“But the economy’s out of control. Money just doesn’t need us human beings anymore. Most of us only get in the way”

….

Kevin shrugged. “People lived before money was invented. Money’s not a law of nature. Money’s a medium. You can live without money, if you replace it with the right kind of computation”

Bruce Sterling Distraction (1998)

….

In the world I see – you are stalking elk through the damp canyon forests around the ruins of Rockefeller Center. You’ll wear leather clothes that will last you the rest of your life. You’ll climb the wrist-thick kudzu vines that wrap the Sears Tower. And when you look down, you’ll see tiny figures pounding corn, laying strips of venison on the empty car pool lane of some abandoned superhighway.

Fight Club (1999)

The obvious overture

On October 13, 2008 I wrote Dow to 6500 thinking that the 6 reasons for my thesis were amply pointed to deal with the next six to twelve months. After all the Dow Jones opened that day at 8451.19 and closed at 9387.61 proceeding to rip off the faces of a great deal of bears who had thought that they had the market by the short hairs and were going to keep banking coin.

They obviously forgot Taleb’s Maxim: The market will take the path that causes the most pain to the most traders.

One month and seven days later the Dow gapped down to 7927.27 at the opening and then closed at 7552.29 coming within around 90 points of a thousand points down during the time between those two posts.
First Movement

In the days between market commentary has turned darker changing key with perhaps either their understanding of the impact to their 401k/RRSP investment vehicles or perhaps just because negative news sells.

Paul B Farrell (never one to see a glass half full when he can see it half empty) penned 30 Reasons for Great Depression 2 by 2011 and continues to bring Naomi Klein’s ideas of Disaster Capitalism to the great unwashed masses. (Now that she’s getting published in Rolling Stone, so the more exposure the better right?)

Mr Optimist (Karl Denninger) has become increasingly strident and comments less about the market than his politics of late but his Bush Capitulates post has this doozy:

“This – sovereign debt denominated in other than your native currency – is how a nation winds up like Weimar Germany – or Argentina! We must not issue bonds denominated in foreign currency – period.”

which comes in relation to Japan Economists call for ‘Obama Bonds’ whereby the world’s second largest economy is making it loud and clear that they will not accept the repayment of US debt they hold in de-valued currency.

And they note that the [[UUP]] is about to go south:

“There is no wonder the dollar will weaken,” said Eisuke Sakakibara, Japan’s former top currency official and now a professor at Waseda University. “The dollar now looks strong for a technical reason. The money the US financial firms had invested in the world is being repatriated into the homeland, causing dollar-buying. But once this conversion into the dollars is done, the currency will head south,” Sakakibara said at a forum in Tokyo on Sunday.

Oh – and by the way – Japan is selling as much US debt as it can, mainly to the Chinese it would appear.

Karl’s “final word” on the subject of foreign held debt goes like this:

If foreigners do not want to buy our debt then we must cut back our government spending until they are willing to do so.  But we must not, under any circumstances, issue Treasuries denominated in the currency of another nation. Down that road lies the ruin of our nation and monetary system - with certainty.

There are two problems with his market nationalism:

1. Who do you think payed for the tax breaks in 2002-3 and the stimulus cheques?

If anyone thinks that the overloaded, deeply in debt American government did (as a proxy for the American taxpayer) then then they need to start making plans to reconnect with reality. One need only examine the amount of debt that was issued and who bought it to understand who financed those adventures in American politicking.

2. Carter Bonds

Check it – Jimmy Carter had to do this as the first real administration after Nixon’s decided to move the US off the gold standard. The US didn’t implode then – it wasn’t pretty but and yet,  it did work.

The fact is that everyone is getting a little nervous about the viability of the US debt. Naomi Klein argues that it will be that very issue which will cause the cessation of most of the social support in the US but the fact remains most anyone that was born after 1960 in the States probably has never had any real expectation of the social system working for them in their old age. Now that the debt is far greater than that hodge podge of systems, is there any real reason for the Stars & Stripes to keep it’s AAA rating?

Second Movement

Ah, the American Auto industry. As authentic a piece of Americana classica as one could ever encounter. Unfortunately for them – they didn’t innovate, they stagnated – hesitated, failed to cogitate and now they attempt to lobby others to legislate on their behalf.

Again Bruce Sterling in fiction form presents the automotive industry’s classic mindset against innovation:

“You think it’s easy running corporate R&D? it was just fine, as long as the guy didn’t have anything. Jesus, nobody every thought a goddamn sugar engine would work. The goddamn thing is a giant germ in a box! We build cars up here, and we don’t build giant germs! …. We’re a classic, metal-bending industry! We have interlocking directorates all throughout the structure, raw materials, fuel, spare parts, the dealerships… We can’t get into the face of our fuel suppliers, telling them that we’re replacing them with sugar water! We own our fuel suppliers! It’d be like sawing off our own foot!”

If one was to replace the idea of a sugar engine in the paragraph above with anything like electric or even super efficient engines – well, it’s pretty close to the reality of the last how many decades?

The point is that the parabolic super spike in [[USO]] freaked out Main Street. Badly. And now that the job losses are mounting the super spike is in [[DUG]] , and folks are car pooling, taking public transit – and trying to save every dime they have because they will soon owe more on their SUV than the vehicle is worth.

The sad fact is that most North American companies went on the same mad spending sprees that the North American consumer did, and now any company with a significant level of debt is getting crushed. First by the market, and then by the ratings agencies.

Third Movement

And now for the truly scary stuff:

The recent 93 percent collapse of the obscure Baltic Dry Index – an index of the cost of chartering bulk cargo vessels for goods like ore, cotton, grain or similar dry tonnage – has caused a bit of a stir among the financial cognoscenti. What is less discussed amidst the alarm is the reason for the collapse of the index – the collapse of trade credit based on the venerable letter of credit.

Letters of credit have financed trade for over 400 years. They are considered one of the more stable and secure means of finance as the cargo is secures the credit extended to import it. The letter of credit irrevocably advises an exporter and his bank that payment will be made by the importer’s issuing bank if the proper documentation confirming a shipment is presented. This was seen as low risk as the issuing bank could seize and sell the cargo if its client defaulted after payment was made. Like so much else in this topsy turvy financial crisis, however, the verities of the ages have been discarded in favour of new and unpleasant realities.

….

Further adding to the difficulties, many bulk cargoes are financed in dollars. Non-US banks have been progressively starved of dollar credit because US banks hoarded it as the funding crisis intensified. Recent currency swaps between central banks should be seen in this light, noting the allocation of Federal Reserve dollar liquidity to key trading partners Brazil, Mexico, South Korea and Singapore in particular.

Fixing this problem shouldn’t be left to the Fed. They aren’t going to make it a priority. Indeed, their determination to accelerate the payment of interest on reserves and then to raise that rate to match the Fed Funds target rate indicates that the Fed are more likely to constrain trade finance liquidity rather than improve it. Furthermore, the Fed may be highly selective in its allocation of dollar liquidity abroad, prejudicing the economic prospects of a large part of the world that is either indifferent or hostile to the continuation of American dollar hegemony.

Point #2 from my “Dow to 6500″ post is an echo of these comments as well, pointing to the fact that the Fed has acted in he best interest of the US markets angering debt holders first by devauling the means of debt repayment, and now with the alphabet soup of bailouts is (in)directly causing the  whole international credit market to seize and forcing a collapse in faith in said currency.

IF the Fed was so stupid as to listen to KD’s point and force the world to continue to take the USD as a debt payment instrument (and who should listen to a guy that posts on his own forum as “Genesis”?) then that would in effect be a default in the face of creditors.

The point the rest of the world is trying to get the US to understand (and by proxy Main Street as typed by Mr. Denninger’s populist suggestions) is this:

Controlling access to trade finance determines who loses their jobs, whose children go hungry, who riots, which governments fall. Without dedicated focus on the issue of trade finance and liquidity from those in the emerging world most interested in sustaining the growth of recent years, little progress can be expected.Trade finance is rapidly communicating the stress on bank liquidity to the real economy. It presents a systemic risk much more frightening than the collapsing value of bits of paper traded electronically in London and New York. It could collapse the employment, the well being and the political stability of most of the world’s population.

Coda

Someone somewhere needs to innovate something and quick. I’ll pass along some ideas from LateralAction’s post “Tyler Durden’s 8 rules of innovation” with a reminder that

“You’re not your job. You’re not how much money you have in the bank. You’re not the car you drive. You’re not the contents of your wallet. You’re not your fucking khakis.”

Bruce Sterling’s Distraction posited the idea that if the American market collapsed under it’s own weight in a similar manner as the Soviet Empire did (i.e. the complexity of the system would overwhelm it’s ability to function), then the “proles” would sort of drop out and innovate in wonderful and weird ways.

His depictions of reputations replacing currency are an interesting play on the real function of the market – which is to say that the price of an equity, an index, or even a currency has to do with it’s reputation in the world with which it exists.

From where I type, it appears that the entire bull market from 94 on was nothing but based on leverage, more leverage and globalisation. The other fact of the matter is that the US doesn’t really innovate as much as it did. The whole “service economy” is bunk – was bunk – and will be bunk.

The innovators will probably come from where ever things are manufactured.

The Takeaway

On October 13, 2008 [[GLD]] closed at 81.99 and today it closed at 73.45 down about 11.5% while the Dow Jones has dropped about 10% in the same period of time.

[[FXY]] closed on October 13 @ 98.27 and today at 105.99 putting it up about 8% despite repeated warnings by the Japanese central bank that they intend to devalue it.

I STILL like shiny metals and Japanese Yen.

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