Military Re-Training?

Egyptian soldier in Tahrir Square

It's celebration time! Hosni Mubarak has resigned and turned over the reigns to...the military. Oh wait...last three military rulers in Egypt? Nasser, Sadat, Mubarak. Oh right. Okay, so I do think this is still a big deal, and I'm cautiously optimistic the military will serve as a transition government until free and fair elections are held. They saw the numbers in the streets, and I do believe they realize those numbers will come out again, if not more, if they make this transition not happen. That being said, even if we see a move towards democracy in Egypt (after, presumably, civil institutions are rebuilt somewhat from their hallow roles during the rule of the semi-autocrats for so long), there is this problem. The Egyptian military is huge and probably doesn't want to see itself shrunk.

The Great Recession? Not for Apple (Or Any of the Peeps Waiting in Line for the Iphone IV)

Talk about the haves and the have-nots. Apparently this web-developer is out of touch with reality because I cannot for the life of me comprehend how a sane person would camp overnight to by a stupid cell phone. Yet, all around the world reports are coming in regarding the lines outside of Apple stores that wrap around blocks.

Really? Are you serious? I was so sure that this was a publicity stunt for Apple--some kind of gorilla marketing campaign--that I

Real Estate in China vs. the United States: How Two Giants Spar (Part I)

This is part 1 of a multi-part post (probably 3), in which I will discuss the very different roles real-estate has played traditionally in both China and the United States. I will later discuss the global impact of what appears to be a severely overheated real-estate market in China and how the binary stop-go control system of China’s communist leadership is largely incapable (even less so than the US government) of effectively dealing with this segment of its economy, which unlike many other segments that are directly controlled by the State, is much more difficult to manage from a central location. I posit that, as China continues to take on the semblance of a fully capitalist system, with a rapidly growing middle-class modeled after the US economy, they are inevitably going to face a conundrum: to protect their new, thriving, economy by adopting more democratic principles of government; or protect their present form of government at the very large cost of their impressive economic progress, whereby to reestablish totalitarian control over the people, they will inevitably be forced to squash the new found visceral freedoms of its burgeoning middle class. I will argue that the myopic nature of a centrally managed system of government makes it nearly impossible to gauge the ripple effects (and the echoes of those ripples) of an economy as large and widespread as China’s. More importantly to the rest of the world, I will also make the case that the lack of understanding of property rights on the part of the Chinese government threatens not only that particular economy but all others that do substantial business with them (i.e. the entire world). Most of us are familiar with the the expression: "If the U.S. economy sneezes, the the rest of the world catches a cold." Well, for better or worse, there is a new germ in town and the medicine to deal with that germ is not well-known. China does not do things like the United States, and lest we all get too eager to welcome another giant into the room to compete with the current alpha male, it might serve us well to remember that the style of government in the United States is integrally connected to a powerful set of checks and balances that simply do not exist in China. Moreover, China's publicly stated desire to build a middle-class by allowing private ownership of real-estate is not only at odds with the central tenets of communism but also, more specifically, with the enduring power of the Communist Party in China. Nonetheless, to address such an important topic with such a wide brush does the subject no justice, and so I will focus this post and those that follow on the significance of real-estate in both countries and economies and how the development of both may effect us all moving forward.

Before we delve into the intricacies of the changing real-estate landscape in China, it will serve readers well to become familiar with or review the inner workings of the real-estate in the United States. The reason for focusing first on the US real-estate market (which comprises roughly 12% of GDP in the world's largest economy) is three-fold: first, China has recently attempted to adopt (at least in principle) the real-estate-based economic model of the United States (and Japan) without implementing property taxes (which might change in the very near to intermediate future); secondly, because unlike the multi-faceted control system of the U.S. and Japan, China’s centralized, top-down, stop-go system is unsuitable for effectively reaching and slowing all parts of their country's economy with equanimity; and lastly, because, while China seems to be trying to emulate the United States in the way of growing a large middle-class through real-estate ownership, China does not seem to fully realize that the real-estate market in the United States functions (cough-cough) as well as it does largely in part because the US is run via democracy.

Although much of what I am purporting is theoretical in nature and likely will not work itself out in the real-world for many years, it is nonetheless worth considering the possible ramifications of a country adopting an economic system from another country whose political governance is not only contra-stance to its own, but is indelibly linked to a history of oppression and harsh rule and law changes. The United States, for all of its ails, was conceived through hundreds of years of subtle, evolving, organic and natural "progress" that is inextricably tied to the democratic constitution that makes all of its citizens equal in a way that is not possible in communist China. A government that is truly of the people can only be modified in a significant way by the people and through an extremely resistant process (consider, for example, Byrd Rule), whereas with a totalitarian regime, he who giveth can taketh away. For better or worse, these facts leave those who invest in real-estate in the United States and those with similar investments in China with very different levels of risk. The individuals governing China seem to want the best of both worlds for themselves without reconciling that to get the “best of both worlds” they must relinquish some of their control and establish a system that more or less runs itself. For capitalism to work, every individual that belongs to the relevant society must believe that they not only have the ability to achieve capital appreciation, but that the appreciated capital is safe from confiscation and government interference. (*Side note to readers questioning the assertions being made here regarding variant liberties of the US vs. China: this post will not even be accessible from Chinese IP addresses--indeed, a few months back when Google stopped filtering its results in mainland China, we at nospoonblog.com learned that, like most uncensored content on the web, our blog was (is now again) blocked. In fact, it was impossible not to know it was blocked since, on the day Google announced it had stopped filtering results, the traffic on our blog--specifically for FB's post on Tiananmen Square--increased by a whopping 520% in one day, and then abruptly returned to our average once Google announced that they had been forced to resume filtering and were pulling out of the country.)

I suspect we will see a lot of discontinuity in policymaking over the next few years, especially in the Western World, amid lots of panicking and last ditch efforts to save the world from financial Armageddon II. Meanwhile, during the same time-period, Beijing has grown increasingly worried--and rightfully so--about signs of overheating, and after trying unsuccessfully to pare growth carefully, it has given up the scalpel and brought out the sledgehammer.
This is very significant, because private property in China is a very new concept and it is growing into a very significant portion of China's economy. To underestimate the significant unknowns involved in a country/culture that is thousands of years in the making, is a grave mistake. Indeed, the history of financial cycles itself has changed dramatically during the past 200 years. During this relatively short time period economists have begun to think of the ups and subsequent downs as part of the same process (as opposed to viewing them as emergent consequences of external shocks, such as war or famine). For those interested in learning more about modern thinking on the subject, the Luwig Von Mises Insitute has an excellent article on the business cycle in general and how the subordinate cycle of credit expansion and contraction effects it. This is super relevant to the subject of this post because the birth and growth of the United States, and of its private real estate sector, largely coincides with the inflection point that marks the changing views of the financial cycle. One of the first published acknowledgements of credit cycles in relation to their impact on the greater economy was the 1838 edition of the Encyclopedia Americana where under Credit it states: “The history of every industrious and commercial community, under a stable government, will present successive alternate periods of credit and distrust, following each other with a good deal of regularity.” Clearly this is true in the United States, but we are witnessing more and more evidence that a similar ebb and flow is beginning to make its way east with China experiencing its own periods of credit lust followed by distrust. The two key differences being 1) the fluid complexity of the U.S. political and economic system incorporates self-governing checks and balances that do not exist in China, which allows the US economy to be a living, organic creature that is not so much controlled, but rather guided; 2) due to the self-governing aspects of the US system it is very difficult (though not impossible) to successfully blame a single governing body, institution, or other entity for the ails that may result from the credit contractions that inevitably occur.

I fear that the financial high that many involved in China's economy are experiencing will soon reach a level of intoxication too powerful for those same individuals to feel the ground beneath their feet. Indeed, the credit boom that has been building in China during the past decade is looking more like a tsunami than anything we've seen in the U.S. Some might ask, "who cares? What does that have to do with us?" It has everything to do with all of us. Long gone are the days when nations effect only their own economy and perhaps their most proximate neighbors. Globalism is no longer a buzzword: It is real, it is powerful, and it is here to stay. We need only look at the domino-effect that the small country of Greece (with a GDP of $356 Billion) is having on Europe and the rest of the world to begin to see the potentially catastrophic ramifications of the world's third largest economy (China with a GDP of $4.3 Trillion) slowing or expanding "too rapidly," a phrase whose meaning in relation to China we do not really have the tools to measure. We are in unchartered waters regarding the intricate interconnectedness of global economies. Meanwhile, the rules, laws, and politics of these countries do not have the equivalent international reach as do their economies, which in turn creates an intriguing albeit awkward intimacy. Thus far, such a relationship, with both countries' inextricably connected mutual interests, seem to be inspiring diplomacy and stability. Still, it is important to note that although some economic ties have been strained during the past several years due to the global financial mess through which we currently find ourselves muddling, we have not witnessed (and hopefully never will!) a situation where a political leader of either country has attempted to dictate or mandate policies or laws of the other directly.

... that concludes Part 1. Part II of this post will focus almost entirely on the very particular nature of property rights in the United States. For those who cannot wait, I urge you to pick up a copy of James W. Ely, Jr.'s thoughtful book on the topic The Guardian of Every other Right: a Constitutional History of Property Rights.

Enough is Enough. Time to Get Real BP (and that Means "Honest")

A Catalog of the Long-term Implications of the BP Gulf Spill

Enough time has passed at this point that as a national and global society we need to consider the worst case scenarios regarding the BP oil gusher. When the top energy adviser to the White House, Carol Browner, says in a live interview “This is probably the biggest environmental disaster we have ever faced in this country,” (CBS’s “Face the Nation”) and the situation is getting worse not better, it is necessary to consider the long-term implications of simply allowing a morally corrupt corporation remain in control of fixing the (ongoing) mess they have caused.

In a worst case scenario Browner explained , "There could be oil coming up 'til August [and…] we are prepared for the worst." The worst case scenario, of course, would be that the gushing well is not able to be capped at all and we will all be forced to wait until BP is able to finish drilling the two relief wells they began working on several weeks ago. As far as I know, however, that does not necessarily mean that the oil will stop leaking completely though either, merely that the pressure pushing it out will be relieved (hence, "relief well"). If I am misunderstanding the net result of this operation and an expert in the field can explain what I am missing, “There is No Spoon” would love to learn a thing or two in the comment section of this post.

Seriously though, have not we been trolled enough already by “Beyond Petroleum?" I think it is time that government resources be used more judiciously and the bill slapped on BP’s treasury desk. In fact, I couldn’t help but think about Bush’s Mission Accomplished fiasco--I mean speech—back in 2003 regarding the successful end of the US-Iraqi war (for those who don’t know, our men and women are still over there).

Please do not get me wrong, I am not so naïve as to think that during the first few weeks after the explosion, the execs at BP headquarters would have been so quick to tell the truth, (i.e. admitting that they didn’t have a clue and needed help from the US government as soon as possible). That is just not how the world works, as the Oil Giant’s biggest investors would be skinned alive if Virgil were to come loose so early in the crisis--don't forget how many politicians have money in oil either (a la Cheney and Co). They needed to buy time. Okay, fine. I get it. Yet, by May 10th we were on our 6th attempt at solving this issue having already been told that the big steel box thing-a-ma-bob contraption was going to work--then it wasn't going to work--uh, uh, yes it is--nope Terry farted again, it isn't. On to plan F comrades: let's stick a 4-inch pipe down the busted steel well pretend like that will siphon off enough oil to call it progress. After three days of failed attempts BP Says Latest Scheme to Halt US Oil Leak Working Well. In fact, if you watch the video on that BBC page you will very quickly be under the impression that all is solved and we can all go home for "it has succeeded," claims the reporter. “Significant amounts of oil [were] being siphoned via this mechanism.” The next day we learned that "BP, is finally getting a handle on stemming the tide of some of the leak. BP engineers have used a pipe fitted into the leaking well head and have been able to divert some of the oil up to the surface to a drill ship." At the time of reading this, I turned to my partner and asked, "Does that mean that if I turn a flashlight on at midnight it's suddenly almost dawn?" On May 19th we learned that the pipe had freezed up due to ice crystals and was no longer having an impact.

On May 26th BP’s effort to plug the hole with “junk and mud” was going as planned

Then it wasn't.

Then BP's Junk Shot wanted not.

Today, June 3, 2010, we learned that the company finally cut the pipe and is preparing to cap it. As a result the stock climbs 5% while the rest of the market goes up less than half a per cent.

For the record, I would not be nearly so hard on the Execs if “[they] really [were] doing everything in their power to fix this thing,” but they just aren’t.

So enough bitching and moaning on my part, I just wanted to refresh my memory a bit on what has gone on thus far so that I might begin to understand what we can expect from this ugliness moving forward.

First, BP will most definitely not go bankrupt. I expect the company will be much smaller in 5 years or so, but after 101 years of paying fines, British Petroleum has figured out how to work the system and then some.


Second, the nearest state to BP's gushing undersea well (42 miles away), Louisiana, has been the most impacted by the spill so far, and as we all know the aftermath of Hurricane Katrina and the horrible response of the then President is ongoing. Unfortunately Louisiana’s pains are about to get more acute as Governor Bobby Jindal said this week that "more than 100 miles (160 km) of Louisiana's 400-mile (644 km) coast had so far been impacted by the spilled oil. State officials have reported that “sheets of oil” are wrapping the precious wetlands and seeping into marine and bird nurseries, not to mention the oyster beds that serve as the economic motor for many small communities there. Sticky sludge stains cover the marsh cane that binds the wetlands together and promises to endanger the wildlife for quite some time.

In Mississippi and Alabama, “tar balls and surface sheen,” have been reported, while last week National Coast Guard officials spotted tar balls on some beaches in the Florida Keys, raising fears that the Loop Current, which sends water and wild life from the Gulf of Mexico through the Florida Straits may have already brought oil from the spill far to the southeast. Apparently, however, laboratory tests subsequently showed the tar balls were not from the BP spill. (Where else would they be from?) Perhaps what is more scary, however, is that Pensacola was reportedly struck by the rich black goo yesterday, drawing the possibility (illustrated in the simulation embedded in the previous post) that if not contained very soon, small bits—followed by heavy streams—of oil could find its way as far north as North Carolina.

DERIVATIVE IMPLICATIONS (more detailed analysis of the impact of the BP oil spill)

FISHERIES— Having declared a "fishery disaster” in the seafood-producing states of Louisiana, Mississippi and Alabama due to the oil spill, the US government has made these states eligible for federal funds to offset the impact on fisherman and their communities of the oil pollution in their fishing grounds.
Louisiana's $2.4 billion seafood industry supplies up to 40 percent of U.S. seafood supply and employs over 27,000 people.

The state provides more shrimp, oysters, crab and crawfish than any other state in the country and is the second-biggest U.S. seafood harvester. As of Friday, the NOAA extended the area closed to fishing in the Gulf of Mexico to 25 percent of Gulf U.S. federal waters—an area covering 60,683 square miles (up from 20 percent previously, with a warning that more closures should be expected. Mind you, all of these economic effects are for a single state, currently receiving a lot of attention. I can only imagine the more subtle effects of this crisis.

WILDLIFE
As reported, Oil—in thick sheets, surface sheen and tar balls--has come ashore in Louisiana wildlife reserves like the Breton National Wildlife Refuge in the offshore Breton and Chandeleur Islands, and the Pass-a-Loutre refuge further to the south. Large amounts of methane gas has also been released from the source having an unseen/unknown impact. However, during the 43 days since the spill started, wildlife officials report that 491 birds, 227 turtles and 27 mammals, including dolphins, have been collected dead along the U.S. Gulf Coast, according to an update released on Sunday by the oil response unified command.

TOURISM
Tourism operators in Louisiana, Mississippi, Alabama and Florida-- from hotel owners to restaurateurs and boat charterers -- have reported cancellations as a result of the oil spill.

From HotelNewsnow.com we learn that “Tourism officials and hotel operators in Gulf of Mexico coastal regions say they are struggling with occupancy and reservations, but some areas are suffering more than others.”
[…]

We have had some cancellations. It is hitting the beachfront properties hard and the casinos have seen some impact … and the charter boat companies,” said Richard Forester, executive director of the Mississippi Gulf Coast Convention and Visitors Bureau in Biloxi. The timing is unfortunate, since many hotels and casinos had been experiencing an uptick in business earlier this year as the U.S. economy started to improve, he added.


SHIPPING

The National Oceanic and Atmospheric Administration said on Friday it has begun surveying a new ship anchorage site at the mouth of the Mississippi River for ships to undergo inspection and oil decontamination before entering ports. This is a subtle if significant development as we are beginning to see the outlier impacts of the BP spill moving forward.

U.S. authorities are anxious to sustain Gulf shipping operations as the Mississippi Delta is extremely vital to U.S. exports and imports. NOAA says the Lower Mississippi River ports export over 50 million metric tons of corn, soybeans and wheat per year, more than 55 percent of all U.S. grains inspected for shipment.

REAL-ESTATE
If the bursting of the housing and commercial real estate bubble wasn’t weighing on the real-estate already, it is hard to believe that anyone would desire to buy up oil-front property. This particular point might seem far off at the moment, but remember that the source of this oil is over 1 mile below the surface of the water. It will take time, even after the oil well is successfully and completely capped, for all the oil that comes out, to find its way to the surface.

OIL INDUSTRY
There is likely to be a significant impact to the oil industry moving forward for a number of reasons. The most obvious will be the immediate cost to BP to clean up the physical mess—estimated by Credit Suisse to be 37 Billion—but that does not include what it will take to repair their image after this colossal crisis. The expectations of these profit losses has not only brought down BP’s market value, but the entire oil industry as it is a major component of the S&P500 and nearly all energy indexes. Also weighing on the industry are expectations of new costly regulations that will be put in place to make sure this never happens again. The end result amidst a continuing debt crisis in Europe is more strain on an already weak recovery.

Interview with Eric Spott About Economies Around the World

Awesome interview on BNN with Eric Sprott, chairman and CEO, Sprott Asset Management explaining his view and research concerning the World's biggest economies (China, US, and Europe) talking specifically about the Flash Crash that I wrote about a few weeks ago. He's a very articulate speaker and really does a good job bringing some very complicated topics down to earth. A Must watch!

http://watch.bnn.ca/#clip304447

European Union Engaged in 25th Hour Rescue of the Markets: Obama Overseas to Show US Solidarity with Europe Against Speculators

Wow, its a busy day for political-economic news. This time I get to report about stuff being published in real-time Germany. Note* in most of Europe right now it is nearly midnight so these are not ordinary proceedings. Having lived in Germany from 2007-2008, I picked up enough German to be able to provide you with a translation of a just released announcement of a coordinated move on the part of the 16 member block of European countries that share the Euro as a common currency. Apparently, the euro countries want to defend their common currency against speculators with an aid package amounting to €560 billion against speculators. The EU countries are rumored to be putting finishing details on the program, which should be announced on Monday morning (a live webcast in English should be available at http://video.consilium.europa.eu/index.php?pl=&sessionno=2899&lang=EN when the time comes). Either way, I'm expecting it shall happen before the opening of financial markets in an effort to provide some stability (in reality it will probably only cause a short-covering rally if anything at all). According to the German article, it appears that the initial package, which will be given directly to the European Commission, will be for €60 billion, however, in the end they expect up to €350Billion to come from the European Union and €150 to come from the International Monetary Fund. (roughly translated) "The point is," according to comments made by the Swedish Finance Minister, "the Euro is being attacked by a pack of wolves, speculators, who will 'break' the weaker European countries, if they are not stopped." He goes on to delineate "the next potential victims of speculation are Portugal, Spain and possibly Italy. They are testing the Euro Zone's ability to provide an appropriate response."

Apparently, at least according to the aforementioned source, President Obama is overseas and engaged in these last minute arrangements as well.

My thoughts on the matter? All this is well and good, but the stock market is up 78% from its March 2009 lows, and was up as high as 89% before the recent weakness in the market came to roost. Why is it, then, that when the market is out of control to the upside we say "the market is healthy, hurray, hurray! Look at all the good our administration has done." Yet, when the market begins to correct and acknowledges it's over-extended state, suddenly speculators are at fault? Be careful folks. Just as I stated in my earlier post today, when the government meddles in the market, there can be powerful unforeseen consequences that cannot be quickly retracted. If, in fact, this sovereign debt bail-out goes through, watch gold. Gold, as over-extended as it seems to be, it will continue to reach new highs as long as Government's continue to dilute the purchasing power of their currencies.

Retail Traders and Investors get Fleeced by Humongous Banks and Brokers: JPMorgan and BofA Sell High, Buy VERY Low, Sell High Again in Mere Minutes

Thursday's market meltdown and ensuing rally, all of which took place in a matter of 8 minutes will go down as one of the most unethical fleecings of retail investors/traders by the HB&B's ("Humongous Bank & Brokers") in history. Thanks in part (at the least) to high frequency trading algorithms (more about HFT below), between 2:40 and 2:48pm on Thursday May 6, 2010, the S&P500, already down 2% on the day, dropped an additional 6.1%, before dramatically rebounding right back to where it was before the collapse. Of course, the media (namely, CNBC), very quickly (within 2 minutes of this collapse and rebound) came out with "the explanation," that "someone had fat fingers at one of the trading firms, and entered a 'b' for billion instead of an 'm' for million." Give me a break! (See CitiBank Fat Finger, or Stock Sell off May Have Been Triggered by a Trader Error; there are hundreds of additional sources online, just google "fat finger sell-off". Several hours later, conflicting reports out of Fox, SmartMoney, and even CNBC, the source of the original "explanation" came out: Obama Administration Source: 'Fat Finger' Error Didn't Trigger Thursday Selloff and 'Fat Finger' Trigger May be a Myth. ) Again, there are myriad sources that argue in opposition to what I personally believe is an incredibly lame excuse that a single trade at one of the HB&Bs triggered more than $1 Trillion worth of losses and gains in less than 10 minutes (it took 4 minutes for the market to drop and another 4-5 minutes for the market to bounce back to where it was before the meteorite struck).

It is undeniable, however, who benefited the most from this "freak" event. I have managed to get my hands on twenty-five minutes of audio from the NYSE stock trading floor before, during, and after this 8 minute period, which I believe sheds some light on what really happened during the aforementioned time period (nothing short of grand larceny). At the very least, it shows who bought at the absolute nadir of the collapse (Dow -928 points) and sold once the market "returned to normalcy" (Dow -300 points). It gets really interesting just before the halfway point in the audio clip when the anonymous reporter yells: "This will blow people out in a big way like you won't even believe."

Many believe--myself included--that the market does not have the fundamental foundation to support being where it is right now and that it is only at such levels because High Frequency Trading (HFT) or algorithmic trading on the part of hedge funds and the HB&B's have artificially moved it higher taking both the bid and ask prices up in fractional increments so fast that true supply and demand pivots cannot be calculated. In other words, up until several years ago, large stock market transactions required a person to stand up and bid for a certain amount of stock at a particular price and then do the opposite if and when that person or entity was ready to sell. Now, however, with computer trading comes the ability to create a trading algorithm that would trade in place of the person behind the trading account by taking advantage of so-called "inefficiencies" in the market place. This works wonderfully (for the hedge fund behind the computer) when other (mostly retail) investors and traders are willing and able to take the other side of that trade; indeed, it is extremely lucrative under such conditions, which is why when the market is acting "rationally" the HB&Bs are able to rake in the profits. However, when a political or economic event suddenly makes it difficult or impossible to gauge an intrinsic value for the market (the BP oil spill in the Gulf, the uncertainty surrounding Greece's debt problems in the Euro Zone, and the Financial Reform legislation taking place on Capital Hill all qualify) these computer algorithms do not have a counter party to take the other side of their trade and since they are programmed to figure out where inconsistencies exist based on the next bid, they start pounding the market price down until a bid is reached, no matter how far that bid may be. Before HFT, the market would simply have stalled momentarily while the persons behind the trades thought about what was a reasonable bid and ask spread. That moment of reason does not exist with HFT and since it all happens so fast, the market can very easily and quickly feed on itself, igniting fierce downward pressure in market prices that essentially force everyone involved to reevaluate appropriate market valuations. Well, I believe that is partially what happened on Thursday. But wouldn't you know who was available to buy at the exact bottom of this downward spiral, which coincidentally was a few fractions of a percentage points away from the circuit breaker trigger (10% loss) that would have shut down the market for the day: that's right, the proprietary trading desks of JPMorgan and Merrill Lynch (now owned by Bank of America). Just listen to the audio to hear it yourself--note that the recording cracks at various points because of the excitement of the environment. Just keep listening, it comes back.

Computers do what they are programmed to do, and nothing more. If the algorithm behind the trades incorrectly assumes that trading conditions or environments do not change, and therfore does not compensate for "panic" scenarios that inevitably happen in the stock market from time to time, the end result can be catastrophic because the permissions and controls have already been provided to the computer. If you are interested in learning about and discussing the perils of high frequency trading, I highly recommend this prescient post HFT: The High Frequency Trading Scam, by Karl Denninger, which was published on Seeking Alpha two weeks ago.

For those who know what a stop-loss order is, suffice it to say that pretty much every stop order that had been placed prior to this event was hit. For those who do not know what a stop-loss order is, essentially what it amounts to is a great number of individual traders and investors were forced to sell at very low prices, which only became trades in the first place because the algorithms were instructed to "find the next lowest price"--period. Furthermore, it happened so fast that those who were bright enough to figure out what was happening did not have enough time to react.


UPDATE Sunday May 9, 2010: A plethora of news syndicates have finally reached past the implausible "fat-finger" excuse and are actually doing some critical thinking into the matter. Fortune Magazine Online just published an article dissecting what they believe are the most likely possibilities for cause of the flash crash of May 6th, but only after first reiterating my thoughts above:

The fat finger. Plausible, but very unlikely. Typing in billions with a "b" versus millions with an "m" seems impossible. Trading systems don't work that way. More likely, the trading system accepts the sell/buy amount in thousands. Some trader in the heat of the moment forgets it's in thousands, types in an order for 16,000,000 instead of 16,000. That kind of thing seems far more plausible.

Check out the article for more.

Plutocracy, Complacency, and Taxes

I am growing ever more fearful of the plutocracy that is ravaging the spirit of my country and the pride of my people. Much like a cancer that has quietly metastasized undetected for so long that even chemotherapy is an unfeasible option (perhaps a lack of health insurance prevented preventative check-ups—God forbid they pay out of pocket in time to learn they cannot afford to pay for treatment!), I believe the governing system of America is so inflicted and full, not so much of corruption (although that is also true), as much as incoherent and therefore unenforceable rules and regulations, that it will inevitably implode and take the country--if not the world--with it. (Please note, as someone who has experienced the horror of watching a loved one succumb to cancer that went undetected until it reached stage-4, I am aware of the implications of this analogy.)

The intensity of economic inequality that has swept America and enslaved the ethos of its people is such that I no longer believe that a gradual structural revamping of the system is possible; the only way out of this mess is to hit the reset button or wait for nature to do it for us. What, exactly, it means to “hit the reset button” is surely a question worthy of significant attention and discussion, but suffice it for the purposes of this blog entry to say that some kind of major and immediate structural change—regulatory or not—resulting in a major redistribution of a significant portion of the wealth of the top 5% of Americans to the remaining 95% is necessary or we are doomed to suffer a civil war, another third world war, or both.

Before I enter into an endless filibuster with those who think they represent (or some day will)—and therefore feel the need to defend—the top 5%, permit me a few more moments of your time. First off, by the laws of probability, you most likely do not and never will represent the top 5%. Truly, one of the greatest illusions propagated by American plutocracy during the past 50 years, is the Reaganomatic three-class system. Apart from the fact that “upper class” sounds oh so much better than “rich” and “lower class” better than poor (albeit still a denigrating term), the fact of the matter is that socially, economically, and thus residentially, American society is divided and subdivided so completely and thoroughly that one can hardly maintain candid awareness of their place within it. I believe many individuals actually prefer it this way; as it is more palatable to trade away our consciousness than to accept that within the context of the actual, far more variegated, stratosphere in which we exist, the majority of us are really pretty damn far from the top, not “2nd best”, as our acceptance of “middle class” status would have us believe or even “upper-middle class.” There is plenty written on this subject so I defer to the Ackerman’s of the world for those that want to isolate discussion to Reaganomics. As for me, I am passed that as I think it is more pertinent to note that the average tax rate of the wealthiest 1% fell to its lowest level in at least 23 years in the year 2000 and has been maintained at such a level for 9 years. The group's share of the tax burden has risen, but only because its share of income has risen faster. This painful fact is only possible because over the past hundred years this group has had their taxes gradually lowered from 70% in the 1920’s to the current rate of 35% (I’m ignoring of course the Eisenhower time period in which they had a 90% tax rate because of the need to fund the war). [More on this topic can be found at: www.heritage.org as well as the IRS's income-statistics website.] The compounding impact of the increased wealth of the top 1% (you can use 5% if you prefer) creates an increasingly unfair playing field as these extremely wealthy individuals are provided with much lower risk opportunities to multiply their free and available money that unlike the “middle class” is not being tied up by liabilities connected to basic necessities. Yet, our regulators have not only accommodated the wealthy (forget for a moment that many of them belong to this privileged group), they have actually made it exponentially easier to compound their wealth.

It is important to note here that the word “wealth” is often confused with “income.” As noted in Wikipedia: “These two terms describe different but related things. Wealth consists of those items of economic value that an individual owns, while income is an inflow of items of economic value. The relation between wealth, income, and expenses is:

change of wealth = income − expenses

A common mistake made by people embarking on a research project to determine the distribution of wealth is to use statistical data of income to describe the distribution of wealth. The distribution of income is substantially different from the distribution of wealth. According to the International Association for Research in Income and Wealth, "the world distribution of wealth is much more unequal than that of income.

Two important points need to be extracted and highlighted here: first, the wealthy do not grow wealth-y by spending their money, they do so by hording it or by having such a disproportionately large income compared to that of the rest of the individuals in society that they cannot spend it all without gratuitous effort; second, the more wealth an individual has sitting in appreciating assets, especially those that pay dividends, the more powerful the compounding effect of such wealth becomes, allowing such an individual to take from the economy without producing an equivalent worth of production.

Thus, without voluntarily giving back, or being compelled to give back (via taxes for instance) an amount of that money proportional to the amount of energy that created it, the said wealthy person is essentially sucking net value and currency flow from the economy, thus defeating the two purposes of using a currency system in lieu of a bartering system, which was intended to facilitate the transfer of value (and individuals net production to society) over space and time. Does that mean that we should get rid of interest rates and capitalism? Absolutely not! I have a retirement account and I completely agree that those who have the prudence and gumption to endure short-term pain for long-term gain (my definition of “investing”) should be rewarded. What that individual is giving up (and it is not merely the unit value of the money, but the comforts that such money could have provided) allows for multiplied production. At some point, however, an individual’s wealth is so great that he endures no pain whatsoever, and hence could not possibly buy any further reasonable comforts, yet he is rewarded as if he has given up an incredible amount for the good of society.

Apart from forcing the wealthy individual to give back, what else can be done to return balance to the economy? We could cut expenses. Certainly excessive and unnecessary public spending should be avoided as it ultimately causes the same concern as the previously described super wealthy individual, the money controlled by the government is granted to them under the pretense that if combined it will be able to provide a quality of life enhancement that in general is greater than the pain caused by taking it from the individuals for whom it belonged.

I can already hear someone in the back of the room yelling, that’s exactly why the wealthiest 5% should not have to pay their money into the pot since they do not utilize public resources. Such a skewed perspective is how we got to this point to begin with. Lloyd Blankfein may never need to use the Metrorail system, but 95% of the persons that are somehow connected to the success of the company he runs do (think pension funds) and will continue to depend on public investment. Out of sight out of mind, I guess.

We live in a society in which everyone is convinced of two seemingly connected but really very separate things: one can achieve anything in this world if one wants it badly enough; and the wealth that one has is the result of one's hard work--hence, you’ve earned it. One does not magically result in the other, especially when one thinks of, say, Paris Hilton. Such ideologies allow the wealthy to feel like they are entitled to the disproportionately easy living they have and the un-wealthy believe that the energy they are transferring to the wealthy is just part of the due-diligence process at the end of which they will some day enjoy the benefits of a role reversal. The misdirection lies in the fact that very, very, seldom, if ever, will roles actually be reversed. Sure, it is quite likely that our un-wealthy worker will one day meet another hardworking individual with even less wealth than he, but that does not mean that roles have been reversed. The flow of real wealth, the flow of real power and of economic value in America is for the most part unidirectional and exponential. Furthermore, since it is customary to inherit one’s family wealth, it is not at all obligatory for an individual to produce their wealth’s worth of production.

Continued denial of the state of disequilibrium in our country will only bring us to an ever more painful inevitability. What happens when the masses stop believing? Worse, what happens when those who stop believing begin to mobilize? A friend of mine recently told me that he does not believe in recessions, that they are merely the result of people resting on their laurels after a period of time in which things came to easy. He went on to say how he was at Target and was waiting in line for so long (because there weren't enough employees) that he just put his stuff down and left. He said, on the way out he saw a "we're hiring sign" on the door and continued with a smugness that made me question if he was the same person I played t-ball with as a kid 25 years ago. All I could think to say to him was "the other possibility is that the cost of living has increased so quickly relative to wages that in the end it's not worth working at all." He was disgusted with my response, and as someone who has held multiple simultaneous jobs for most of my life, I wasn't sure I believed the words coming out of my own mouth. Then my 23-year old brother called me to tell me he had quit his job because after subtracting the cost of commute (two hours a day), taxes, and other basic job-related expenses he was working for $4.90 an hour. How can anyone believe in the "American Dream" when they work their ass off for $4.90/hr during one of the worst recessions in history while the front page of the newspaper reads: Goldman Sachs’ profit and remuneration soars?