From Adjustment to Recession? March 1, 2008 5:00pm by Barry Ritholtz Amusing . . . via Ben Sargent > ~~~ Spread the wealth. twitter facebook linkedin What's been said: Discussions found on the web: mitch commented on Mar 1 br, not sure if its just me, your site is getting a little stale. We all know that credit markets are crashing and recession is looming or here. How about your specific thoughts on opportunities? I think we’d benefit with more of a Kass approach, constructive negativity? We’ve tipped the scale, charts and cartoons are becoming filler. Wayne commented on Mar 1 I agree with Mitch. The E-Trade ads are really annoying. It cheapens the content and site; beginning to look like fool central. ~~~ BR: I asked readers if they minded/wanted advertising, to pay for a redesign and expansion of the site. They response was overwhelmingly positive. I’ve retained a programmer and designer for this, and they will end up costing about $25k before its all done. Advertising is whats gonna pay for that. me commented on Mar 1 They don’t call it a “recession” anymore, it’s “slowness.” Cherry commented on Mar 1 Barry has sold out? LOL!!!!! firefox commented on Mar 1 … AdBlock+ scorpio commented on Mar 1 not sure that “constructive negativity” helped Dougie Kass’ portfolio switch recently. remember the old adage “if i lose my job it’s a recession, if an economist loses his job it’s a Depression”. Pat G. commented on Mar 1 I guess that old adage is true; “a recession is when you lose your job”. sir jorge commented on Mar 1 I hear that; great photo, and yes, it’s so true in so many ways. Carlos commented on Mar 1 No. A recession is when your neighbor loses his job. When you lose your job it’s a depression! (Old joke… not even sure where I read it). Dave commented on Mar 1 Eh if Barry can rack in some extra cash by putting up some ads, I’m all for it. I can’t even imagine the amount of time a blog like this takes to maintain. Innocent Bystander commented on Mar 1 Its fine Barry, I use E trade anyway. Tell them you know me. John Borchers commented on Mar 1 Recommend you don’t clutter the blog with ads on the posts. I think it’s a negative impression. Excellent fund managers like yourself don’t need pennies from ad impressions. techy commented on Mar 1 a silly ad which can be easily ignored is offending some one… i guess we want quality stuff…but it better be free. Jmay commented on Mar 1 You’ll notice Google doesn’t put a big fat ad under their search bar. They’ve seemed to do alright. Barry is free to put ads any damn place he pleases… but in between every post is definitely annoying. If they’re gonna be there they should be thin and wide not boxy. ken h commented on Mar 1 It’s the weekend! Lighten up! k2163 commented on Mar 1 I’m jealous. Winston Munn commented on Mar 1 Barry can do as he pleases with his blog – but I do miss the recent comments list – often I would check comments due to who wrote the comment as much as the topic itself. David commented on Mar 1 Barry, great blog, nice cartoon; This will also happen in the EU, and other countries, but worse; the point is, this cartoon is not limited to us, but other nationalities also. The housing bubble is world wide and oil will not go lower, and governments will promise everything. Again great blog; “I like this place and willingly could waste my time in it.” William Shakespeare Rock commented on Mar 1 I like this site and enjoy the occasional witty cartoon. The ads are small and don’t bother me none. Keep it up. John Borchers commented on Mar 1 David, I’m 100% sure the housing bubble is in S Korea. They’ve been flipping real estate their the same as here. I take frequent vists there and have friends who tell me what’s going on. They believe it will start to collapse soon the same as the US. World banks have blamed US for subprime problem. These world banks are writing down assets and blaming the US when I bet not all of them are related to each other. Eclectic commented on Mar 2 Winston, I answered your request in the affirmative in a prior topic, in case you didn’t see it. I’m always happy to entertain anything you have to say as it always tickles my appreciation of rational thought. Eclectic commented on Mar 2 Barringo, No problem with the ads. And to all of you who have complained – Give the Motor Trucker an opportunity to benefit from all he does for us. C’mon… WTF?… You think this blog is your personal property? Advertising pays the freight for almost everything that informs, educates or entertains you, and Barringo does all 3 here. Give him a fucking break, why don’t you? Eclectic commented on Mar 2 BTW, I’m with Winston on the recent comments notification. I like to see when Winston gets home from the piano bar with his jar full of erudite punditry. I’ve always thought you could omit the blogroll listing and just link it to a “go to” page with all the blogsters listed there… and maybe the same for the category cloud. Eclectic commented on Mar 2 Mitch, I think you’re experiencing a psychological phenomenon, best explained as something being “anticlimactic.” http://www.thefreedictionary.com/anticlimactic It may only seem stale to you because much of what Barringo and many others of us have been saying here for several years is happening before our eyes. Anticipation provides most of the illusion of experiencing events. (end of comments directed to Mitch) — Nobody in their right mind will have wanted this financial fiasco, but being right about it happening is no indictment of those who correctly assessed that it would happen. I’ve known for several years that the derivatives-based tomfoolery would come to a pathetic frozen-liquidy lack-of-settlement-party ending, and that’s exactly what’s frozen some of the ordinarily liquid money market alternatives now. It’s because nobody trusts them to be tangibly settled if a forced settlement were commanded. Thus, a forced attempt to liquidate them would drive some settlement parties to extinction, possibly enough of them to ripple through and collapse the entire financial system. Supply-side economic policy and its optimistic ‘willfulness for its own sake,’ aided by an incompetent central bank, is what got us here… and that was made crystalline clear to anyone paying attention to last week’s Congressional testimony given by Dr. Benber N. Anke. Francois commented on Mar 2 Barry can do whatever the hell he wants with his blog. Keep it up Chief! wunsacon commented on Mar 2 Hey, why is — apparently in some folks’ opinion — “bad form” to complain about the additional advertising? True, people can always leave if they don’t like it. But, don’t you think Barry would prefer negative feedback about it than for people to leave? (Yes, I’m sure he monitors the page stats. But, you can’t isolate factors from aggregate stats.) I bet Barry’s the kind of person who likes to hear constructive criticism. Remember the old adage: if you ignore your customers (readers), they’ll go away. Middyfeek commented on Mar 2 Hey nitwits, don’t presume to tell the man how to run his blog. Sheeesh! mitch commented on Mar 2 The point Im making is, I think BR is getting a little lazy (the ads dont bother me). I just felt cartoons and charts are becoming more prevalent (it seems). I look for insight and occasionally entertainment. I dont see a problem with a little criticism, I’ve been reading the blog for well over a year and its my opinion. Barry Ritholtz commented on Mar 2 Charts have been a daily post here for (literally) years. Cartoons get posted when one really amuses me. Sometimes there are a lot, sometimes few — it depends on what tickles my funny bone. Other than the charts & ‘toons, I lazily write 10-20,000 words a week on ~25+ posts, plus the weekend linkfest. Oh, and I do this on top of my real job. Lazy must be my middle name! Marcus Aurelius commented on Mar 2 As with any advertising vehicle, the content of the enclosing media is what draws eyeballs. If the ads distract or bother you too much, Barry will loose your set of eyeballs, and will modify his site accordingly. In the meantime, stop calling him lazy, as that accusation is obviously not true, and as I consider him to be a friend of mine (albeit a friend who would not be recognized if i passed him on the street). if you want a perfect blog, go start your own. bluestatedon commented on Mar 2 “I just felt cartoons and charts are becoming more prevalent (it seems).” This is ironic… over at CR, readers are slamming Tanta for articles they say are too long and overly detailed. To both BR and CR I say: what you provide to visitors like me is an incredibly valuable free education. You do it any way you want. cinefoz commented on Mar 2 I’ve been to busy to write for a couple of days, but also discovered that I am running out of interest. Nothing will convince me that this is not a bottom, due to a bad day. This will be a profitable year providing people buy at the bottom and sell at a top. The tops this year will be about 1450 to 1525, and the bottom following each top will be higher than January, and probably higher than each previous bottom. Next year is uncertain due to the ‘taxes’ created by higher energy and higher commodity costs combined with stagnant wages. But next year is a long time from now and a lot of money can be made before then. Besides, the markets might have some offsetting characteristic that is unforeseeable at this time which keep the market trending upwards at a gentle pace. The problem here in this blog is the unrelenting repetitiveness of pessimism. Nothing new is being added, just elaboration on predictable and backward looking headlines. Big whoop. Everybody else is saying the same things. Nothing new here, unless it is just a few steps behind Roubini’s paranoia. Eve the WSJ under new ownership is taking on a on a more hysterical and panic inducing fear mongering approach. Fear sells and Murdoch is just giving people want they want, even though the WSJ is becoming of declining value to the informed reader. If you want to impress me, tell me about tomorrow, unless these headlines are just assumed extrapolations of a continued downward direction. If this is true, then explain how the money supply will contract drastically … which is the only thing that can lower the market to the levels predicted here in January. By drastically, I mean a huge percentage of the money supply would have to vanish down a sinkhole filled with rabid alligators. I’ll return when I have something to add or am bored and need an outlet. Until then, here is my market prediction for 2008 … The S&P will rise 2 or 3 times to the 1450 – 1525 level, with the higher levels being later in the year. It will bottom after each top, but each bottom will be successively higher than the previous one. Basically, we are looking at top ranges that are midpoint between The highest high and the lowest low of recent dates. I intend to buy at the bottom of each and sell at each top. bluestatedon commented on Mar 2 not to get all kumbayaa and everything, but I find the comments by regulars and first-timers are also informative and entertaining. It’s a great community BR has brought together here. wunsacon commented on Mar 2 >> Lazy must be my middle name! Don’t sell yourself short, Barry. “Lazy” is my real FIRST name. Lars commented on Mar 2 Enjoy reading this Blog, but really want to see more thoughts and insights. Give us more commentary Barry (even if only a line or two). Winston Munn commented on Mar 2 Eclectic, Thanks for the response. So far there hasn’t been an opportunity to place the thoughts in context with a subject and I don’t want to get too far off topic. But to get your brain juices flowing, the idea is to find a mechanism in a debt-currency system that debases the value of the currency through excess currency production. With a 1:1 asset/liabilty causitive effect between borrowing and lending, how can debasement-inflation pressure occur? Short Man commented on Mar 2 I don’t think the site is getting stale…keep up the good work BR. What I have found personally though is that the trading opportunities generated by reading this blog and being 6 months or more ahead of the MSM/Fed/Sheep in seeing the true underlying economic condition are becoming less and less apparent. Of course, some of that is due to the fact that we have already picked the low hanging on the industries we knew had to collapse (homebuilders, subprime lenders, etc). I recently looked back at my top 10 trading positions for 2007 and can attribute at least 5 of them to being significantly influenced by what I read on this blog (IMB, ABK, LFG, HOG, BDK – all were short/put positions obviously). Looking at my current positions, I am only barely net short with 50% cash, 30% short/put, 20% longs. Shorts are limited to a few plays I think have further downside (BAC, COF, DB, HOG, LEH, JOE, SRS, WHR). Longs are primarily golds (GG, ABX), uranium and a few tech plays. The big question now though is whether the next phase is inflationary or deflationary and how the individual asset classes will be affected. Regardless, 2007 was easily my most profitable year ever and I appreciate the sound views and opinions of all those that post here and I know I will continue to read even with the odd ad. Eclectic commented on Mar 2 Winston, My brain juices just flowed, and as you know I’m not bashful about expressing my opinion. Go ahead and post your entire thoughts when you get the best chance, but according to your question with its assumed answer [negative – couldn’t be deb-inf pressure]: “With a 1:1 asset/liabilty causitive effect between borrowing and lending, how can debasement-inflation pressure occur?” end quote… I’m afraid the whole concept is D.O.A. In theory it might be correct that no debasement-inflation pressure could occur, but you’re also talking about a near-caveman-like economy of exactly matched goods and services. Even then, every single Cro-Magnon still has the capability to violate the weakest chain in your assumption – that 1:1 absolutism. Cro-1 [to Cro-2]: “Say, BigDog… what say you pay me dig ditch, run water to root crop, you like?” Cro-2: “Yep, what cost dig?” Cro-1: “4 eagle feathers, 2 combs honey and 6 rabbit furs.” Cro-2: “Good deal, but no got – take, ummm, maybe 1 moon… you still dig?” Cro-1: “Not problem… I work now, get later. You say ‘1 moon?'” Cro-2: “Right – 1 moon – most.” Cro-1: “Done.” — See, Winston, the government can NEVER EVER deprive even ordinary citizens from creating credit… and the second they do it violates your 1:1 absolutism… and the first thing you know all the Cro-Magnons in the land are contracting for “you digs” with rabbits, eagle feathers and honey they don’t have. Thus, you’re right back in the middle of inflation you’d hoped to prevent. Our old friend Stormrunner brought us suggested legislation back months ago that had written into it the absurd authority of government to actually i-n-t-e-r-v-e-n-e between our two Cro-Magnons in a way that literally threatens l-i-b-e-r-t-y itself. I’ve also mentioned that any mechanism you might suggest to attempt to bring a 1:1 causality is prone to the same human temptations to abuse it that exists with the current Federal Reserve debt-based credit system. Lastly, I’ll repeat from our ancient discussion with Storm – The problem is not with the system, but rather with its administration. Winston Munn commented on Mar 2 Eclectic, I doubt I’ll post the entire piece as it really is a niche study of one single component of inflation – of limited interest. It does not deal with the overexpansion of debt as an inflation driver – but only looks for the mechanism that could cause an imbalance between currency(in all its forms) and its backing units, thus debasing the currency’s value. I was not looking for cure but a mechanism of causation. Here is a quick summary of my conclusions: 1) Commercial banks have a 1:1 asset/liability ratio, therefore there is no banking mechanism that can expand currency units without compensating debt. As debt holds and stores value, this system is designed to peg itself to a debt equivalent – which creates more flexibility than a gold-backing. (It is easier to “mine” and create debt than gold bars.) 2) The mechanism of debasement must then lie outside banking. 3) The only answer I could find was in derived values. Derived value increases act like currency (as capital) but are independent of personal productivity, and have no compensatory debt backing. It then follows that the mechanism that debases the currency – alters the 1:1 ratio – is this derived gain in value. Instead of C=D, we end up with C+DV>D, where C is currency, D is debt, and DV is derived value. As each unit of C holds a value of D, the addition of DV reduces the value of each unit of C. Street Creds commented on Mar 2 Psst…is he gone? Eclectic commented on Mar 2 Winston, The mechanism has always resided outside the banking system. Now that I know exactly what you’re asking (it doesn’t change my earlier observation of WHY that 1:1 ratio can’t be maintained), I realize that, although I’m not prepared to explain it perfectly right now, that mechanism you seek, while it can not be entirely separated from human productivity, IS something I have already described at length. The mechanism is enveloped primarily within my two concepts of: 1)- Perceived Liquidity, and 2)-Monetary Obedience… but still to an important degree according to my personal definition of inflation, that being the “failure of one or more parties to economic exchanges to recognize that what they formerly viewed as profit (an erroneous philosophical concept) was merely a phantom resulting from the unrecognized reorganization of the currency unit value.” You’ll have to elaborate on Derived Value to make me understand how you anticipate separating it from human productivity. It’s going to be tough to take the “mind” out of that derived value you suggest. I’m still listening. Eclectic commented on Mar 2 Winston, another way of thinking about my last comment to you is this way, and I’ve contributed this before as well: When Weimar failed, I maintain that it wasn’t because of inflation. Hyperinflation is itself not inflation, but the loss of Monetary Obedience. In the case of Weimar, not only was the government unable to reassure the people that their currency was perfectly exchangeable for equivalent value of hard commodity (gold, silver or whatever), but they couldn’t even convince them – absent a real need to make such an exchange – that the government still had the power to f-o-r-c-e monetary obedience. Thus, the currency was severely debased but at the same time it wouldn’t have changed the banking system’s books pertaining to assets and liabilities one iota. It was still balanced 1:1 as you rightly indicated. The currency during Weimar would have continued to function perfectly, even without the gold backing, were the people to have been convinced that the government could enforce its use as legal tender. Any who doubt what I just wrote need only examine the currency in their own possession and understand that they have for years experienced this identical situation. Winston Munn commented on Mar 2 Eclectic, The more I utilize your theories the more I grasp and the more accurate they become. I have made arguments elsewhere based on your theories – which I conclude are powerful. Be aware, though, that foreign terminology remembrance is not a strong point for me, so I rely on understanding the principles and may screw up the terms. Let me clarify what I mean by derived value (DV) as a cause of debasement. A holder of a contract for RMBS may benefit from a rise in collateral value unrelated to any personal productivity. It is akin to double accountancy: the productivity that produces 100 houses can affect the value of a bond backing the mortgages of 100 other houses already built and sold. There is no human labor that causes the derived value itself to rise – it is riding piggyback on real productivity. In this sense it is a ficticious gain – and its rise in value unbalances the 1:1 asset/debt relationship. It has no equivalent debt backing – a counterfeit gain, printed in concert with real values created by real productivity. So it would seem to me that the debasement pressure of modern inflation is caused by derivitive gains – the greater the leverage and exposure, the greater the imbalance of the 1:1 ratio. Winston Munn commented on Mar 2 Eclectic, Adding to these thoughts, and combining the link Barry provided about total mortgage losses, it occurs to me that this ficticious DV gain artificially improves balance sheets, leading leveraged investment structures to increase their leveraged positions – compounding the problem if a collateral value deterioration commences – leading to a delevaging merry-go-round, as falling collateral value and forced derivative product sales re-inforce each other in a downward spiral. Eclectic commented on Mar 2 Winston, “per you” with **my comments. “…holder of a contract for RMBS may benefit from a rise in collateral value unrelated to any personal productivity.” **Not exactly. It would be true with the concept of “effortless good fortune” in my analogy example of a lone market participant in a wilderness environment. In conventional economic situations however, it’s something that’s also random and to a degree beyond the control of one’s productivity, but not entirely effortless. You’re ignoring the market participant’s capacity to evaluate risks and to use skills in making investments that might benefit from a rise in collateral value. You’re denying the intellectual component of LABOR, the efficiency of which IS productivity. The only collateral value that can rise independent of human productivity inputs is a “random gratuity:” A long lost relative dies and you inherit money. Even winning the lotto, though an exotic and extreme example, involves human productivity. — “There is no human labor that causes the derived value itself to rise – it is [riding piggyback] on real productivity.” **It’s a value determined within the human mind and is only ONE of the elements of Deferred Liquidity. Part of it always IS derived from human productivity as I’ve described above, and you have acknowledged under your [own hand] immediately above. No pig, no [piggyback]. Winston Munn commented on Mar 3 Eclectic, Thanks. Isn’t there, though, a subtle difference between speculating on collateral rise (a silver contract, for example) and investing in a yield-paying instrument that has the “good fortune” to see spectaculor rise in underlying collateral value (RMBS)? But, if as you say, there is no real way to debase the currency in a debt-currency system, then the only mechanism left to drive inflation is overexpansion of debt-currency above that level that would occur in a true demand/supply equalibrium. Or another way, I guess, would be if the value of the underlying debt fell – but this would be reflected in confidence in the debt instrument itself – which is in keeping with the Weimer collapse? Would this be accurate? Eclectic commented on Mar 4 Winston, of course there’s a subtle difference but both of them require intellectual input nonetheless and are both functions of ultimate productivity. Imagine a theoretical world in which every single participant had i-n-s-t-a-n-t-a-n-e-o-u-s knowledge of even minute changes in the total amount of species in existence. It may be difficult to think in these terms, but just ponder it long enough for it to take over your ordinary resistance to an exotic philosophical thought experiment. Further, imagine that even a monk feeding a yak in Tibet above the permafrost line had this perfect knowledge and the capacity to react to it just as instantaneously and perfectly as might Warren Buffet… and so did those suffering abject poverty or the enlightened intelligencia. All the same knowledge and capability to react to it. There would be no inflation. Variations in price associated with demand, yes of course, and these would moderate the prices of other goods and services, but they would not debase the species in the balance. I think we’ve come full circle now, Winston, and together we’ve defined your mechanism sought. It’s as I’ve long explained it on this blog. It resides in the unrecognized real reorganization of the species unit value that is erroneously attributed to profit (itself an erroneous philosophical concept). The reason inflation exists is because that pristine theoretical world I just described doesn’t exist and never can. It’s really a world in which irregularly distributed knowledge, skill and the capability to use these attributes create outbound waves like the waves on a pond that ripple out from economic events and then ripple back from the other shore bearing the reorganized species unit value. 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