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Banbury Cross

a pillow for lost thoughts...

Archives for: February 2009

Send in the Clowns

On the unpolished dancing parquet of life, tragedy and comedy often find themselves entangled in awkward embrace. The recent samba that the stock market shimmies on the edge of a bottom less abyss certainly has its tragic overtones, but at the same time, it lures many an amusive clown out of his financial abusement park.

Exhibit 1:

Chairman Bernanke to Committee on Banking, Housing, and Urban Affairs, U.S. Senate, April 3rd, 2008: "Clearly, the U.S. economy is going through a very difficult period. But among the great strengths of our economy is its ability to adapt and to respond to diverse challenges. Much necessary economic and financial adjustment has already taken place, and monetary and fiscal policies are in train that should support a return to growth in the second half of this year and next year."

So this is what our Supreme Monetary Leader and the Most Enlightened Prophet of Profit had to say in April 2008, roughly six months before all this anticipated "growth" turned into one of the deadliest stock market crashes on record. With the benefit of hindsight, it looks like the Central Bank pulled off its own production of Katrina.

To begin with - I am not entirely sure why the interest rates have to be set by a fraternity of bearded shamans, when the market - representing thousands of minds thinking day and night about both intended and unintended consequences - would have done the same job much better. But hey - all men need their toys. So if they want to tinker with the monetary policy in the Hallowed Halls of their Marble Shanty - sure - let them divine the lending rates from whatever combination of tea leaves and cow entrails they use. What truly puzzles me about our Chief Interest Rate Calculater is something more fundamental.

Why do we expect this myopic man to lead us out of the current crisis? There were legions of well informed economists who saw the train wreck coming years before it hit. Yet you don't hear them bearing on the pronouncements coming out of the Treasury Department. When it comes to pulling our economic cart out of the rut, we are relying on the harum scarum judgment of those who stubbornly pooh-poohed the implication of the subprime mess until it blew literally in their face. Short sighted people with blurred vision do not usually turn into excellent rescue workers. How about someone connected to reality? Someone willing to offer more than printing sky high stacks of money.

And why on Earth or any celestial body for that matter do we listen and fawn over economic predictions of the man with such disastrous foresight? Why is his every gargle during the Congressional Testimony being scrutinized as if it came straight from the throat of Nostradamus himself. Why are his statements still adorning front pages of financial sections of major newspapers. Why is CNBC not calling Adam Sandler or Paris Hilton about their recent musings on economy? They could get much more accurate predictions. And why not drag out that Pennsylvanian Groundhog out of its burrow while we are at it? It has a pretty darn good track record on weather. I am actually very curious what is Punxsutawney Phil's Phinancial Philosophy. Its final verdict would look great next to the horoscope section of the Wall Street Journal, which is where all economic prognostication belongs anyway.

Exhibit 2:

"If I'm working 70 to 80 hours a week, it's only fair - I'm not asking for charity," said Jose Felix, 30, a Wall Street securities trader who wouldn't name his firm, but was steamed over Obama's declaration on Thursday that the $18 billion in Wall Street bonuses was "shameful" amid the economic crisis.

Apparently, the harrowing experience of repeated haircuts hadn't quite opened the eyes of the Wall Street bozos. Their brash sense of entitlement and absolute lack of contrition would astound even the most contumelious of Leprechauns. How difficult is it to understand that if your firm loses billions of dollars in operations, then you do not deserve any bonuses, no matter how hard you work.

There used to be time when money was earned for creating something other people wanted, not by conjuring up financial pyramid schemes. Sure, the business model looks cute: as the market bubbles up, you reap fat profits, and when it crashes down, you put on your begging hat and come knocking at the taxpayer's door. But on a closer scrutiny, that sounds a lot like the business model of a common thief. In both cases money moves from person A to person B without the consent of the former.

But tell this to Mighty Traders. They live in a parallel Universe. In its Outer Space, they still fret over the tones of their Zanetti ties while they should really be concerned with the matching leg irons. And the argument for the retention bonuses as a way to keep "talent" in the house comes from an even more far fetched spiral of their convoluted little Galaxy. What talent?? Pray tell. These guys messed up. If they go elsewhere, good for us, let them go, maybe the AIG will regain its consciousness. In the meantime, go hire a school of twenty somethings straight from the college. They may still remember some basic economy, and they most likely haven't caught the deadly Master of the Universe virus yet. So if they make couple of mistakes, no big deal. Instead of losing billions we will ONLY lose millions.

But all this tomfoolery puts me in a thinking mode. Maybe I should start a company that will make mathematical models predicting the chances of afternoon showers in Ulanbatar. My sophisticated state-of-the-art models will be based on non-linear regression, differential topology, current American Idol standings, the probability of a nuclear conflict between Norway and Sweden, correlations of planetary positions, baseball scores, pork belly sales in Lower Saxony, and the number of shoes in Jennifer Aniston's closet. I know, I know - it doesn't make much sense. But you know what - I am going to work hard on it for 70-80 hours a week, so I surely deserve some remuneration for it. Never mind that my little scheme does not produce any value and my business will probably convulse far from a thriving or even self-sustained state. But I say, together with papa Descartes: I work hard, therefore I am (entitled to gazillions of dollars). And when the enterprise goes bankrupt, as it inevitably will, I am simply going to ask for a taxpayer bailout. I am sure that the esteemed members of the private sector will find it in their heart to mail me a hefty bonus check.

This brilliant idea should push some really wide smiles onto faces of Wall Street clowns.

clown

Interest Rate Haiku

The Internet bubbles with information, so when I need to make some sense of the highway robbery currently in progress in the financial district near you, I turn to its blogs for education and opinion. Naturally, I prefer authors with integrity, prescience and a penchant for critical thinking, those who don't change their cheerleading chant every month, like so many Monday Night Quarterbacks of the mainstream media (soon to become Dimebacks). Their incessant pimping and pumping would make you think that magic amulets became the latest rave of financial forecasting.

My favorite blog, Mish's Global Economic Trend Analysis, is written by Michael Shedlock, an investment adviser for SitkaPacific Capital Management. It is an erudite and well written guide through the labyrinth of contemporary economy, covering many of its intricate facets, without pushing any particular assets. Over time, a colorful and knowledgeable community gathered around the blog's comment section, where many investors, weathered and green alike, offer their views about the near term fate of the Dow Jones Industrial Waterfall. Since I can't predict the direction of the stock market any better than that of a drunk sailor coming off a spinning wheel, I comment only sporadically - just a few lines here and there - under the nickname "interest rate haiku".

Haiku is a traditional form of Japanese poetry, an idea condensed into three metrical phrases of 5,7, and 5 syllables respectively. Due to its extremely terse format, it is an antidote to the longwindedness of modern parlance, it is a mere reflection of a thought, a flitting spark of an image pushing its way through your mind, a snippet of an old familiar song that you catch in a car while you dial through the range of your radio. Haikus can be a tricky business, kind of like landing a private airplane on a town square, but to a true minimalist they offer a neat literary vehicle - seventeen syllables of heightened awareness, whose every single word must be self-conscious and arrogant at the same time. And best of all - they produce no intellectual waste - they are the greenest form of poetry.

Here is a dozen of haikus I wrote over the past three months, in reaction to various articles dealing with our economic plight.

=======================================

nov 15 (on assurances that financials are not crashing)

gin and ice for all!
hollered the twenty stewards
on board titanic

nov 16 (on futility of living off bubbles)

bubble gum bubbles
so fun to inflate...but boy
they stick to your face

dec 2 (on auto execs coming to dc for a bailout)

down under the hill
three stooges opened the hood:
where is the engine?

dec 8 (on market experts not seeing the obvious)

when the good times roll
everyone is a guru
emperor's tailor

dec 17 (on the incipient bubble in treasuries)

treasuries island:
long john silver ponders gold
is this my black spot?

dec 18 (on Japan's decade long efforts to revive their economy)

X trillion yen
and all you find in your pot
is tiny bonsai

jan 5 (on attempts to reinflate the credit bubble)

never ending smiles
much like credit expansions
lead to muscle cramps

jan 13 (on the pension funds implosion)

old men and the sea
your pension marlins go to:
the sharks of wall street

jan 22 (on execs of failing firms buying expensive furniture)

bed in jail - ten bucks
seeing the fat leeches squirm
behind bars - priceless

jan 26 (on dangers of lurking socialism)

Government spending
and perpetual motion.
Pass the weed, Lenin

jan 31 - (on attempts to prop up the housing prices)

ruthless pendulum
no country for old bubbles
now call it, friendo!

feb 16 - (on the pork laden stimulus package)

in lieu of big dreams
burger we can believe in
subprime stimulus

One Miracle A Month

If you are bewildered that every now and then life tosses you a little bone in the form of a miracle, you are not alone. British mathematician John Littlewood noticed that too, but instead of puzzling over it he went on and calculated how often on the average we should encounter highly improbable events in our daily lives. He defined a miracle as a rare occurrence whose likelihood is less then one in a million. Then he simply estimated how many events a regular person experiences every day, figured how long it would take to accrue one million of them and came to the conclusion that once every 35 days or so we should happen upon a one-in-a-million event. Think of it this way: if the chances of you winning a lottery are one in a million, then buying a million tickets makes winning a lottery almost a foregone conclusion. If we translate Littlewood's statistical prestidigitation into plain English: we are allotted roughly one miracle per month!

A few months ago, Australians came up with a really crazy idea to promote tourism. They created a position of the caretaker of one of their tropical islands (billed as "the best job in the world"), and offered $100K for 6 months of lazying around palm skirted beaches, exploring the Great Barrier Reef and sharing the resulting shark stories with potential tourists all over the world. All you had to do was shoot a short application videoclip, and the free ticket to Hamilton Island would be yours, with a generous compensation package and keys to a five million mansion to boot. Mango flavored lollipops not included.

Considering that roughly 35,000 applicants sent in their video, winning this job would qualify as a miracle in its own right. But my decision making cerebral cortex has a long standing policy of "No crazy idea left behind", so I talked one of my friends into recharging his camera and dragged him to a nearby Roosevelt Island on one cold February weekend to shoot the application clip. We don't really have any Hamilton islands in Northern Virginia, so I figured that Roosevelt's would be my next best shot in proving to the Queensland Board of Tourism that I am capable of existing on an island that bears a great name from American history (a subsequent research revealed that Hamilton Island is actually named after one of the officers of the HMS Salamander, the British ship that first landed on the island).

Roosevelt Island, located on the Potomac river just across from the Kennedy Center, is a small natural preserve accessible by a short walkway bridge from George Washington Memorial Parkway. The Teddy Roosevelt monument that gave the island its name is fittingly drowned in mostly uncultivated woods, so we found plenty of natural scenery to use as a backdrop for the videoclip. The island itself is rather small and with the possible exception of strolling loan sharks, does not abound in any particularly dangerous wildlife. Its trees are a different story though, and most of them seem to have an affinity to internal rotting that often leads to nearly spontaneous disintegration. The floor of the island is littered with rotting stumps and fallen tree limbs and with a particularly bad timing you could easily incur a tree induced bump on your head, maybe even a concussion.

We were shooting the second segment of the video, when something unusual happened. Without any help from wind or an overweight squirrel, the upper part of one of the trees broke off and in a slow motion came crashing down. My monthly miracle materialized right there in front of our eyes, although, sadly, not in front of our electronic eyes. Despite the presence of two video and one digital camera, we didn't catch a single frame of it. Before we could close our gaping mouths, the spectacle was over. What a pity. It would make a great contribution to YouTube.

That is how miracles operate. We know that statistically speaking, they occur with certain periodicity, but we never know exactly when the next one will strike. So the moral of this story is - be prepared. Have your camera ready. Figuratively speaking.

As a consolation prize, I shot one peculiarly deformed young tree that suggested beyond reasonable doubt that a screw is not really a human invention. Putting a helical groove on a shaft is something Mother Nature is perfectly capable of by herself. Or maybe it was just a small snake that fell asleep on the tree and was overgrown by its bark. Whatever the case was, it would be a stretch to call it a miracle. But that's ok, I have time. If Littlewood is right, the next one should be coming my way sometime in late March. I'll have my spiritual camera ready.

screw

Thelma and Louise: the Wall Street Edition

Imagine a bus riding on a smooth paved road. The countryside whizzes by in a comforting monotony, the engine contentedly purs and passengers are busy reading, napping, chatting, watching the scenery or munching on their Doritos. Quite an idyllic journey. But hidden from view, two clouds are looming just underneath the horizon: a few miles ahead the road suddenly ends at a steep cliff and the driver is personally motivated in maintaining or increasing the speed. Let's say that it has been arranged that his base salary is proportional to the reading on his speedometer. The edge of the cliff approaches. The driver could slow down, or even stop (reducing his salary rate to 0), but he could also step on it, and make a good use of the last stretch of the road for his personal benefit. If you wonder why he would engage in such self destructive behavior, let's just say he may have a golden parachute stashed in his side bag and that will spare him the unflattering impact of the ground. But here is the strangest part. Guess who is going to eventually pay for the totaled bus. Yep, you got it: the surviving bus passengers.

As the epic economic disaster unravels, many people wonder why the financial whiz kids on Wall Street didn't see it coming. Well, I suspect that they saw it, but chose to look the other way, as their remuneration was crucially dependent on the ever-expanding credit bubble. Their cold statistical models may have been marvels of risk assessment, but failed to take into account one elementary fact. Just as every Ponzi scheme reaches a saturation point, every credit binge sooner or later depletes the pool of credit worthy debtors and has to turn to lower rungs on the ladder of affluence. Venture capitalists become adventure capitalists and that is when the house of cards starts to tumble. If you need to rush meager-income fruit pickers into 500k homes in order to sustain the housing prices, then you either see what is coming or are monstrously incompetent.

Plenty of voices were warning about the impending catastrophe as early as 2005 - a presidential candidate Ron Paul or a host of independent economists (Roubini, Shedlock, Fleckenstein, Faber) to name just a few. But the economic elites were so infatuated with the cash stream generated by the late real estate bubble that they kept kicking the can down the road, hoping that the laws of economy and common sense will temporarily be suspended. CEOs became heavily invested in their own pipedreams, regulators were lulled into complacence by the glut of good times, managers at all levels depended on the commissions from exotic and poorly understood financial instruments, politicians were happily cashing in fat contribution checks from the whole real estate complex, consumers grew more and more addicted to drinking the lethal credit cocktail, and insurers were insuring away, protected only by the good faith that bad things never happen. They all decided to keep the pedal pressed to the metal as long as they saw road underneath them.

So here we are - dashing down a scree, having lost control of our little bus and not really knowing what awaits us. Will there be a merciful meadow at the bottom, where we tumble a few times and come to a complete halt against a robust haystack or will we hit an unforgiving rock and ruin all that was built by generations before us? Judging by the speed with which the global financial system unravels, we will know very soon.

(By the way, what exactly is the purpose of this global financial system? Can't we just have a transparent network of local banks that take deposits from people and lend money to enterprises with sound business plans?)

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