Thursday, December 13, 2007

Then and Now

On the back of yesterday's discussion about energy regimes and the need to change from fossil to alternatives, I will make a special book recommendation prior to the main post.

A commenter (thks. Anon.) reminded me of one of the most important books I have ever read: Daniel Yergin's The Prize:The Epic Quest for Oil Money and Power, winner of the 1992 Pulitzer Prize for non-fiction. The title says it all and despite its size and subject matter it reads like a novel. The author has since become a red flag for peak oil proponents, but if you wish to understand what has been shaping world events for the past 100 years you really should read this book.

Yesterday the Fed announced a Treasury Auction Facility (TAF - notice the allusion to "tough") and an arrangement with other central banks to form a united front, "
designed to address elevated pressures in short-term funding markets". Nice trick, I first thought, and then started laughing. I mean, what is one to make of this confederacy of dunces? They first underscore there is a serious global problem, but then proffer a BandAid?

If desperate times call for desperate action, why bother with droplets of credit? If you are going to go down that route (as opposed to coming up with credible solutions), you might as well start warming up the printing presses, because the Sea of Debt will require an Ocean of Cash to service. Thus, in the spirit of tragicomedy, today I am attempting comedy. I will leave the tragedy to others, obviously better equipped to provide it.

What a difference a year makes.

That was then.
This is now.

Snap of the fingers
$10 billion dollars for your LBO fund.
"Hey, you! Waiter! Where's my damn soup?"

Bonus time
Choice of Ferrari colors.
Extra playing time at the video arcade.

Hedge fund
2/20% , VIX stuck at 10, lush green.
What you must scrape together to pay for lawn service.

Smaller than the chances of winning LOTTO.
We have a winner!!

Mustique island villa, $30.000/wk.
Gilligan's Island on cable. Cheez Doodles, $1.29/bag.

Working Environment
Master of The Universe.
Yes, master.

2006 Vintage
The MBS schlock you turned into CDOs.
The only schlock you can afford. Twist-off bottle.

Financial engineer

Repo Man
The house man you called daily to run your bond positions.
The man that calls at your house daily.

Bail bonds
Get out of bonds.

Welcome to our store, how may I help you?... Welcome to our store, how may I...

AAA rated CDO
Safe as houses.
Safe as houses.


  1. Perhaps it is the spirit of comedy that reminded me of a favorite quote attributed to Imelda Marcos,

    "I am beyond logic and rationality."

    (What can I say, on some level I'm a fan.)

    I've been thinking about the Yergin book a lot lately. I read it many years ago and it was a revelation. (The irony of OPEC being modeled after the Texas Railroad Commision is rich indeed.) Didn't PBS do a video series based on it? It would be nice if he could do a new edition to bring it up to date.

    The media never seems to mention the huge BP pipeline that runs across Turkey from Baku when they report about the Kurdish conflict, yet its protection is what will define the quashing of any attempt at a united Kurdistan. That's the kind of thing that reading the Yergin book initiates you to. Instead of follow the money, it's follow the oil.

  2. The Kurdish issue is 100% about oil. The Kirkuk and Mosul oil fields in northern Iraq (i.e. Kurd territory) used to be part of the Ottoman Empire, of which Turkey is now the smaller descendant.

    The Turks simply want it back.

    It's the one sure way for them to lay serious claim to the superpower status they so desperately seem to desire.

    Apart from Kurdistan, nearly every human misery flashpoint in the world is associated with oil. Sudan, Palestine, Iraq, Afghanistan, Chechnya, Nigeria... the list is very long.


  3. It may be premature to compare this economic crisis with the depression of the 1930's, but....

    The US was energy self sufficient then

    Most goods and people moved by rail

    economies were regional

    food production was local

    many people grew their own food and had a root cellar or canned the excess

    hardship was much more intense in the cities

    If anything on the magnitude of the depression happens now, we are so much less able to adapt.

    Jason B

  4. Any effort at clean sustainable energy will be undermined by the relative abundance of Methane Hydrates. Serious efforts are underway in China and India to extract this stuff from the ocean floor. It accumulates at certain depths in the ocean and in the Arctic. It's abundance is probably larger than all oil, gas and coal combined. So the happy hydro-carbon days will continue for a while. What will this do to our atmosphere/climate? Nothing good I am afraid.

  5. to yoski, re hydrates.

    Interestingly enough that's also Greenspan's solution, along with carbon sequestration. It's in his book.


  6. Forgive my ignorance; but what connection does Afghanistan and Palestine have to oil?

  7. Re Afghanistan/Palestine

    Afghanistan stands astride any possible pipeline from the Caspian and Iran into China.

    The Palestinian matter (at least 60+ years old) is not only an Arab(=oil) humanitarian conscience issue, but a constant thorn for the Israelis. No matter what anyone else may or may not believe, the Arab "street" views Israel as America's police station in the oil region.


  8. Great Post yesterday!
    Over a year has past since the start of "Sudden Debt". Switching your focus from the days of "Thoughts on a Limb"(another wealth of insight I might add)to this reveling look into our collective underlying debt, the how's and whys as it is unfolding and where we need to go from here. Your calm lone voice of reason from the past has grown and this recent post (12.12.07)with all the excellent comments is a marker of your unique skills. I want to personally thank you for all the work you have put into this blog it has been a great reflective portal to help me sort out and understand the financial universe(that is to the best of my limited abilities) that I am a small part of.
    In keeping with the other day's post, I do not see a sudden turn in gov policy concerning energy with the strong winds of "business as usual"(I agree oil underlies everything) steering us onto the rocks of reality. The question is how do we make a transition to a distributed energy base from the bottom up. Micro credit? to spur the capital to construct the production and jobs needed to make a transition, the ROI I would think would be next to 0 on an economic basis today but pay handsomely for our children's children.

  9. H. Re your reading recommends:

    Bookstaber, R: A Demon of Your Own Design.

    Excellent. Well written and very informative. Bit technical in places.

    You did not recommend this one; I picked it up on iTulip.

    Warburton, P: Debt and Delusion (2005 reprint). ISBN (10) 0-9770793-3-3.

    Same as above. Has 1999 Afterword; 3 Technical Appendices; Glossary and Reference bibliography.

    Brian P.

  10. Dear geoff,

    Ths. very much for your kind words. As far as govts. are concerned, it almost always takes a 2-by-4 to wake them up. Incredible inertia built into the system. I think it's in the human genome, or whatever it is they call the soul nowadays.

    Dear Brian,

    Glad you liked Bookstaber's book. He's one of the very few real Wall Street risk pros explaining both the market/management side and the technical/risk ops.



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  12. Has anyone read Bill Bonner & Addison Wiggin's book "Empire of Debt" they're the editors at another great daily read also.

  13. I have a question about debt in America I think you have not answered which may be making you come to some incorrect conclusions. You have not accounted for Power Law assumptions in your analysis. Although America's debt may be 350% of GDP, how does this break down in terms of debt to individuals when looked at from a Power Law wealth distribution in Society perspective? If 80% of wealth in society is owned by 20% of people, then wouldn't debt also follow a similar pattern? If so, 'the median is not the mean' implies that debt might not be nearly the problem you imagine... we might be able to tolerate much larger amounts of debt than you think. Has a fractal analysis of America's debt been made?
    Does it still show a problem?

  14. Re: debt/wealth/income distribution

    We actually have this information. The fed does a household survey every three years - 2004 is the latest available. The 2007 survey is underway.

    Pls. go to

    There is wealth of information there.


  15. Geoff,

    You put your finger on the problem which, from a real investment perspective, has everything to do with the question of whether sectors involved in such transition are able to return an expected to be durable higher than average rate of economic profit.

    If this is not the case, well, you know it will not happen other than in sporadic and atomized ways largely driven by socialization of costs subsidies which, from general economic tendencies and what Hellasious and others expose on the debt front, are themselves quite problematic.

    It is truly worth considering whether the same system which provided us with these problems is, at this moment in its long, now downsloping curve, competent and able to do the contrary.

    Put differently, the mere fact that remedial technologies and methods are available is insufficient, as the generalization and superior development of these is contingent on the above -- or, from another perspective, the overturning of such limits.

  16. excellent blog here. ive been lurking for quite a bit now and learned a great deal. you helped me in putting pieces together. ive been pondering why stock market kept up.

    i really liked articles about CDO's, credit swaps and Fed actions. if i digest everything properly, some gloomy picture is painted.

    stock market is priced out with CDS spreads, mutual correlation here. CDS affect CDO valuation, essentially being part of price to model formula.

    well, it seems that Fed and wall street are trying to do everything they can to prop the stock market, because if it crashes, then credit swaps yields will spike, causing astronomical devaluation in debts, which will make lots of firms insolvent.

    am i reading it correctly? and with other factors like inflation, jobs, energy prices, deficits, government forging numbers, upcoming elections etc, we are destined if not for a crash then for a prolonged recession.

  17. thai,

    Since hellasious has helped you out with the FRB link, you might also find this from UCSB's Bill Domhoff of interest.

    There are extreme differences.

  18. "If 80% of wealth in society is owned by 20% of people, then wouldn't debt also follow a similar pattern? "

    Let's assume your assumption of the Pareto distribution holds. How would the wealthy 20% finance each dollar of debt with only 10 cents of income?

    The latest Z.1 Flow of Funds shows that in Q3, 2007, for every dollar of total debt growth, the *national* income grew by only 10 cents. At an average interest of 6% - it's probably higher given how much junk debt there is - 60% of income would go just towards interest payments!

    The way out is asset sales and foreclosures. As those proceed, the debt goes "Poof" and vanishes. It's all virtual anyway, bytes on hard drives. It can be deleted as easily as email.

    Our Ben is desperately trying to prevent people from hitting the delete buttons.

  19. Has anyone read Bill Bonner & Addison Wiggin's book "Empire of Debt?"

    I've read it. I think they make good points. Their analogy of modern America being like ancient Rome has been made by myself and others. The authors of Empire of Debt refer to other empires throughout history and make the same analogy, namely: empires rise by fighting wars, hoarding resources and going into debt. Eventually the debt becomes too great to manage and the empire falls under the inability to finance it.

  20. Thanks for the input Okielawyer will put it on my to-read list then. The commentary they make on their dailyreckoning site reminds me very much of this blog.

  21. Foreigners owning US Assets... is it already happening?

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