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Construction Defects Haiku and Black Swan Sighting   (July 28, 2007)

Longtime reader/correspondent Cindy Schnackel submitted a series of Haiku on a rarely-mentioned but increasingly ugly aspect of the housing bubble's bust: construction defects:

Granite Countertops.
Pretty place to spread out your
legal documents.

Water coming in.
House rotting from inside out.
No Window Flashing.

Slums of tomorrow
are disposable housing
being built today.

Left to get his tools
Waiting six months for repairs.
He never returned

Builder says it is
normal for concrete to crack.
Hand fits inside crack.

The word “cosmetic”
Hides a multitude of sins
When attached to “crack.”

Thank you, Cindy. As for the ultimate end of abandoned/defective exurbia, I offer this:

tumbleweed ghost town
posh gated community
now bulldozed rubble.

On an unrelated topic: I have a gut feeling that the stock and credit markets are about to experience a "black Swan Event," i.e. a supposedly "impossible/improbable" decline of epic proportions.

Frequent contributor U. Doran recommended The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb some months ago, and though I have yet to get a copy, I gather the basic premise is that outlier events which are supposedly unlikely happen quite regularly, and it is such "improbabilities" which largely drive human history.

This is fundamentally the thesis of a book I have often recommended here, The Misbehavior of Markets, in which mathematician Benoit Mandlebrot explains that risk--i.e. of large, statistically improbable declines in markets--cannot be massaged away with statistical models of hedging. The reason is that markets are fractal geometries, and therefore linear statistical models simply don't work in predicting market activity.

Then there's a little thing called luck, which may finally be running out. The Powers That Be which have reaped such enormous financial and political gains from the past six years of essentially bogus (read borrowed) "prosperity" have had an unprecedented run of luck: no attacks on the homeland, a quiet hurricane season last year, an uninterrupted flow of cheap money via the yen carry trade, a willing Chinese central bank soaking up $1 trillion in U.S. debt with nary a whimper of protest as the dollar loses a third of its value--all extraordinary trends of amazing fortune. (pun intended)

Could the PTB and the Plunge Protection Team's run of stunningly good luck be coming to a natural end? After all, nothing lasts forever. The possibility that the yen carry trade may suffer an abrupt unwinding is addressed by blogger Karl Denninger over at the Market Ticker blog (well worth reading), and by Gary Dorsch in DEJA VU, SPIKE RALLY IN JAPANESE YEN SPOOKS GLOBAL MARKETS (thanks to U. Doran for submitting this article).

Could another Gulf hurricane be the catalyst for oil to jump from $77/barrel to $80/brl? Or might it rise to $80 - $100 just on global supply/demand imbalance alone? Whatever the cause, the PTB won't be able to spin a happy Euphorestra-induced story about it.

Others have pointed to the rise in the VIX volatility index and many other technical indicators to suggest a reckoning is finally at hand; U. Doran sent over this excellent summary Bearish Divergences Abound by Frank Barbera.

While common sense suggests a slow, rocky decline in the markets into seasonally troublesome October, my seventh sense (even more unreliable than my sixth sense) is quivering with a premonition that the markets aren't going to be "rational" and wait for October. That may well be a Black Swan circling higher and higher in a gyre, no longer heeding its frantic Masters' urgent commands.

For more on this subject and a wide array of other topics, please visit my weblog.


copyright © 2007 Charles Hugh Smith. All rights reserved in all media.

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