USA: The Crisis Continues

USA: The Crisis Continues

Today's piece resembles one chariot driver trying to guide two ill-tempered chariots - sort of a "Ben Hur" to the power of two. We

  • Take you through a crisis cycle and tell you where we are in it, and

  • Give you a model of how assets combust into liabilities.

In earlier "Collateral Damage" notes, we tied the crash to The Economic Clock™ , already having warned subscribers already way back in May 2006 of U.S. stagflation.

Hate to say "I told you so", but we did! Finally, markets have moved out of denial and into "distress", the penultimate phase of MIT Prof. Charles Kindleberger's marvelous anatomy of a crisis. In June 2007 we wrote, "The last leg, panic, should set in by the end of this June (2008)."

In our earlier work citing Prof. Arnold Toynbee, we wrote that the "the internet annihilates distances." In a similar vein, we could re-coin this by stating that (US$500 trillion worth of) "derivatives annihilate prudent banking as well as effective banking supervision": nobody can measure what their actual exposure is. How deep is deep?

When do assets combust into liabilities?

The columnist Martin Wolf wrote in the ever-erudite Financial Times (FT) of 16th January 2008 that "The world has witnessed well over 100 significant banking crises over the past three decades. The authorities have had to rescue important parts of the US. financial system four times during the past same period:

  • from developing country debt in the 1980s, and

  • the 'savings and loan' crises of the 1980s,

  • the commercial property crisis of the early 1990s

  • the tech bubble from 1995 - 2001 and now

  • the sub-prime and securitized credit crisis of 2007-8.

No industry has a comparable talent for privatizing gains and socializing losses." What he meant is that bankers get whopping bonuses - but, once the chickens of avarice come home to roost, the public gets to bail them out - and (third rate) politicians get elected to do so in order to "save jobs". In the FT of 19th/20th January 2007, we get two juicy tidbits on such privatization of gains and socialization of losses:

Thorold Barker writes that "...the five big Wall Street banks managed a combined profit slump of more than 60 percent compared with commiserations to shareholders who saw US$80 billion wiped off the combined market value of the gang of five."

Meanwhile, total compensation to the bank employees of these five big boys actually rose. Meanwhile, on page 8 of said FT, we are overcome with joy to read that "Bonuses at the five largest investment banks rose to a new high of US$40 billion last year even as they reported far more than that in combined mortgage-related asset write-downs." We obviously went to the wrong university - how about you?

John Authers notes that "Sentiment turned sharply against Greenspan this week...after it was revealed that he taken a job advising a hedge fund that had made a big bet against sub-prime debt. Many believe him to be profiting from his own past mistakes." Well done, Dr. Greenspan!

So it is of little surprise that Charles Geisst, a Wall Street historian, is quoted in the same FT: "Not since before World War I have companies gone looking for foreign capital as much as they are now."

Today we again review Prof. Kindleberger's marvelous anatomy of a crisis, suggest where we are in his framework, and then trace how assets combust into liabilities. This is important because of our crisis road-map: we want to know what we don't know.

On a cheerier note, we on 14th January, we gave you 14 ways to earn off the coming panic, including shorting the finance and consumer discretionary. One day later, we gave you eight ways to make money off this "distress". We are in the money - how about you?

Please see for further details.