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Don't Write for Readers, Just Write Grants

Ernest Lehman, Screenwriter

Central Casting, Dept. of Acceptable EVil

American Identity
Hapas: The New America

Can You Tell What I am? Part I

Can You Tell What I am? Part II

Only in America


Unfolding Crises: Asia
China: An Interim Report

Shanghai Postcard 2004

Japan's Runaway Debt Train

Will Avian Flu Trigger a Global Depression?

China and India: Five Flies in the Ointment

China & the U.S.: Circle of Self-Interest

China Trade Surplus: Gusher Profits for U.S.

Battle for the Soul
of America

The End of Empire is Real Simple

A Degree of Success

Why the Democrats Keep Losing

American Chickenhawks: Your Congress

Is This a Nation at War?

A Nation in Denial

Hawaii National Guard:
An Unfair Deployment

Planetary Meltdown Watch
The Immensity of Global Warming

Financial Meltdown Watch
Are We Entering the Next Age of Turmoil?

Housing Bubble? What Bubble?

Housing Bubble II

Housing Bubble III: Pop!

Meltdown in the E.U.

Meltdown: U.S. - China

Retirees: the New Elite?

Boomers: Prepare to Fall on Your Swords

The Real Federal Deficit

How much Is a Gallon of Gas Worth?

What This Country Needs Is a... Good Recession

The End of Cheap Oil

The Word of the Decade: Gold

Outside the Box
How to Make a Favicon
Asian Emoticons

In Memoriam: Winky Cosmos

The Wheeled Vagabonds

In a Humorous Vein
If Only Writers Had Uniforms

Opening the Kimono

One-Word Titles


Keys to Affordable Housing

U.S. Conservation & China

Health, Wealth & Demographics
Demographics and War

The Healthiest Cold Cereal: Surprise!

900 Miles to the Gallon

Are Our Cities Making Us Fat?

One Serving of Deception

Terroir: France & California

L.A.: It's About Cheap Oil

The Last Redwood

Airport Walkabouts

The French Village Bakery

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

Bad Karma: Election Fraud 1960

Hiroshima: First Use


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

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

Beyond Oil: The View from Hubbert's Peak

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

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


weblog August 2005

weblog July 2005

weblog June 2005

weblog May 2005

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

Weblog and Wessays

Welcome, readers, welcome. Please browse this month's weblogs and the wEssays listed in the sidebar. If you're in the mood for a short story, check out The Adventures of Daz and Alex: Stories of America. (They're all quick reads.) If nothing here strikes your fancy, skim through my recently published articles (generally in the San Francisco Chronicle).

I would be honored if you linked any essay or story to your website, or printed a copy for your own use. And of course I appreciate your recommendations of this weblog and your comments:


October 1, 2005

Read This Book

The nation is racing off a financial cliff with no bottom. But don't take my word for it--read this detailed account by a Republican who served as Commerce secretary for President Nixon. You might think a rock-ribbed Republican would rise to the defense of Presidents Reagan, Bush and Bush II. He does not; rather, he excoriates them all--along with all the Democratic presidents, too--for being fiscally reckless, borrowing vast sums of money to bribe constituencies today and saddling future generations with the tab plus interest.

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

The author makes it clear it wasn't always like this; the Founding Fathers and plenty of subsequent leaders were rock-solid on the dangers of accumulating enormous public debt. Yet now we have Vice President Dick Cheney stating that "Reagan proved deficits don't matter." Read this book and then try to agree with Mr. Cheney. You can't.

How much will the Federal government have to come up with, via taxes or borrowing or both, to pay for the retirement benefits and Medicare for the 77 million Baby Boomers who start retiring in 2008? Try $27 trillion--or $43 trillion. The numbers vary depending on who's doing the estimating, but the bottom line is obvious--the sum is more money than the nation could ever hope to raise. The entire Federal government consumes about $1.4 trillion annually at the moment, of which $400 billion is borrowed from the Chinese and Japanese central banks (and a few other foreign central banks).

Do you have any idea how much interest we collectively pay on the $8 trillion in Federal debt we already have? $335 billion, and it goes up every year. Check the official U.S. Treasury website and see for yourself. And since we're borrowing $400 billion more every year, we're insuring that the interest expense will go up every year. And this is with interest rates at their lowest level in a generation. If that doesn't frighten you, you're in absolute denial. We are paying almost as much in interest as we are for the entire U.S. Military, and if interest rates shoot up--well, then the interest expense will be greater than the cost of the Armed Forces. That's an astonishingly large and permanent burden on future taxpayers.

The author forces you to accept these numbers, for everyone who's ever looked at it, from the GAO to blue-ribbon panels from both parties, reaches the same conclusions. Certainly the current generation of retirees is the greediest on record, happily scarfing up huge benefits of which they paid only a fraction of the cost during their working years; so as I have noted here before, Boomers: Prepare to Fall on Your Swords, the Baby Boomers will have to accept benefits much more constrained than those their freeloading parents raked in. (Estimates suggest cutting benefits by half might just save the system from complete collapse--if we raise taxes enough to eliminate the deficit immediately.)

But as the author notes, the Republicans are in the grip of a theology of tax cuts, and they really don't care about deficits because fiscal reality is not part of their religion. The Democrats, meanwhile, have never seen a social entitlement program they didn't want to increase, even if 80% of the recipients are doing just fine without the government handout (for instance, the new Medicare drug plan give-away).

The road to ruin is paved with profligate public borrowing and entitlement spending without limits. Reality has a way of interceding on fantasy, so mark the years 2006-2015 as the decade the chickens come home to roost. The best we can hope for now is a quick collapse of the dollar and an end to foreign financing of our mad borrowing. As long as the Asian central banks continue to pour the drinks, then the debt addicts currently leading our nation will happily slosh another $400 billion or $500 billion a year onto future generatiions.

But read the book and come to your own conclusions.

September 30, 2005

Why are we in this handbasket?

I saw a bumper sticker recently which captures all too well the zeitgeist of the times: "Why are we in this handbasket, and where are we going?" The reference, perhaps obscure to some, is to the old saying that "we're going to Hell in a handbasket."

The handbasket seems to be picking up velocity recently, and as readers of this modest little blog know, I have been agape for a long time at the bizarre sense of denial and unreality which has enveloped the nation. Before I begin the laundry list of denials which appear to finally be crumbling in the face of various realities, take a look at this archival photo of me at the age of 16 shooting hoops at our old plantation house on "Teachers Row" on the island of Lanai, Hawaii.

Lanai High and Elementary School is visible on the right; teacher housing (my stepfather taught chemistry and math) was conveniently located adjacent to the school. By good fortune our bungalow had a regulation basketball hoop in the driveway. For the long shots, we had to set up in the street. The Pine Lads (our school basketball team) had many outstanding players in those years, and we went to the state championships both in 1970 and in 1971 (I'd moved to Oahu by then). Alas, I added very little to the team except comic relief and a cheering bench warmer, but my jumpshot form looks pretty good here. Note also the shadow of my brother Craig as he snapped the shot of the shot, and the tall Norfolk pine trees which line the central quandrant of Lanai City.

OK, here's the connection between "going to Hell in a handbasket" and a photo from 1970: we were going to Hell in a handbasket, then, too.

Herewith are various fantasies currently crumbling as the basket gains momentum:
  • Fantasy: The U.S. economy, and indeed the global economy, is humming along in peachy-keen perfection. The reality: enormous imbalances and excesses are finally taking a toll. Let's see: personal income is a negative number for the third straight month, inflation is rising, oil refuses to drop back down to $60 a barrel, never mind $40, sales of new homes and autos plummeted in August (before the hurricanes, mind you, so don't blame Nature), the trade and Federal deficits are rising to unprecedented heights just as foreign governments seem to be tiring of propping up the rampant spending of American consumers and governments...the list of excesses is too long to recount here; just scroll down through this month's blog listings for a more complete list.
  • Fantasy: Only a fringe of liberals and nutcases are questioning the war in Iraq. The reality: the American people at large are wondering if the war is "winnable" and if it is being mismanaged. The American people are remarkably resilient and patient when they see the need for patience and resilience. Thus we continue to station troops in Germany, Japan and Korea, 60 years after World War II--three generations--in order to maintain the stability of those regions.

    On the other hand, in 1970 the Vietnam War was still raging and the American people were beginning to doubt the management and ultimate cost of that war. Although the analogies between Vietnam and Iraq are largely false (but that is another entry), the salient point here is whether the American people support the war or not. It has been apparent for some time that the post-war planning was inadequate, and that the leadership of this nation fired or suppressed anyone who questioned the adequacy of their plan--to mention but one example of many, General Eric Shinseki. Gen. Shinseki, a combat veteran of Vietnam who is missing part of a limb as a result of his service to the nation, was convinced that we needed 200,000 or more ground troops to secure post-war Iraq. He was quickly snubbed by the chicken-hawks (those who never served or weaseled their way out of service during Vietnam) and shuffled off to retirement. Their over-reaching arrogance is now coming to haunt them--as it should. The losers, unfortunately, are our citizen-soldiers.

    This is not an opinion on the nature of the war or the conduct of the war--that is too complicated for this entry-- but simply a statement of fact that the American people are beginning to question their leaders' handling of the war. At some point, Whether the war is "winnable" or not will no longer matter, for once the American people no longer support it, it's politically untenable.

  • Fantasy: The American people elected this leadership because they care about values more than any other issue. Reality: as the American economy crumbles beneath the weight of the excesses created by this leadership, Americans will "vote their pocketbooks" which will be much lighter as the recession takes hold and destroys their wealth (housing bubble pops, inflation eats up paychecks, consumer confidence plummets, taking spending with it, foreigners stop propping up the dollar which sinks, pushing interest rates up faster and higher than any pundit thought possible, and so on).

    The parallels to 1970 should not be dismissed too lightly.
  • An increasingly unpopular war would run for another five years, costing thousands of lives and burdening the Treasury with deficits which triggered an inflationary spiral that ran for a decade. The war also contributed to the destruction of the two presidencies tasked with managing it.
  • The top of the Bull Market in stocks occurred in 1966, four years before. (The recent top in the market was 2000, five years ago.) Unbeknownst to the pundits and politicos, a 17-year Bear Market was in progress beneath the seemingly placid waters of the 1970 economy. It would take another 13 years before the Dow Jones Industrial Average again reached 1,000, it's high-water mark in 1966. In those 13 years, the American people suffered from spikes in the cost of energy, inflation, rising interest rates, two deep recessions which cost millions their jobs and a "stagflation" which eroded wealth and earnings for 13 long years.

    If you don't see the parallels, well, you're not paying attention. But you will--you will.

    September 29, 2005

    What a difference 27 years makes

    I came across a clipping of food columnist Susan Dart from June 14, 1978, detailing her trip to mainland China as one of the first journalists allowed to visit the newly opening nation. All I say is, wow: What a difference 27 years makes. (The following are excerpts from the column.) I have bolded those comments which most visibly highlight that bygone era.

    "China is the most totally controlled place I have ever been. Everyone appears to be exactly like everyone else. To begin with, they all dress alike, even though it is not obligatory to do so.

    We may laugh at their uniform dress, but we cannot dismiss their uniform good health. They look a lot better than we do. For example, you never see anyone who is obese. Nor do you see anyone who is underweight. The Chinese are doing something right, and I tried to figure out what it is. Partly it may be their way of life, which because there is little choice in anything, is less stressful than ours.

    Other factors, like breathing relatively unpolluted air and working or studying by daylight instead of by overhead fluorescent lights may have a bearing on health. But the two things that are most obvious are probably the most important. They are exercise and diet.

    There are no private cars whatsoever in China, and no school buses, so everyone does a lot of walking or bike riding. The children walk to school.

    The diet of the people is also regulated by necessity. China produces almost all its own food, and to obviate shipping and processing, most of it is produced near the place its consumed. The rice is only partly polished and all the vegetables and fruits are fresh. But probably the most important thing is that they get almost no junk food.

    What impresses me is their lack of emphasis on food. Unlike us, who seem obsessed with eating, these people, from what I see, eat when they're hungry.
    Interestingly, Dart's observations about food remain largely true, although meat consumption and junk food are on the rise. Her assumption that Chinese people don't care much about eating is of course patently absurd to anyone who knows anything about China, its history, culture and cuisine. It would be more accurate to say that we are obsessed with weight while the Chinese are obsessed with food preparation and gustatory enjoyment.

    Sadly, the health of the Chinese people is deteriorating as rapidly as their air and water quality. (Scroll down to the Sept. 22 entry for more.) Streets that were crowded with bicycles just five years ago, never mind 27 years ago, are now jammed with vehicles. As for the uniform clothing: no one who visited Shanghai in 1978 would recognize the chic, well-dressed masses of young people filling NanjingLu, the city's primary retail shopping street. With industrial-era consumer choice and production comes industrial-era pollution and disease.

    September 28, 2005

    The Conundrum Effect

    Talk about macroeconomic conundrums. Poor Federal Reserve chief Greenspan has mentioned three himself. To paraphrase:

  • "I keep raising short-term interest rates to cool the housing bubble, oops, I mean 'froth,' but the darn long-term rates keep dropping. What's up with that? Don't people know that when the short-term rates rise above the long-term rates, it invariably signals a recession?"
  • "I keep telling people that the housing bubble, oops I mean 'froth,' is being pumped up by speculative buying, but they keep buying houses at absurd prices anyway. Idiots! How much simpler do I have to make it?"
  • "OK, so we've been remarkably successful in lowering everyone's expectation of inflation and other gyrations in the economy. So guess what? Now everyone feels safe to gamble on risky hedge funds, no-interest mortgages and other cockamamie schemes. Folks, I can't help you if you keep swallowing firecrackers."

    One term the Chairman never uses is the "wealth effect." Why? To paraphrase again:
    "Wealth effect? Are you nuts? That's like saying there's a housing bubble. People will panic in the streets if I admit that the wealth effect works great when housing is going up--everyone feels so rich they spend like there's no tomorrow. But the same mechanism works on the way down, too, after the bubble pops. People feel poorer than they actually are, and so they stop spending. Economic activity goes into a tailspin and then we've got the big R, recession, or worse. The bigger the bubble, the bigger the pop and then the bigger the drop in the wealth effect. But for goodness sakes, don't let on we know that. I retire in a few months and want to get out while the getting's good, before the whole thing blows up."

    Think I made this up? Please read today's Wall Street Journal article entitled Greenspan Says Fed's Success May Inflate Bubbles.
    "In perhaps what must be the greatest irony of economic policy making, success at stabilization carries its own risks," Mr. Greenspan said in a speech via satellite to a conference of the National Association for Business Economics in Chicago Tuesday.

    "Monetary policy -- in fact, all economic policy -- to the extent that it is successful over a prolonged period, will reduce economic variability," Mr. Greenspan said, which will lead investors to demand less compensation for lending to risky borrowers, or for long periods. In practice, this means yields on long-term bonds will fall, as is happening now, pulling down mortgage rates and supporting housing prices. A similarly euphoric response to higher productivity in the 1990s produced that decade's stock bubble.

    Eventually, Mr. Greenspan said, this reverses and asset prices fall, reflecting "the all-too-evident alternating and infectious bouts of human euphoria and distress and the instability they engender."
    In other words: Yikes! Look out below.

    September 27, 2005

    When Empire Was Easy

    The Jule Vernes story Around the World in 80 Days was bound to become a Hollywood film. Three versions have been made: the 1956 big-budget classic with David Niven and Cantiflas (Amazon link above), a 1989 television series starring Pierce Brosnan and a 2004 Jackie Chan vehicle that flopped.

    Around the World in 80 Days-film What makes the 1956 version so interesting now is not the story per se but the way it reflects the absurdities of 1950s America, the filmaking techniques of the 50s and the American take on the British Empire. By then reduced to a shadow of its former grandeur, the Empire receives a tongue-in-cheek ribbing mixed with wide-eyed admiration. What really strikes this modern-day viewer is:
    Phileas Fogg, the emotionless, neurotic epitome of an upper-crust Englishman (David Niven) does basically nothing, while his "gentleman's gentleman" valet, Passepartout, (Cantiflas) performs all the heroics.

    Niven spends most of the film checking his watch and regally enjoying his tea, rain or shine, while Cantiflas braves the rigors of the bull-fighting ring, clambers atop a speeding train beset by attacking Sioux (sadly lacking the firearms they most certainly possessed by the 1870s), and rescues a Princess in India from a blood-thirsty horde while the upper-class Englishmen watch from a safe distance--hmmm. The one moment of physical courage Fogg endures is a foolish, prideful duel with a cantankerous cliche of a Southern gentleman, a duel which is interrupted by a propitious attack on the train by "Red Indians."

    I haven't read the book since childhood, but I wonder if this isn't an American subtext of sorts--we did, after all, throw off the weight of the Empire at the cost of a seven-year war which was both a world war (recall that we won thanks to the French fleet blockading Cornwallis' army from re-supply or evacuation) and a civil war in which at least 40% of the populace either actively or passively considered themselves loyal British subjects.

    With our own "Empire" (not of territories so much as influence and alliances) girdling the globe as a result of being "last man standing" at the end of World War Two, this film reflects the American ambivalence to Empire. The British overlords are portrayed as supercilious, petty buffoons, confident in their right to rule but doing nothing for themselves, quite content to order their servants around. Yet the structure which enabled the Empire to work gets a favorable treatment; Fogg cannot be arrested in Cairo by the incompetent British detective tailing him because the warrant has not yet arrived from London, and the Imperial ships and trains all leave on schedule. The film offers a model of global reach which was admirable in its orderliness, functionality and rule of law.

    Of course the moral righteousness of the Empire is made clear: heathen "natives" are either burning the poor Princess (played by very pale Shirley McClaine) on a funeral pyre or trying to torch poor Cantiflas at the stake (during the hopelessly campy "Cowboys and Indians" sequence).

    The viewer cannot help but be struck by the leisurely pace of the film. Segments which would be cut to a few manic seconds in a modern version are allowed to unfold in real time: a Spanish dance, Cantiflas' fledging efforts as a bull fighter, scenes of the Indian countryside from the train window, etc. It's hard not to conclude that modern audiences suffer from attention-deficit syndrome and cannot bear to watch any scene in real time except intricately plotted "action" sequences. There are exceptions, of course, and these are often the better films of our era.

    I recommend the film not just for its cast and dialogue or as a snapshot of a bygone era in film-making, but for its fascinating array of subtexts.

    September 26, 2005

    Doubling Down on 5-Card No-See-Um

    To use a poker analogy: the world's bankers are doubling down, but they have no clue what the cards hold for the world economy. We are in uncharted territory in five major ways:
  • Unregulated Hedge Funds
  • Rising demand and fixed output of fossil fuels
  • Global supply chain vulnerabilities
  • The growth of unregulated financial derivatives
  • The historically unprecedented U.S. trade deficit
    And the dealer's first visible card:
  • Economic terrorism

    global trade The net result is an unprecedented number of opaque risks which could bring the global expansion to a halt. Let's start with hedge funds, secretive, poorly regulated and now larger than most corporations or mutual funds. Check out this BusinessWeek expose on Cerberus, a hedge fund which started out with $10 million in 1992 and is now larger than McDonald's, 3M or Coke. Would you like to know something about the company's inner workings? Sorry, that's privileged, not public information like you get from a publicly traded company. Might Cerberus be holding a trillion dollars in risky derivatives? Maybe. We'll never know until it's too late.
    Risk factor: unprecendented. Trillions of dollars are sloshing around, completely unregulated.

    While the markets are cheering that oil is "only" $63 a barrel today--stock markets around the world are roaring up in euphoria--the bottom line is still that supply is capped and demand continues to rise. Yes, giant new fields may be discovered, but it would take 10 years to start getting gasoline from them (that's if any are found, which is doubtful). And yes, the Saudis want to build a couple of refineries to process their heavy sulfur-laden crude oil, but that's at least a 7-year process. So there are no near-term solutions except to cut demand, and so far there are few indications that China's economy will need less oil or Americans will do more than trim the edges off their 23 million-barrel a day habits.
    Risk factor: unprecendented. Never before has total global supply of oil been unable to meet demand.

    As the new book End of the Line: The Rise and Coming Fall of the Global Corporation details how the global supply chain is poised on a very precarious edge of vulnerability. Critical components of global corporate products are made in a handful of distant places, making them vulnerable to shipping snafus and other disruptions, be they fires, political upheaval or just factory breakdowns.
    Risk factor: unprecendented. Interdependency and "just-in-time" component systems are now acutely vulnerable to local crises which could disrupt the entire chain.

    To assess the risks posed by trillions of dollars in exotic financial derivatives, scroll down to my September 16 entry for a chart showing the explosive growth of these "financial instruments." "Instruments" doesn't sound too scary, does it?
    Risk factor: unprecendented. No one knows how these trillions of dollars of inter-connected derivatives will unravel in a financial crisis. Such crises have not been outlawed--they are an integral part of the system.

    The chart above vividly shows the U.S. trade deficit is now so enormous that it is offsets the entire surplus created by the exporting nations. At 7% of GDP, our trade deficit is truly unprecedented. Historically, economies collapse on themselves at 5% of GDP trade deficits.
    Risk factor: unprecendented. No one knows how long the U.S. trade deficits can keep rising without triggering a reversal.

    Never mind the prospect that some terrorist cell will figure out that economic terrorism (blowing up a refinery, for instance) is the strategy to follow if you really want to bring the U.S. down. Let's just stick with the risks that are visible.

    As the global financial institutions continue to double-down their bets that these imbalances can continue expanding more or less forever, it has finally dawned on me that they have no clue what they're doing. Fearing any change might bring the system down, they continue doubling down the bet that the game can go on with the cards never being called, that is, turned up. Are they really holding four aces, and all these unprecedented risks are vanishingly small, or are they actually bluffing a hand of a pair of two's, a four, a nine and Jack? Go over the list again and decide for yourself.

    September 24, 2005

    A One-Two Punch to a Glass Jaw: the Knockdown of Recession

    Take a look at the false-color image below from the NOAA Storm Tracker site on Friday, tearing through oil platforms on its way to the coast. Now tell me this one-two punch to the delicate glass jaw of the region's oil refining and natural gas complex is no big deal and the U.S. economy will barely notice it. Unbelievable, but that malarky is the official Wall Street line.

    I have personally witnessed two well-publicized natural disasters, the Loma Prieta Earthquake of 1989 and the Oakland Hills Fire of 1991 which destroyed 3,000 homes. Although the loss of life and property was tragic, these two events were chump change compared to the damage wrought by these hurricanes. More importantly, these S.F. Bay Area disasters had virtually no effect on the rest of the nation. Their influence was entirely local.

    Contrast that with the destruction wreaked on the nation's oil and natural gas complex by Katrina and Rita. The scale of damage and the expense of repairing the damage are beyond ready measure; everyone is relying on back-of-the-envelope estimates which aren't even close because the full damage hasn't even been totalled. Nobody can say how prices of gasoline and natural gas will be affected next month, never mind next April, because no one can say whether foreign refineries can compensate quickly enough to suppress prices. We already import 1 million barrels of refined fossil fuels every day, and it simply isn't possible to ramp that up overnight by another million barrels.

    But don't take my word on it; read a blog written by industry insiders. Katrina and Rita will disrupt essential refining capacity and the delivery of natural gas for many months; the facilities, tankers and pipelines to carry enough product to minimize that impact simply do not exist.
    Put another way: the recession of 2006 just started.

    September 23, 2005

    The Flutter of a Butterfly's Wings?

    NOAA Storm Tracker website The cliche is that the flutter of a butterfly's wings may spawn a hurricane. Perhaps, but then
    what does a hurricane spawn?

    The cliche is based on chaos theory, in which changing the initial state of a system by a small amount can cause enormous changes in the eventual outcome.

    So who can say with certainty what the outcome of Katrina and Rita will be in six months? No one, of course, but we can look at the initial state of the system, in this case, the U.S. economy, and draw some conclusions from its current precariousness.

    The Economist has assembled an in-depth look at the growing imbalances in the global economy. To quote from one of the essays:

    "It is commonly argued in America that if the housing bubble were to burst, and falling house prices threatened to choke consumer spending, the Fed would slash interest rates to prop up the economy, as it did after the stockmarket bubble popped in 2001-02. But then inflation was falling. Today, with inflation rising, the Fed would no longer have that option. If the economy hits trouble, investors and homebuyers should not expect to be bailed out again."
    Take a look at the chart, and note how our nation's household savings rate has fallen below zero (the lefthand scale) even as our net worth (righthand scale) has climbed along with housing values. The trap is all too visible here: household net worth dropped precipitously after the 2000 dot-com stock market meltdown, but then shot back up as housing prices skyrocketed. Now that peak has topped out and net worth is starting to decline as Americans pull vast amounts of cash from what they now consider their "savings account," their house.

    Lest you reckon I am exaggerating, then feast your eyes on the next chart, which reveals our household debt payments are rising to unsustainable levels. As the quote suggests, the Federal Reserve will not be able to pump up housing values next time around because now we have inflation to worry about.

    As a result, we can safely predict three effects of Katrina and Rita: inflation caused by rising transportation and energy costs will filter through the supply chain, raising prices of everything, gasoline-pinched consumers will have a harder time paying their debts or acquiring new debt, and interest rates will have to rise, not drop, to combat the hydra-headed monster of inflation.

    Put more simply: the cash machine called the American house will jam, interest rates will rise, making debt ever more costly, and inflation and energy will take a bigger piece of Americans' dwindling paychecks. If you consider the charts and reports objectively, there are no other possible conclusions.

    Thus do the butterfly wings flutter.

    September 22, 2005

    Air Pollution and China's Future

    A new epidemiological study reported in Scientific American Online this week highlights the long-term dangers of air pollution.
    "They found that as the number of fine particles less than 2.5 microns in diameter increased, so, too, did the risk of dying: each jump of 10 micrograms per cubic meter corresponded to a 11 to 17 percent increase in the risk of dying from any cause."
    Particulates are generally measured as either PM-10 or PM-2.5, indicating concentrations per cubic meter of particles either 10 microns or less in size or 2.5 or smaller. The Average Annual Mean for PM-10 in central Los Angeles is around 44.

    By comparison, some cities in China have levels ten times higher. Consider this excerpt from report from the U.S. Embassy in China:
    "The average concentration of total suspended particulates (TSP) in the city in 1998 was nearly 600 micrograms per cubic meter, according to the World Resources Institute. Local health experts say about 80 percent of Taiyuan’s suspended particles are "respirable" (less than 10 microns in diameter). This would imply the average concentration of lung-damaging PM10 is more than 450 micrograms per cubic meter — nine times the U.S. standard for annual exposure. Add in high levels of SO2 and nitrogen oxides (NOx) and Taiyuan’s composite air pollution index regularly tops the list among China’s 42 major cities."
    So let's do the math. If a rise of only 10 PM-2.5 causes a 10 to 15% increase in mortality, what would a concentration of 100 to 200 PM-2.5 do to a population's health? It would obviously drive a significant percentage of residents to an early grave, and indeed, anecdotal evidence suggests many urban Chinese are dying in their 50s and 60s from the very lung and heart diseases exacerbated by severe air pollution. When you consider the total urban population in China is 515 million people, the terrible human toll of this air pollution becomes clear.

    For a summary of China's horrendous pollution problems, read this September 2004 report from the Washington Post and my own essay China: An Interim Report. By all accounts, the Chinese government is aware of the dangers and is moving to reduce air pollution; but the policy changes are obviously not deep enough or fast enough to significantly improve public health in urban China.

    For an overview of global urban air quality, take a look at this World Bank chart of air quality of major cities around the world. It appears to seriously under-report particulates in China's cities, as Taiyuan's particulates per cubic meter is listed as 105, while the U.S. Embassy report states it's nearly 600 PM. Though that difference suggests gross under-reporting of actual concentrations, the chart still provides a comparison of global cities' air quality.

    For a list of the U.S. cities' rankings in air quality, check out American Lung Association Chart of the 25 U.S. Cities with the Worst Air Pollution

    And lest you think it's a localized urban risk, think again; it's a global problem

    September 21, 2005

    Is Obesity an Inflammatory Response?

    I came across this fascinating bit of medical research into the links between sleep deprivation, obesity and inflammation. The study suggests that the less sleep you get, the more obese you are likely to be. This is interesting in itself, as Americans are notoriously short of sleep. Perhaps the rising rates of obesity are causally linked to this lack of sleep.

    Even more interesting is this quote from the paper:
    Leptin promotes inflammation. The hormone provides an interesting link between obesity and pathophysiological processes such as insulin resistance and atherosclerosis, and disorders such as autoimmune and cardiovascular diseases and the metabolic syndrome. Increased serum leptin levels in obesity and metabolic syndrome support the view that these disorders are in fact low-grade systemic inflammatory diseases, characterized by increased concentrations of proinflammatory cytokines like interleukin-6, tumor necrosis factor and leptin. Leptin's proinflammatory role suggests that it may link energy homeostasis to the immune system.
    In other words, obesity--the result of inactivity and sleep deprivation--may trigger an immune response to low-level inflammation which ends up causing diabetes (insulin resistance) and heart disease (atherosclerosis), as well as other autoimmune/inflammatory diseases such as arthritis.

    As for why Americans don't sleep enough, many people point to overwork and busy lifestyles. My own experience is that while these conditions do inhibit sleep, the countermeasure which leads to long, blissful sleep is exercise--not necessarily a punishing run, just a good fast walk or bike ride.

    So we can see the outlines of a negative feedback loop: less exercise causes less sleep, and the two together stimulate obesity, which triggers an immune response to chronic inflammation which leads to diabetes, heart disease and a host of other auto-immune ailments.

    September 20, 2005


    My entry of July 11, 2005 called attention to the break-out in non-dollar-denominated gold, alerting readers to its future rise. Voila! Dollar-denominated gold has recently risen to 17-year highs, with no signs of abating long-term. As a result, I am reprinting the July 11 entry, for it still holds true in my view.

    This is not to say that gold won't pull back from it's recent high, perhaps sharply. But that will provide those of us who see it as a hedge against inflation another opportunity to buy.

    *     *     *

    If you had to choose the most important word for the balance of this decade, what would it be? Wie, as in Michelle? Terrorism? Petroleum? My vote goes to gold--not as jewlery, but as a financial hedge against all the bad things which could start unfolding next year. The belief in the inherent value of gold has been dismissed for 25 years as the rantings of "gold bugs," but take a look at this chart (courtesy of Barrons and eSignal) which tracks gold in non-Dollar currencies. It shows what chartists call a "break-out," meaning that gold has broken out of a trading range and is reaching new highs--highs which are cloaked to us in the U.S. by the current strength of the dollar.

    Gold is an interesting placeholder of value because you can buy the actual metal in coins, or gold mining stocks, or an exchange-traded fund (ETF) which holds physical gold.

    The Establishment (such a 60s word) or the Standard Economic Model (to paraphrase physics) has no use for gold. Everything is absolutely hunky-dory as is--low inflation, rising real estate values, low unemployment--this is the best of all possible economic worlds, and there is little Establishment doubt that any disruption would be short-term and modest in effect.

    Uh-huh. Still, I'm sticking with Gold as the key word for the next five years. It's something the "little guy" can buy to protect whatever assets he/she has accumulated--something which cannot be said for perquisites of the wealthy such as hedge funds.

    September 19, 2005

    Monday Morning Grab-Bag

    Here's a piece from the Washington Post outlining exactly what I'd described in my Sept. 2 entry--that all the New orleans houses that were flooded, even just a few inches above the floor, will have to undergo major work that may well match the expense of building a new house when all is said and done.

    In an unrelated bit of questionable timing, minimum credit card payments will begin rising for many consumers as early as October, which just coincidentally is when the new bankruptcy law kicks in, making it more difficult to blow off all that credit card debt we've collectively been accumulating.

    Then there's the little matter of natural gas rising 40% as a result of Katrina-caused shortages and a potential 31% rise in the cost of heating oil.

    But really, everything's wonderful, so go back to spending like crazy. Interest rates are still low (for now), people have jobs (except for all those people wiped out by Katrina), and crude oil is dropping all the way back to $63 (wasn't everyone freaking a year ago when it hit $50?) now that this Katrina thing is blowing over. That's the official Wall Street word. So never mind those 40% and 30% energy cost increases this winter, or the higher credit card payments. Foreign stock exchanges are hitting four-year highs everywhere from Britain to Japan, so obviously the future's so bright we gotta wear shades.

    Pardon me if my skepticism is showing.

    September 17-18, 2005

    Adios, O Bogus Prosperity











    Here is yet another chart which should boggle your mind. What we have here is a display of the relationship between foreign buying of U.S. Treasuries (i.e. our Federal Deficit) and the interest rate our government pays buyers of that debt. As you can see, as foreign buyers were increasingly snapping up prodigious quantities of U.S. bonds--to the tune of $400 billion a quarter last year--then interest rates dropped. (Note that this chart reverses the usual format and places higher interest rates at the bottom of the chart.)

    Simple addition is all that's needed to draw several sobering conclusions from this chart. First, let's add the $200 billion our nation spends in Iraq every year (if this is for a lousy $20 billion in oil annually, what a crummy deal) to the $200 billion promised for Katrina rebuilding by our President. That's $400 billion. Even before Katrina, the deficit was nearly $400 billion annually, so even if we weren't in Iraq we would still be running a nearly $200 billion deficit just to fund all the tax giveaways, costly (and mostly ineffective) drugs for seniors, and the rest of the money our free-spending leaders lavish on various interest groups (generally wealthy ones).

    So let's round it all off to $600 billion in deficit spending. Our wonderful friends, the central banks of Asian nations, have most generously picked up the tab for the last $1.5 trillion or so of our public debt, but they appear to be getting tired of supporting our spendthrift ways, judging by the fact that their quarterly buying has dropped from $400 billion a quarter to a mere $100 billion. Four times $100 billion equals $400 billion, so gosh, it looks like we might have to fund $200 billion ourselves. Oops, the U.S. has a negative savings rate of .6%. Dang, with no savings, it might be hard to buy our own bonds. What a bother.

    And who would be stupid enough to lose money by buying a Treasury bond, anyway? Producer Prices rose at a 7% annual rate in August, before Katrina, and we're paying bond holders a miserable 4.25%. Adjusted for inflation, they're actually losing money. Do you reckon we'll have to raise interest rates to something above inflation? In a rational world, the answer is yes.

    So why have foreign central banks been so foolishly keen to keep buying our Treasuries? The answer is not easily reached. The usual reason given--Asian central banks recycling their trade surpluses in order to suppress the value of their currencies--turns out not to be supported by data (see this article in The Economist). While those are probably factors, it seems Asian governments may also be holding huge reserves as insurance against another Asian financial crisis of the 1997-98 sort.

    One trend is certain: these banks are buying less and less of our debt, even as our political leadership revves up hundreds of billions more in deficit spending. It is difficult to foresee any outcome to this divergence other than rapidly increasing interest rates. And with higher rates, the Great Housing Bubble finally implodes, taking with it the entirely bogus "prosperity" which it spawned. The chickens are in sight, and they appear to be heading home to roost.

    September 16, 2005

    Is Risk Being Eliminated, or Merely Increased?

    A front-page article in the September 12, 2005 Wall Street Journal outlines how mathematical formulas are employed at the highest levels of finance to reduce risk via trading derivatives. The technique is widely used to lower risks in portfolios of stocks, bonds, currencies and commodities as a form of "insurance:" if one part of the portfolio tanks, then the derivative "insurance" (actually a bet in the opposite direction) rises in value, offsetting the loss.

    Being financial instruments based on other financial instruments rather than on something with intrinsic value such as a bond or share of stock, derivatives are hard to grasp. Owning a derivative is not the same as owning an actual bond or stock, and as such they can be created out of thin air by financial institutions.

    The WSJ article describes how a new algorithm has spurred the rapid growth of bond and mortgage derivatives (see chart). The piece goes on to note that despite the stated goal of lowering risk, the derivatives have the potential to trigger a cascade of financial mayhem should things go wrong.

    The person who devised the new formula, David Li, says of it: "It's not the perfect model, but there's not a better one yet." This begs the question: how good is any model?

    The answer can be found in a seminal if generally overlooked book by mathematician Benoit Mandelbrot,
    he of fractal geometry fame, entitled The Misbehavior of Markets. Turning his analytic eye to the stock market, Mandelbrot found an uncanny resemblance between the charts of actual stocks and the semi-chaotic meanderings derived from fractals.

    Suspecting that markets may follow a fractal pattern, Mandelbrot examined the "standard model" of portfolio risk management (that is, the one using derivatives as insurance) and found that these standard models did not match the actual behavior of markets.

    More specifically, they made no allowance for the rapid, sudden swings up and down which are inherent in fractal geometries and actual market behavior. The odds of a sudden fall-off are tiny in the standard model, yet in real life huge drops occur with startling regularity: the Asian Criss of 1997, the Russian Default crisis of 1998, 9/11/01, and so on.

    The takeaway from Mandelbrot is simply this: the standard model of portfolio risk management completely underestimates the risk of sudden, violent downturns in markets.

    Interestingly, the WSJ article highlights a "close call" of just the type unanticipated by the standard model. A downgrade of GM bonds last year nearly triggered a meltdown in the bond derivative market, as the model ties all sorts of bond risks together in a chain of "tranches," or degrees of risk sold to different investors.

    In other words, the story of this new model and the near-collapse of the derivatives it has spawned suggests that Mandelbrot is correct: the risks that are built into the "standard model" are far higher than generally recognized, and that periodic eruptions of risk have the potential to take the entire system down.

    Note that the derivatives based on just this one slice of the market already exceed $1.5 trillion. The size of the entire derivatives market is estimated at $10 trillion, or about the size of the entire U.S. GDP. The potential losses if such a mountain of derivatives should fall are similarly huge.

    We have a friend, obviously a very smart person, who trades currencies in New York for one of the large global banks which collectively trade over $1 trillion in currencies each and every day. I once asked him: What's your dollar limit on currency bets? $10 million? $100 million? He shook his head and smiled slightly. There is no limit, he replied. I might own $10 billion or even $100 billion in a currency for a few minutes or hours.

    There aren't many such traders in the world--perhaps only a few hundred--but if you add the other big traders in bond and stock derivatives and options, you get a picture of just how much money changes hands in the world financial markets every day, and how quickly an unanticipated "event" could bring the entire supposedly "risk-free" edifice crashing down.

    September 15, 2005

    Katrina, Vietnam, Iraq: National Purpose, National Sacrifice

    A year ago I penned two short essays-- Is This a Nation at War? and A Nation in Denial--about the surreal state of denial in which Americans happily wallowed. Nothing has changed in the past year, but cracks are beginning to appear in the nation's rickety facade of self-absorption and excess.

    Let us start with Katrina, by some accounts the single most destructive natural disaster since the 1906 San Francisco earthquake. (The larger disaster seems to be a very human hubris, but never mind that for the moment.)

    Though some $70 billion in Federal aid has already been approved, today's Wall Street Journal estimates the eventual total at $200 billion. Who is going to front this enormous sum? The same people who have fronted the current year's $412 billion Federal deficit, of course--the governments of China, Japan, et. al. via their purchase of U.S. bonds.

    Was there a call for national belt-tightening by our President or Congressional leaders, a call for a national surtax to fund this vast rebuilding? Of course not. No sacrifice is necessary, as long as foreigners shower us with billions to spend any way we choose.

    Are Americans really so shallow and greedy that they cannot bear any financial sacrifice? I think not; last week in Virginia, local fire department folks passed buckets along the lines of commuters waiting at stop lights, collecting cash donations for the Red Cross. Untold numbers of residents in Houston and other nearby cities have toiled overtime to take care of New Orleans' refugees. The failure, it seems, is not in our citizenry, but in our leaders complete lack of faith in our willingness to sacrifice for the greater good. Clearly, our leaders fear that there is no political will for any sort of sacrifice; their measure of American character is so low and mean that I wonder why no one else feels outraged by their crass depreciation of our willingness to face facts.

    The lead article in last week's New Republic, titled American Idle, reveals that America's civil engagement has quickly returned to its pre-9/11 lows. Military enrollments were down even before the Iraq war, civic involvement (which correlates nicely with watching TV--the more you watch, the less you do for your community) has returned to the lows of the late 90s, and the stupidities and mindless excesses of our rabidly consumer culture pile ever higher.

    For those too young to remember how our nation slipped into a war in Vietnam without a national debate or act of Congress, let me offer you a brief refresher course. Reckoning there was little political support for a ground war in Asia, President Lyndon Johnson avoided telling the American public what was as stake in Vietnam (propping up a hopelessly corrupt but nominally anti-Communist regime created out of whole cloth after World war II). Rather than face a rejection of his policies, he simply slipped us into war "on the cheap," a little at a time, until there were 540,000 American troops in Vietnam and tens of thousands more in Thailand and at sea.

    Now we find ourselves yet again in a war being waged "on the cheap," with no visible sacrifice being asked of the American people, with the exception of the National Guard and our 1.4 million-person Armed Forces. Unlike Vietnam, we have been told this war will last for years, perhaps even a decade, but collectively we have not been asked to sacrifice anything for this great effort. All the sacrifice falls on our professional, volunteer military, who are also asked to "tighten their belts" fiscally so our government can pay absurd sums for largely ineffective medicines for our seniors, who vote, it seems, in their own self-interest rather than that of the nation.

    Although I generally avoid religious topics, it is time to look for inspiration to our greatest president, Abraham Lincoln, and his deeply religious assessment of the Civil War. The version of Christianity currently popular in our nation is quick to absolve sins; nothing is demanded except a confession or appeal to Jesus. But Lincoln's understanding of sin and sacrifice is nothing like this easy, facile redemption; consider this quote from Lincoln's Second Inaugural Address:

    Fondly do we hope, fervently do we pray, that this mighty scourge of war may speedily pass away. Yet, if God wills that it continue until all the wealth piled by the bondsman's two hundred and fifty years of unrequited toil shall be sunk, and until every drop of blood drawn with the lash shall be paid by another drawn with the sword, as was said three thousand years ago, so still it must be said "the judgments of the Lord are true and righteous altogether."
    For those who didn't grow up in a deeply Christian household, allow me to translate: slavery was a terrible sin, and the massive slaughter of the War was payment in kind for this sin. If God wills it, then the cost of redemption may be the entire wealth of the nation and a measure of blood equal to the suffering of those millions the nation enslaved.

    Although the sins of greed, self-absorption and wanton excess are much less than those of slavery, I wonder if there won't yet be a cost to our nation's mindless denial of fiscal, social and environmental realities. Not a happy thought, perhaps, but perhaps it's time to face the gathering storm head-on.

    September 14, 2005

    Deforestation and Sustainable Forestry

    The difficulty in saving the Amazon is people--the ever-growing number of usually impoverished people trying to eke out a living in what is fundamentally a fragile, easily degraded habitat with poor soil.

    This map, and the accompanying article on NASA's Earth Observatory website show that fire, both intentionally set slash-and-burn agricultural fires and those started accidentally, is fast consuming the entire Amazon. The authors' studies, conducted over a 20-year period, reveal that the damage caused by fires extends far beyond the land that has been cleared by logging and slash-and-burn agriculture; any fire opens an exposed area of land which, as it dries out in the Amazon's dry months, becomes increasingly vulnerable to more fires.

    As a result, previous estimates of deforestation have radically under-reported the actual amount of forest which has been damaged, perhaps fatally.

    There are a host of other inter-related problems eroding the Amazon. Roads cut by logging companies are pernicious in several ways: they enable slash-and-burn farmers to extend deeper into heretofore virgin forests, and they balkanize the forest into areas which are too small to support full-spectrum habitats. (E.O. Wilson states that reducing an area by a third may destroy half of the creatures and plants who once thrived in the larger parcel.)

    Since people, and their governments, already occupy the Amazon, the only way forward is to foster rules and plans which make their livelihoods sustainable, so that the remaining forest can be preserved. One essential step in many to reach this goal is to gather reliable data on natural reforestation of previously logged parcels--just what Ashton's team accomplished.

    The complexities of sustainable forestry will require another entry; not all trees in the forest are economically harvestable, and not all have commercial value. Each species has a different minimum "footprint" and a different number of "parent trees" required for re-propagation. Such research as depicted below is the necessary pre-condition to establishing truly sustainable logging in the Amazon.

    The solution is to utilize the land which has already been cleared or disturbed--such as the previously logged land Ashton's team studied. Nurturing the land which has already been degraded with sustainable practises means that the inhabitants have less need to destroy virgin lands to make their living.

    September 13, 2005

    Real Science

    Many of the knottiest problems in the world today cannot be fixed by white-coated lab techs in nice clean business parks--they require real data, collected in some of the globe's harshest terrains and habitats.

    Consider, for instance, the Amazonian rain forests in Bolivia, just east of the Andes. Here is a typical insect you might encounter there while collecting data, along with a host of much less impressive but much more dangerous biting insects which are vectors for a variety of compellingly nasty diseases.

    The young man sporting the facial spider is Ashton Erler, a very adventuresome and dedicated friend of mine. He recently returned from leading an expedition into this section of the Amazon basin to study the regrowth of previously logged forests. Planning and funding the two-month expedition took the better part of a year, and required surmounting entire ranges of logistical and bureaucratic obstacles.

    A political crisis erupted as the research group gathered, injecting a further element of volatility in an already precarious knitting of governmental support (guides, etc.) and access to protected lands.

    Despite these difficulties, Ashton's team of youthful academics and seasoned guides proceeded into the jungle and conducted two months of data acquisition under trying conditions. The work was essentially transecting quandrants of the forest which had been logged decades earlier, charting the type and size of the trees which had grown in the ensuing years. Photographs of the canopy were also taken which will provide accurate data about the composition and density of the new growth.

    This data is important on many levels, but the primary goal will be to help the Bolivian government lay out a logging plan for the area which is sustainable over the long term. This is a complicated subject which I will write more on tomorrow. For now, let us be grateful that dedicated people, both in government and academia, are devoting themselves to collecting the data without which no sustainable progress can be made.

    September 8, 2005
    (Note: I will be out of town 9/9 - 9/12; next post 9/13/05)

    A Financial Meltdown in the Making

    Here is a Tale of Two Charts. The first one reveals how deeply banks have jumped into the over-extended and increasingly risky home mortgage market, while the second chart shows rather vividly how bank reserves against bad debt--i.e., defaulted mortgages and the like--have sunk to 19-year lows.

    In other words, right when they're assuming huge piles of risk, they're also cutting their bulwarks against risk to the bone. If this isn't the definition of pure folly, then what else do you call it? Fiscal prudence?

    If you set out to create a financial crisis, you couldn't do better than this: right at the top of an unprecedented financial bubble (scroll down to the Sept. 3 post, and also check the three "Housing Bubble" essays in the sidebar on the left) in housing, then concentrate your assets to an unparalleled degree in the very asset class which is riding at the top of the bubble.

    Buying mortgages today is the equivalent of buying the Internet stocks in February, 2000, when the Nasdaq was days away from its high of 5300. (It's 2100 today.)

    Then reduce your reserves against any potential losses to the absolute lowest level in a generation. The recipe for an unfolding crisis is complete; now lower to simmer and hope for some external shock--say, an era of rising energy costs--which will push heretofore boundlessly optimistic consumer confidence over the inflection point to doubt. Once housing prices stop rising--and that moment seems to have arrived--then an era of defaults and losses begins which will erode away all that risky debt lenders have been falling over themselves to create. Ah, but I forgot--this time it's different.

    September 7, 2005

    Welcome to 1935

    As an aperitif for today's substantial offering, click on these two websites:

    Bureau of Labor Statistics
    Bureau of the Public Debt

    On the BLS website, select the "inflation calculator" link in the upper left column titled "Inflation & Consumer Spending." Now select the year "1987" in the calculator and plug in $100. Click the button and voila, you find it takes $172 today to buy what $100 bought in 1987.

    Okay, now go to the Bureau of Public Debt and note that as of September 30, 1987, the Federal Deficit was $2.35 trillion. Next, note that the debt as of today is $7.94 trillion. Now multiply the 1987 debt ($2.35 trillion) by 1.72 to adjust the debt into current dollars: voila, $4 trillion. In other words, if the debt had risen only with inflation, it should be around $4 trillion, not $8 trillion.

    Doesn't the fact that our government has borrowed $4 trillion over and above inflation in the past "low-inflation" 18 years strike you as somewhat troubling? After all, one trillion here, one trillion there, and pretty soon you're talking real money.

    Now for the main course: a chart comparing the Dow Jones Industrial Average and the Nasdaq from their respective pre-collapse highs in 1929 and 2000. To avoid a confusion of dates, the timeline is measured in days from the peak rather than years. The vertical axis measures the two stock indices' decline from their highs by percentage. Thus we see that by some uncanny coincidence both the Dow and the Nasdaq rose to about 45% of their pre-collapse highs at the same time--2000 days after the highs, right about now for us in 2005 and right about April 1935 for the previous generation of "investors."














    The present status of the Nasdaq is roughly analogous to April 1935, when, we note, the Dow took a major cliff-dive.

    Chartists have long observed that the stock market tends to form patterns which repeat over the years, decades and even centuries; they do not see coincidence in the close correlation of these two lines but repetition of an underlying pattern: a mania bubble which bursts dramatically, setting up a more leisurely "echo" of the bubble--where we are today--which is followed by a collapse of the "echo" boom. The overlay rather persuasively suggests that the deflation of the echo boom is close at hand.

    For an explanation for why the Nasdaq recovered more quickly than the Dow, look no further that the extraordinary dumping of low-interest cash into the economy which began in 2001. The Fed poured trillions of new dollars into the money supply in the past four years, something which did not occur in the early 30s. Despite this largesse, we find ourselves at exactly the same point 5.5 years out from the peak--on the edge of a secondary cliff.

    Okay, so you don't believe overlaying charts has any predictive value. Well, how about the statistic that bull runs historically average about 30 months in duration? We are now at month 35 in the current run up from the low set in October 2002. If that doesn't give you pause, then allow me to usher you to the Permanent Bulls Table over in the corner, where the banter today is all about how resilient the U.S. economy is in the face of fearsome energy cost increases. The table is thronged with excited traders today, but check back in December; the crowd--and its ebullience--may have noticeably thinned by then.

    September 6, 2005

    Tinseltown Tags Titles from Bard

    I was watching the classic film version of Hamlet with Laurence Olivier the other night on PBS and was surprised to note how vigorously Hollywood has plundered the famed (and brief) "To Be or Not To Be" soliloquy for movie titles. Within those relatively few lines, I recognized four film titles:

    To Be Or Not to Be

    Outrageous Fortune

    What Dreams May Come

    The Undiscovered Country (Star Trek V)

    Here are the lines Tinseltown tagged:

    "To be or not to be, that is the question."

    "The slings and arrows of outrageous fortune"

    "For in that dream of death what dreams may come"

    "The undiscovered country from whose bourn" (boundary)

    I took two semesters of Shakespeare in my years at the University of Hawaii, and yet I do not recall our very learned professor pointing out how shamelessly Hollywood (as well as various authors, e.g. "The Sound and the Fury," etc.) mined the Bard for titles.

    The Laurence Olivier version of Hamlet, in glorious black and white, is unparalleled in both the lighting (stark at times, fog-strewn in others), setting (the largely vacant, cold castle and wild landscape beyond, all worthy of Jean Cocteau at his finest) and in the delivery of secondary parts; I most especially recommend the scenes featuring the ghost of Hamlet's father.

    September 5, 2005

    Labor Day: Thirty Years and Counting

    Here's a shot of me and my friend Steve Toma, proving that a Skil 77 (the big worm drive power saws) and two 50-year old guys make a righteous production team. We met on a jobsite back in late May 1973, and are still going strong (unretouched photo from a rainy jobsite in Honoka'a, Hawaii, 2004). The Skil 77 is the professional carpenter's choice; it weighs 16 pounds (feels like 25 lbs. late in the day) and has to be handled with one hand except for above-the-head or other tricky cuts. A normal (i.e. sedentary) person unused to actual physical labor would have trouble lifting it with both hands, never mind lifting it with one hand to cut a 2X12 board.

    Those 2X12 rafters laying on the slab in front of us were "pond-dried," i.e. completely waterlogged, and each one must have weighed over 100 lbs. The fact we framed this huge garage and hefted all of the rafters up in two rain-plagued days without getting hurt is a testament to the way experience teaches you to lift and cut safely.

    There is no substitute for the physical skills of building, gardening and mechanics; no amount of "work" talking on the phone or staring at a computer screen gives you the same appreciation for food and water, for the joys of exertion, for the visible nature of the day's accomplishment, for the turns of weather, for the pleasures of hand-skills which come unbidden and without thought, or for the accumulation of decades of physical experience.

    The usual Labor Day bromides count the blessings bestowed on American workers by the labor unions' bitter struggles early in the 20th century to obtain better working conditions and wages for industrialized laborers. Not to take away from those enormous achievements, but what I think of on Labor Day is how much we've lost in becoming an overwhelmingly skill-deprived, physically inept (can't cook, can't fix anything, etc.) society of unhealthy service workers who have largely lost the keenly felt benefits and rewards of physical labor, both skilled and unskilled.

    September 4, 2005

    Read This Book: Boiling Point

    If you want to understand why rising carbon dioxide levels from burning fossil fuels and the subsequent global warming is a big deal, read Boiling Point. Subtitled "How Politicians, Big Oil and Coal, Journalists and Activists Are Fueling the Climate Crisis-- And What We Can Do to Avert Disaster," the book is a bit of a screed against the lobbying might of the petroleum industry and the somnambulism of the media and even the environmental movement. But it is also a well-documented look at the unprecedented forces we as a species have unleashed by raising the carbon dioxide levels from a pre-industrial level of 270 ppm (parts per million) to the current 370 ppm.

    As I have noted before (The Immensity of Global Warming), the magnitude of this warming is difficult to grasp--unless the ground is literally melting, as it is in parts of previously permafrost Alaska.

    Yes, there is an ongoing scientific debate about whether global warming is spawning super-storms like Katrina, but read the book before making up your mind. (It's a short and easy read.) One point is well beyond debate: Nature didn't add 100 ppm of carbon dioxide to the planet's atmosphere, humanity did. And that count continues to rise as we burn mountains of coal and 83 million barrels of oil each and every day.

    September 3, 2005

    Catalyzing the Great Unraveling

    One of high school chemistry's most visual experiments may provide an analogy to Katrina's effect on the U.S. and world economies. First, salt is dissolved in warm water to the point of saturation. As the water cools, a point is reached where a sharp tap on the beaker causes the salt to instantly crystallize.

    The point is not that Katrina's aftermath may prove to be the proximate cause of the great unraveling, but that the global financial situation is so precarious that any shock would have been an equally effective catalyst.

    Consider two apparently unrelated items from the August 22 edition of the Wall Street Journal, one on U.S. bank's dwindling reserves to offset future bad loans, and the other on the growing power of an obscure Chinese banking agency which now owns half of the biggest Chinese banks:

    In the U.S.:
    "Saving less for a rainy day is becoming a popular earnings-enhancement strategy at U.S. banks increasingly stretched for profit growth. More than a dozen major banks took a lower loan-loss provision in the second quarter compared with a year earlier, and the industry's loan-loss reserves as a percentage of total loans and leases are at a 19-year low, according to the Federal Deposit Insurance Corp. Besides some banks helping their profits with gains that don't necessarily reflect underlying success in attracting borrowers and depositors, some analysts are worried the banks are setting themselves up for trouble should the economy stumble."

    In China:
    "Run by an outspoken central-bank veteran, Xie Ping, Huijin has shoveled $60 billion of new capital into China Construction Bank, Bank of China and Industrial & Commercial Bank of China. The funds have enabled the three major state-owned commercial banks to write off bad debt and improve their attractiveness to foreign strategic investors ahead of planned overseas listings. In the process, Huijin has become by far the biggest single owner of Chinese banking assets. Basic facts about Huijin remain unclear. The company doesn't reveal its staff numbers. Its telephone numbers aren't listed.

    Ultimately, it pits the agency against the Communist Party's Central Organization Department, which to this day appoints the heads of China's big banks. The Ministry of Finance, which used to own China's big banks, also has been displeased by Huijin's growing influence."
    So let's see if we have this straight. Just as risky interest-only mortgages are increasingly the bread-and-butter of the U.S. banking system, then these same banks are lowering their reserves for bad debts in order to appear profitable. At the same time, total U.S. debt has skyrocketed (see chart above). Can you say "disaster in the making?"

    At the same time, a politically byzantine, utterly opaque quasi-governmental agency of the Chinese Central Government has "saved" China's largest banks from insolvency by pumping $60 billion into the biggest three and untold tens of billions more into smaller rivals--all in the hopes of enticing Western capital to flow in and save them the trouble of throwing more money down the bottomless rathole of the Chinese banks' bad debt.

    Do these stories paint a picture of a robust, transparent, low-risk global financial system? On the contrary, they reveal a system poised on the precipice of collapse.

    September 2, 2005

    Off the Scale Misery

    Anyone who thinks the aftermath of Hurricane Katrina will be short-lived or benign is in fantasyland. We have 500,000 homeless people, maybe closer to a million, people with no way to return home for months on end. Note that most major cities consider 10,000 homeless people an enormous challenge. Also note that those who fled are the ones with the means to do so--those with cash, cars, nearby relatives, and so on. Those who remained behind did so because they had no place else to go, and no money for a few weeks in a Houston hotel. They are effectively homeless people, with no place to go and insufficient assets to move or purchase other housing.

    When residents do finally return to their houses--those left standing--they will find the walls filled with bacteria, mold and Lord knows what else. That means to make the house habitable again, the flooring will have to be removed, the drywall will have to be torn down to the studs and the electrical wiring replaced--and this is a minimum. Given the termite damage that is prevalent in the area, the initial reconstruction may include most of the major framing, or at least those parts which were blown off with the roof. Meanwhile, nobody has a job to go to, either, because the city is basically uninhabitable. What are people going to live on? Unemployment? Emergency funds? For how long?

    Some optimists see all this construction work as a boon for the economy, but what about the people who will be displaced for months while they wrangle with FEMA loans to fund the rebuilding of their home, and then the difficulties of finding someone reputable to do the work? This isn't building 50,000 houses in a production setting, with economies of scale--this will be rebuilding each house, one at a time, with financing and other conditions unique to each dwelling. Just lining up the money, the crews, the materials and the infrastructure (power, water, housing for the workers, roadways, etc.) will take months.

    As for the oil industry--listen to all the experts talking about the fact there's no strategic reserve for natural gas. In other words, the shortage of natural gas will not be alleviated by tapping the crude oil Strategic Reserve. Meanwhile the pundits are cutting GDP for the Q4 by a tenth of a point. Who are they kidding? With nine refineries out of production, there will be a shortage of gasoline unless people begin conserving. But the behavior we're seeing is the opposite of conservation--people are "topping off" their gas tanks, sparking a negative feedback loop of a shortage created by fear of a shortage.

    As the Wall Street JOurnal noted on August 31:
    "If the U.S. auto fleet of 220 million vehicles went up to three-quarters of a tank -- or, say, 10 gallons more --it would be an additional 2.2 billion gallons of demand."
    Panicked drivers are already topping off their tanks and using credit cards to do so, suggesting the piper will be paid down the line. Meanwhile, the nation's savings rate sunk to its lowest ever last month, -0.6%, suggesting a consumer class that's finally tapped out. But wait, the pundits shout--the Fed will start lowering interest rates again, sparking another wave of mortgage re-financing, putting another hundred billion dollars of free money in people's pockets. But suppose inflation rises with higher fuel costs, as it is wont to do. Then the Fed won't be able to lower interest rates; rather, they'll have to keep raising rates to control inflation.

    And further suppose that the predictions calling for more hurricanes this year than last turn out to be true. Maybe this isn't the last hurricane to sweep over the Gulf Coast Oil Patch. Then what?

    We haven't seen the worst of this yet.

    September 1, 2005

    The C.I.A., Threat Assessment and Oil: The Wisdom of Crowds?

    An article in the August 19, 2005 edition of the Wall Street Journal--well before Hurricane Katrina devastated Gulf Coast oil facilities--was titled Bets Emerge on $100-a-Barrel Oil: Open Call Options Reflect A Drastic Shift in Views On Outlook for Crude Prices.

    For those not familiar with options trading, "call options" are bets made that a commodity or stock will rise by some future date of your choice--it could be days, weeks, months or even years out. Alternatively, "put options" are bets that a commodity or stock will decline by a future date.

    What makes this article interesting is that it suggests some amoung the great unwashed masses of options traders-- typically a more savvy crowd than average stock market players--seem to sense that oil will continue rising:
    'Investors are plunking down serious money on bets that oil prices will top $70 and $80 before the year is out. Those bets could point to higher prices. Adam Seiminski, an analyst at Deutsche Bank in New York, said the options market sees a one-in-three chance of oil prices moving above $75 before December, compared with a one-in-20 chance for the same scenario at the start of the year. "With the likelihood of a strong pickup in demand during the fourth quarter and geopolitical risks and weather events lingering, the chances of a move above $75 continue to be upgraded,' he wrote in a recent note."

    This is eerily reminiscent of the C.I.A.'s much-ridiculed "threat-matrix assessment" stock market program, Policy Analysis Market, which was cancelled in 2003 after much media ballyhoo. Here is a succinct description from
    "The Policy Analysis Market (PAM) was a proposed futures exchange developed by the United States' Defense Advanced Research Projects Agency and based on an idea first proposed by Net Exchange, a San Diego research firm specializing in the development of online markets.

    PAM was to be a "a market in the future of the Middle East", and would have allowed trading of futures contracts based on possible political developments in several Middle Eastern countries. The theory behind such a market is that the monetary value of a futures contract on an event reflects the probability that that event will actually occur, since a market's actors rationally bid a contract either up or down based on reliable information. One of the models for PAM was a political futures market run by the University of Iowa, which has allegedly proven more accurate in predicting the outcomes of U.S. elections than either opinion polls or political pundits. PAM was also inspired by the work of George Mason University economist Robin Hanson."
    The ability of transparent, open markets or independent, decentralized groups of people to accurately assess threats, shortages and prices has been widely documented, most recently in the book The Wisdom of Crowds

    The sharp increase in oil futures call options suggests that $70 per barrel of crude oil is not the top price we will see this year.


    wessay noun, combination of 'web' and 'essay,' denoting a short 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.

    copyright © 2005 Charles Hugh Smith. All rights reserved in all media.