are ignored or glossed over, we are treated to an analysis of Milt Romney's hair. Yes, if you read voluminously within the mainstream press, you can pick up stories on page 19 (buried) which suggest all is not well in the market and in the economy--but you have to piece it all together yourself and place it in context, which is actually the job of reputable journalism.

    Here's another example, one of dozens: did anyone suggest in print that the 2.2% rise in Q4 GDP was not "growth" at all, as PCE personal consumption expenditure price index. i.e. "core") inflation is running at 2.3%? No, you didn't. All you read was reassurances the "moderate growth" (actually a net decline in GDP if you account for inflation) will support a rising stock market and everything is really fine and dandy, nothing to worry about, just move along, folks.

    How much did you read about margin calls landing on "investors'" desks, requiring then to sell to cover their debt? Did anyone actually mention the uncomfortable truth that margin calls have to be covered within three trading days, i.e. by Friday, and that if the market didn't recover from its 3% swoon, then addiitonal selling wasn't just possible, but guaranteed? If you didn't read this, then you have to ask why? Was the prospect of selling pressure verboten and off-limits, because it threatened the bullish bias?

    Where are the stories which call into question the "party line" about how everything is just peachy, stories which challenge the "party line" that the subprime mortgage meltdown won't affect the larger economy, that stocks can rise indefinitely, that deficits can rise indefinitely, that consumer borrowing can continue indefinitely, that the savings rate can be negative indefinitely, and on and on? These are obvious questions which any reputable journalist should be tasked with pursuing. But these questions aren't even being asked.

    Yes, you can read bearish analysis on and other websites and blogs--but the mainstream press is my focus. You shouldn't have to depend on blogs for analysis of the financial issues which profoundly affect every single citizen.

    Frequent contributor U. Doran suggested this topic, and summarized the level of indoctrination which has been achieved within the general public:
    All my friends who are intellectually capable say: "I do not want to hear about all this gloom and doom, do not speak to me about this again." Reality?? It is just the cycle. Credit bubble cycle, free computer money for cars, houses, etc.
    In other words, the business cycle cannot be repealed forever. Credit expansion is followed by credit contraction and a recession. Stock markets which rise on hopes and dreams and which ignore lousy GDP growth, profit contraction and a tumbling housing market eventually fall--not for a day, but for weeks or even months. But did you read that in the mainstream financial press on page one? If so, please send me the link.

    The truth is that we as a nation have been lulled into believing a completely biased coverage in favor of Bullishness and reassurance is actually "fair and balanced" coverage. Nothing could be further from the truth.

    To view previous entries in February, go to weblog February 2007.

    Please browse this month's entries and the archived wEssays listed in the sidebar. If nothing here strikes your fancy, skim through my recently published articles (generally in the San Francisco Chronicle) and my archives back to 1995.

    I would be honored if you link any essay to your website, print a copy for your own use or add my RSS or Atom feed. And of course I appreciate your recommendations of this weblog and your comments:


    wEssay noun, combination of 'web' and 'essay,' denoting a short online essay which exploits the hyperlinks, interfaces and interactive capabilities of the World Wide Web; coined by Charles Hugh Smith on May 1, 2005, in Berkeley California.

    Aphorisms I live by:

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