Tuesday, November 30, 2010

Scientists Confirm that Dispersants Are Increasing Contamination in the Gulf

From the naked capitalism blog.

Peter Hodson, an aquatic toxicologist from Queen’s University in Kingston, Ontario, presented his case on 9 November at a meeting of the Society of Environmental Toxicology and Chemistry in Portland, Oregon…

The problem, explains Hodson, is that the dispersed cloud of microscopic oil droplets allows the PAHs to contaminate a volume of water 100–1,000 times greater than if the oil were confined to a floating surface slick. This hugely increases the exposure of wildlife to the dispersed oil. …

Worse, the toxic constituents of oil hang around longer than other components, another speaker told the meeting. “This idea that there’s an oil biodegradation rate doesn’t hold,” says Ronald Atlas, a microbiologist at the University of Louisville, Kentucky, who has studied the aftermath of the 1989 Exxon Valdez spill in Alaska. Alkanes, the simple hydrocarbons that comprise the bulk of oil, are degraded more readily than the PAHs, he points out.

TED Talk - William Ury: The walk from "no" to "yes"

Related book: Getting to Yes

Stone Age Minds: A conversation with evolutionary psychologists Leda Cosmides and John Tooby

Found via Hunter-Gatherer.

Related books:

Evolutionary Psychology: An Introduction

The Moral Animal


Steve Jobs Interview from 1985

A great Playboy interview with Steve Jobs from early 1985.

Playboy Interview With Steve Jobs


And Steve Jobs' 2005 Stanford Commencement Address is always worth going back and watching from time to time.

Monday, November 29, 2010

China's food crisis spells end of record highs

Found via Infectious Greed.

Rampant food price inflation – of more than 10pc last month – is causing extreme concern and radical action from the Chinese authorities while the world's political and economic attention has been on Ireland, Spain and Portugal.

This appears to be the discouraging investors from piling into the alternative asset class of commodities for all their nervousness about European sovereign debt.

For commodities, which are always more sensitive to demand in China than the rest of the world, have a lot to lose from tightening monetary policy in the world's hottest economy.

Chinese inflation is nothing new, but the food situation is reaching a critical point - one of potential unrest, especially in poorer regions.

This spectre of social disorder has prompted Chinese authorities to start attacking the problem on several fronts.

James Grant at the 2010 Value Investing Conference at UVA

Thanks to Steve F. for passing this along. There are other videos from the conference available on YouTube as well.

Unyielding, an Oligarch vs. Putin - By Joe Nocera

I found this when it was mentioned in the Charlie Rose interview with Joe Nocera and Bethany McLean about their new book.

I wish I had enough space to reprint in its entirety Mikhail B. Khodorkovsky’s closing statement, as his latest sham trial in Russia came to an end earlier this week. I have never been so moved by the words of a businessman.

Not that Mr. Khodorkovsky is a businessman anymore. Once the most famous of the Russian oligarchs, he ran Yukos Oil, which under his leadership became the best-run, fastest-growing, most transparent company in the country — a gleaming symbol of hope for Russian industry. Mr. Khodorkovsky, however, has spent the last seven years in prison, much of that time in Siberia. Stripped of his company, which was sold off to politically connected insiders, Mr. Khodorkovsky and his business partner, Platon Lebedev, were convicted of trumped-up tax charges brought by prosecutors acting on behalf of Vladimir V. Putin, who had come to view Mr. Khodorkovsky as a threat.

With the courtroom packed with supporters, Mr. Khodorkovsky stood up in the glass cage that has kept him imprisoned even during the trial. He talked for about 15 minutes, barely mentioning the charges against him. Instead, he spoke profoundly about what his case meant for his country.

A Case of Senioritis

Bill Gates is raising his arm, bent at the elbow, in the direction of the ceiling. The point he’s making is so important that he wants me and the pair of Gates Foundation staffers sitting in the hotel conference room in Louisville, Ky., to recognize the space between this thought and every lower-ranking argument. “If there’s one thing that can be done for the country, one thing,” Gates says, his normally modulated voice rising, “improving education rises so far above everything else!” He doesn’t say what the “else” is—deficit reduction? containing Iran? free trade?—but they’re way down toward the floor compared with the arm above that multibillion-dollar head. With the U.S. tumbling since 1995 from second in the world to 16th in college-graduation rates and to 24th place in math (for 15-year-olds), it was hard to argue the point. Our economic destiny is at stake.

Gates had just finished giving a speech to the Council of Chief State School Officers in which he tried to explain how administrators could hope to raise student achievement in the face of tight budgets. The Microsoft founder went through what he sees as false solutions—furloughs, sharing textbooks—before focusing on the true “cost drivers”: seniority-based pay and benefits for teachers rising faster than state revenues.


Related book: Work Hard. Be Nice.

Bill Gates reviews Matt Ridley's book "The Rational Optimist"

Found via Simoleon Sense.

The science writer Matt Ridley made his reputation with books like "The Red Queen: Sex and the Evolution of Human Nature" and "Genome: The Autobiography of a Species in 23 Chapters." His latest book, "The Rational Optimist: How Prosperity Evolves" is much broader, as its title suggests. Its subject is the history of humanity, focusing on why our species has succeeded and how we should think about the future.

Although I strongly disagree with what Mr. Ridley says in these pages about some of the critical issues facing the world today, his wider narrative is based on two ideas that are very important and powerful.

The first is that the key to rising prosperity over the course of human history has been the exchange of goods. This may not seem like a very original point, but Mr. Ridley takes the concept much further than previous writers. He argues that our success as a species, as opposed to earlier hominids, resulted from innate characteristics that allowed us to trade. Not long after Homo sapiens emerged, we were using rare objects, like obsidian blades, far away from the source materials needed to produce them. This suggests that large numbers of commercial links were established even at the hunter-gatherer stage of our development.

The second key idea in the book is, of course, "rational optimism." As Mr. Ridley shows, there have been constant predictions of a bleak future throughout human history, but they haven't come true. Our lives have improved dramatically—in terms of lifespan, nutrition, literacy, wealth and other measures—and he believes that the trend will continue. Too often this overwhelming success has been ignored in favor of dire predictions about threats like overpopulation or cancer, and Mr. Ridley deserves credit for confronting this pessimistic outlook.

Having shown that many past fears were ultimately unjustified, Mr. Ridley finally turns his "rational optimism" to two current problems whose seriousness, in his view, is greatly overblown: development in Africa and climate change. Here, in discussing complex matters where his expertise is not very deep, he gets into trouble.


"The Rational Optimist" would be a great book if Mr. Ridley had wrapped things up before these hokey policy discussions and his venting against those he considers to be pessimists. I agree with him that some people are overly concerned with potential problems, and I hadn't realized that this pessimism was so common in rich countries over the last several centuries. As John Stuart Mill said in 1828, in a quote from the book that I especially enjoyed: "I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage."

Mr. Ridley devotes his attention to just two present-day problems, development in Africa and climate change, and seems to conclude, "Don't worry, be happy." My prescription would be, "Worry about fewer things while understanding the lessons of the past, including lessons about the importance of innovation." This might qualify me as a rational optimist, depending on how stringent the criteria are. But there can be no doubt that excessive pessimism may cause problems with how society plans for the future. Mr. Ridley's book should trigger in-depth discussions on this important subject.


Book: The Rational Optimist: How Prosperity Evolves

FT Interview with Howard Marks

Found via Investment Postcards.

Howard Marks, chairman of private equity firm Oaktree Capital, talks to Henny Sender, chief correspondent of international finance, about how he has played the credit markets in 2010 and why he thinks it isn't time for heavy risk-taking.

Hussman Weekly Market Comment: House on Ice

On the surface, the U.S. economy is gradually recovering. Based on mean reversion to potential GDP (which generally occurs over a 4-year horizon absent an intervening recession), we would expect GDP growth over the coming 4-year period to average 3.8%, with average monthly employment growth of 200,000 jobs. This would be my "benchmark" expectation if the U.S. and international banking systems were "clean." However, my concern is that the surface U.S. recovery is built over a foundation that is vulnerable to further strains. If our policy makers had made proper decisions over the past two years to clean up banks, restructure debt, and allow irresponsible lenders to take losses on bad loans, there is no doubt in my mind that we would be quickly on the course to a sustained recovery, regardless of the extent of the downturn we have experienced. Unfortunately, we have built our house on a ledge of ice.

Debt burdens have not been meaningfully reduced in the mortgage sector - they have only been extended. Home values are still well above their historical norm relative to incomes. Yet more than 20% of homeowners already have "negative equity" - mortgages that exceed the current prices of their homes. A few months ago, Deutsche Bank projected that the negative equity rate may rise to 48% in 2011. Yet even if we ignore the mortgages that have been "modified" by slapping delinquent payments onto the back of the obligation, one in seven U.S. homes is presently delinquent or in foreclosure. As much as we have done to make lenders whole, nothing apart from a major restructuring of mortgage obligations will ease the continuing vulnerability on the debtor side.

Meanwhile, the dependence of the banking system on short-term deposits is worse than it was prior to the crisis. The FDIC reports that time-deposits have declined for the 7th consecutive quarter, while the cost of funding assets has dropped below 1%, as banks rely on the shortest liabilities possible in order to earn higher interest spreads. So while the month-to-month progress of the economy has been somewhat encouraging, our policy makers have put us in the position of continually revisiting a can that they simply kicked down the road.

As we look ahead to the coming years, I believe that the best way to avoid major losses will be to remain mindful of the distinction between surface economic progress and latent (underlying) risks. As a starting point, we'll look at the "benchmark" scenario - the potential growth in GDP and employment that we can expect in the absence of further economic shocks. Second I think it's useful to review the observations that the late MIT economist Rudiger Dornbusch made in 1998, many of which are directly applicable to the present environment. Finally, we'll review the current state of the economy and the financial markets.

Billionaires Giving Back: A Special 'This Week' with Warren Buffett, Bill and Melinda Gates and Ted Turner

In a special Thanksgiving edition of "This Week," some of the world's richest people sat down with Christiane Amanpour to talk about their extraordinary Giving Pledge -- a commitment to give the majority of their wealth away through philanthropy. Warren Buffett, Bill and Melinda Gates, Ted Turner and others delved into the meaning of philanthropy, their moral obligation to give back and the future of the country in which each of them reached the heights of prosperity.

Wednesday, November 24, 2010

A Tribute to a Modern Day Hachiko – An Investment Idea from Matt Miller

My colleague, Matt Miller, decided to do a write-up on one of our newest and larger positions, AKITA Drilling Ltd. Although we normally like to keep new ideas quiet for a while, we thought this was another good example to show how we go about our investment process. We’ll probably talk about AKITA a little more in our next letter to investors. If you’re interested in receiving our letters, feel free to email either Matt or me at the email addresses listed HERE. And also feel free to email Matt with any questions about this write-up at: mmiller@chanticleeradvisors.com. Due to tables and graphs, I decided to link to and also embed the write-up below instead of pasting it onto the blog.

Link to: A Tribute to a Modern Day Hachiko – By Matt Miller

A Tribute to a Modern Day Hachiko - AKITA Drilling

Disclosure: Matthew Miller is a portfolio manager at Chanticleer Advisors and the fund Chanticleer manages owns shares in AKITA Drilling Ltd. It may in the future buy or sell shares and it is under no obligation to update its activities. This is not a recommendation to buy or sell a security. Please do your own research before making an investment decision.

For Matt’s previous write-ups and ideas, please see:

A Find in Fremont

The Marketing Alliance – A Micro Cap with a Network Effect Advantage

The Clear Choice

Matt Miller Interview and Eastern Insurance Holdings, Inc.

San Francisco overrides mayoral veto, bans Happy Meals with toys

As a follow-up to my previous post on this subject.

The San Francisco, California, Board of Supervisors banned most McDonald's Happy Meals with toys Tuesday. Despite objections and ridicule from opponents, the vote overrode the mayor's veto and officially approved the ban.

The new ordinance, which requires Happy Meals and other fast food with toys to meet new nutritional standards or else be removed from menus, goes into effect December 1, 2011.


Related previous post: Food, Freedom, and Economic Natural Selection

Tuesday, November 23, 2010

GR-NEAM Reflections: 11/01/2010 - It's the Denominator

Thanks to Matt for passing this along.

The substitution of federal debt for private debt is presumed to be the solution to the decline in credit demand. For governments who borrow in their own currency, however, this may over the next decade revive a problem now thought to be irrelevant.



The relative roles of public and private credit demand, then, likely hold the key to the long-run outlook for inflation. The federal government is the primary source of credit demand in the financial system, which is unprecedented in the postwar period as shown in Chart 3.

Political imperative is likely to maintain this relationship until private credit demand revives. Since the deleveraging process for households is likely to be measured in years, growth in government credit is almost certain to continue at rates that by historic standards are excessive. We reluctantly hold to the view that this paper money episode is as prone to a revival of inflation as those of the past.

The Economist Magazine - The World in 2036: Nassim Taleb looks at what will break, and what won't

Paradoxically, one can make long-term predictions on the basis of the prevalence of forecasting errors. A system that is over-reliant on prediction (through leverage, like the banking system before the recent crisis), hence fragile to unforeseen “black swan” events, will eventually break into pieces. Although fragile bridges can take a long time to collapse, 25 years in the 21st century should be sufficient to make hidden risks salient: connectivity and operational leverage are making cultural and economic events cascade faster and deeper. Anything fragile today will be broken by then.

The great top-down nation-state will be only cosmetically alive, weakened by deficits, politicians’ misalignment of interests and the magnification of errors by centralised systems. The pre-modernist robust model of city-states and statelings will prevail, with obsessive fiscal prudence. Currencies might still exist, but, after the disastrous experience of America’s Federal Reserve, they will peg to some currency without a government, such as gold.

Companies that are currently large, debt-laden, listed on an exchange (hence “efficient”) and paying bonuses will be gone. Those that will survive will be the more black swan-resistant—smaller, family-owned, unlisted on exchanges and free of debt. There will be large companies then, but these will be new—and short-lived.


Related previous posts:

Nassim Taleb describes Antifragility for the Economist

AntiFragility: How to Live in a World We Don’t Understand – By Nassim Nicholas Taleb

Monday, November 22, 2010

Positive psychological changes from meditation training linked to cellular health

Found via Mark’s Daily Apple.

Positive psychological changes that occur during meditation training are associated with greater telomerase activity, according to researchers at the University of California, Davis, and the University of California, San Francisco. The study is the first to link positive well-being to higher telomerase, an enzyme important for the long-term health of cells in the body.

The effect appears to be attributable to psychological changes that increase a person’s ability to cope with stress and maintain feelings of well-being.

"We have found that meditation promotes positive psychological changes, and that meditators showing the greatest improvement on various psychological measures had the highest levels of telomerase," said Clifford Saron, associate research scientist at the UC Davis Center for Mind and Brain.

"The take-home message from this work is not that meditation directly increases telomerase activity and therefore a person’s health and longevity," Saron said. "Rather, meditation may improve a person’s psychological well-being and in turn these changes are related to telomerase activity in immune cells, which has the potential to promote longevity in those cells. Activities that increase a person’s sense of well-being may have a profound effect on the most fundamental aspects of their physiology."

The study, with UC Davis postdoctoral scholar Tonya Jacobs as lead author, was published online Oct. 29 in the journal Psychoneuroendocrinology and will soon appear in print. It is a product of the UC Davis-based Shamatha Project, led by Saron, one of the first long-term, detailed, matched control-group studies of the effects of intensive meditation training on mind and body.

“This work is among the first to show a relation between positive psychological change and telomerase activity. Because the finding is new, it should serve to inspire future studies to replicate and extend what we found,” Jacobs said.

John Mauldin: O Deflation, Where is Thy Sting?

The CPI was out this week, and it showed a continued drop in inflation. There were those who immediately pointed out that this vindicated the Fed’s move to QE2. We have to get ahead of this deflation thing, don’t we? Well, maybe, depending on how you measure inflation/deflation. This week we look deep into the BLS website on inflation to see just exactly what it is we are measuring, and then take a walk down Nostalgia Lane. But first we look at what I think we can call The Sputtering Economy, because that will tie into our inflation discussion.

The Investor’s Guide to Amazon’s Kindle 3 - by Ravi Nagarajan

Link to: The Investor’s Guide to Amazon’s Kindle 3

Epilepsy’s Big, Fat Miracle - By Fred Vogelstein

Found via Tim Ferriss.

Once every three or four months my son, Sam, grabs a cookie or a piece of candy and, wide-eyed, holds it inches from his mouth, ready to devour it. He knows he’s not allowed to eat these things, but like any 9-year-old, he hopes that somehow, this once, my wife, Evelyn, or I will make an exception.

We never make exceptions when it comes to Sam and food, though, which means that when temptation takes hold of Sam and he is denied, things can get pretty hairy. Confronted with a gingerbread house at a friend’s party last December, he went scorched earth, grabbing parts of the structure and smashing it to bits. Reason rarely works. Usually one of us has to pry the food out of his hands. Sometimes he ends up in tears.

It’s not just cookies and candy that we forbid Sam to eat. Cake, ice cream, pizza, tortilla chips and soda aren’t allowed, either. Macaroni and cheese used to be his favorite food, but he told Evelyn the other day that he couldn’t remember what it tastes like anymore. At Halloween we let him collect candy, but he trades it in for a present. At birthday parties and play dates, he brings a lunchbox to eat from.

There is no crusade against unhealthful food in our house. Some might argue that unhealthful food is all we let Sam eat. His breakfast eggs are mixed with heavy cream and served with bacon. A typical lunch is full-fat Greek yogurt mixed with coconut oil. Dinner is hot dogs, bacon, macadamia nuts and cheese. We figure that in an average week, Sam consumes a quart and a third of heavy cream, nearly a stick and a half of butter, 13 teaspoons of coconut oil, 20 slices of bacon and 9 eggs. Sam’s diet is just shy of 90 percent fat. That is twice the fat content of a McDonald’s Happy Meal and about 25 percent more than the most fat-laden phase of the Atkins diet. It puts Sam at risk of developing kidney stones if he doesn’t drink enough. It is constipating, so he has to take daily stool softeners. And it lacks so many essential nutrients that if Sam didn’t take a multivitamin and a calcium-magnesium supplement every day, his growth would be stunted, his hair and teeth would fall out and his bones would become as brittle as an 80-year-old’s.

Evelyn, Sam’s twin sister Beatrice and I don’t eat this way. But Sam has epilepsy, and the food he eats is controlling most of his seizures (he used to have as many as 130 a day). The diet, which drastically reduces the amount of carbohydrates he takes in, tricks his body into a starvation state in which it burns fat, and not carbs, for fuel. Remarkably, and for reasons that are still unclear, this process — called ketosis — has an antiepileptic effect.

Nassim Taleb describes Antifragility for the Economist

Hussman Weekly Market Comment: Outside the Oval / The Case Against the Fed

Ever since the Bear Stearns bailout, I've been insistent that the Federal Reserve is increasingly operating outside of its statutory boundaries. As I noted in the March 31, 2008 weekly comment (What Congress and Investors Should Understand about the Bear Stearns Deal):

"The clear historical role of the Federal Reserve has been to manage the composition of Federal liabilities (by varying the mix of Treasury securities and monetary base - currency and bank reserves - held by the public). The recent transaction is a dangerous break from that role, in which unelected bureaucrats are committing public funds to facilitate private business transactions and selectively defend the holders of corporate securities. Only Congress has the Constitutional right, by the representative will of the people, to commit public funds. The Bear Stearns deal is a dangerous precedent and a dilution of Congressional prerogative."

My concerns here have nothing to do with the direction of the stock market. Ensuring the legality of Fed actions is not a Democratic issue, a Republican issue or a Tea Party issue. Rather, it is about whether we want America to function as a representative democracy. We hear a lot about the risk of "politicizing" the Fed, as if it should somehow operate outside of Constitutional checks and balances. This idea is insane. Reserving the appropriation of public funds to Congress, and by extension to the will of the American people, is central to the meaning of democracy. There is clearly a mindless carnival of circus clowns on financial television that is perfectly willing to look the other way as long as the Fed encourages risk and bails out reckless behavior. We should recognize what we stand to lose.

Wednesday, November 17, 2010

Tuesday, November 16, 2010

WSJ Op-Ed: Open Letter to Ben Bernanke

Signed by Seth Klarman, Jim Grant, Jim Chanos and Niall Ferguson, among others:

The following is the text of an open letter to Federal Reserve Chairman Ben Bernanke signed by several economists, along with investors and political strategists, most of them close to Republicans:

We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.

We subscribe to your statement in the Washington Post on November 4 that “the Federal Reserve cannot solve all the economy’s problems on its own.” In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.

Monday, November 15, 2010

John Mauldin: First, Let's Lower the Bar

Hussman Weekly Market Comment: The Cliff

Municipal bond investors are clearly re-evaluating the prospects for additional fiscal stimulus from the federal government. Indeed, many state and local governments (as well as health and disability service providers that benefited from stimulus dollars), are beginning to talk about "the cliff" - an abrupt reduction in revenues due to the loss of current stimulus funding which has been used to bridge existing budget shortfalls. My impression is that equity investors face a similar "cliff" which they may not have adequately recognized yet.

The essential point is that stocks are much more richly valued than simplistic P/E multiples would suggest. Investors may pay a heavy price if they fail to adjust valuations for the level of profit margins. The only proper way to value stocks is in relation to measures of sustainable, long-run, full-cycle financial performance.

Friday, November 12, 2010

Taleb Says Fed Doesn't Understand Risks of Quantitative Easing

Found via Infectious Greed.

Related books:

TED Talk - Eric Berlow: How complexity leads to simplicity

The Man Who Called the Financial Crisis—70 Years Early - By Jason Zweig

Found via Simoleon Sense.

Decades before anybody had ever heard of a mortgage derivative, an economist named Melchior Palyi predicted key causes of the 2008-2009 financial crisis with precision that makes a modern reader's hair stand on end.

His warnings help explain why investors insist on trusting market gatekeepers they know to be fallible—such as policy makers, regulators and credit-ratings firms.

The seeds of today's problem were planted long ago, and its forgotten history holds important lessons. In 1936, as part of reforms under the new Banking Act, the U.S. government mandated that federally regulated banks could no longer hold securities that weren't rated investment-grade by at least two ratings firms.

To determine how to implement the new policy, the government launched a massive project—with experts from the Federal Deposit Insurance Corp., the National Bureau of Economic Research and the Works Progress Administration—to study how credit ratings should be used.

Mr. Palyi, then teaching at the University of Chicago, was a vocal skeptic from the outset. Looking back into the 1920s, he found that investment-grade bonds went bust with alarming frequency, often in the same year they were rated. On average, he showed, a bank that followed the new rules would end up with a third of its bond portfolio going into default.

The record was so unreliable that it would be "still more responsible," Mr. Palyi growled, to "stop the publication of ratings altogether." He was especially troubled that the new banking rules switched the responsibility for credit safety from bankers—and even bank regulators—to ratings firms.

"From there," he warned, it "will have to be shifted again—to someone else," presumably taxpayers. Liquidity, Mr. Palyi argued, was being replaced by what he scornfully called "shiftability," a new kind of risk that could someday "be magnified into catastrophic dimensions."

Thursday, November 11, 2010

Meredith Whitney on Financials & Politics


Straight Talk with Steve Keen: It's All About the Debt

Economic activity—and hence employment—is thus determined not merely by the level of production and incomes, but also by changes in the level of debt. This generates credit-driven cycles that can occur even if debt is still growing, simply if the rate of growth of debt alters. It can also generate long false booms, if the rate of growth of debt continually outstrips the rate of growth of the economy, and especially if that debt financed not entrepreneurial innovation, but gambling on asset prices.

That’s been the story of the last 40 years for America and much of the OECD: debt has grown faster than GDP, and much of the debt has financed speculation rather than investment. The growth in debt during the long boom stimulated demand, but it didn’t add to productive capacity. So when the rate of growth of debt stopped, the debt burden was much higher than it had ever been before.

The only way to restart growth as we had known it for the last 4 decades was for debt to start growing faster than GDP once more. My belief that we’d reached the end-point of this process—that debt to income ratios had reached a limit—is why in late 2005 I predicted that there would be a serious Depression-level crisis in the near future.

Much of my work is truly complex, in the technical sense of the word—I have built complex dynamic mathematical models of the economy which simulate both a debt-driven boom and a debt-deleveraging-driven depression, and these guide my analysis—but the essence of my analysis can be conveyed with a simple numerical example.

Alert: QE II Has Lit the Fuse – By Chris Martenson

For a very long time I have been calling for, expecting and otherwise anticipating the day that the Federal Reserve would begin openly monetizing government debt. I knew the day would come intellectually, but in my heart I hoped it wouldn't. But with the Fed's recent decision to directly monetize the next 8 months of federal deficit spending, that day has finally arrived. I have to confess, while my prediction has proven accurate, I’m still stunned the Fed actually did it.

In this report I examine the risks that this new path presents, what match(es) may finally ignite the decades-old pile of dry fuel, what the outcomes are likely to be, and what we can and should be doing in preparation.


Related link: Treasury Operation Schedule: POMO! POMO! POMO!

Latest Mortgage Scandal: Force-Placed Insurance

From The Big Picture.

American Banker’s Jeff Horwitz has a spectacular piece of reporting today about goings on in an obscure corner of the mortgage-servicing world: Losses from Force-Placed Insurance Are Beginning to Rankle Investors.

What is force-placed insurance? If any homeowner fails to keep up their insurance premiums, then their loan servicer can step in to buy a comparable insurance policy (theoretically on the loan holder’s behalf), to ensure the mortgaged property remains fully insured.

It’s sensible in theory, but in practice, it’s ripe for abuse. And when the servicer owns the insurer, abusive practices, excessive commissions, and self-dealing transactions have become the norm.

Consider one case found by Horwitz. A homeowner’s $4,000 insurance policy, was paid by the loan servicer, Everbank via escrow. But Everbank purposely let that insurance policy lapse, and then replaced it with a different policy – one that cost more than $33,000. To add insult to injury, the insurer, a subsidiary of Assurant, paid Everbank a $7,100 kickback for giving it such a lucrative policy — and, writes Horwitz, “left the door open to further compensation” down the road.

That $33,000 policy — including the $7,100 kickback – is an enormous amount of money for any loan servicer to make on a single property. The average loan servicer makes just $51 per loan per year.

Here’s where things get interesting: That $33,000 insurance premium is ultimately paid by the investors who bought the loan.

These investors are not happy.


Related article: Losses from Force-Placed Insurance Are Beginning to Rankle Investors

Jeremy Grantham on CNBC


Tuesday, November 9, 2010

John Mauldin's Outside the Box: The Effects of ObamaCare

What will be the effects of ObamaCare? My friend Lisa Cummings, an expert on employee benefits (she was one of the first employees at Dell and was a senior exec at Wal-Mart), has analyzed the bill; and from what she tells me it appears to be one big pile of unintended consequences and costs. It will be far cheaper for an employer to simply pay the $2,000 fine and pay for the employee to enroll in the government health exchange program, which of course puts more cost on the taxpayer. Behind the curtain of wonderful and laudable objectives is a mountain of regulations and costs. But that is what is coming. I asked Lisa to give me a written report on just the more important changes and costs, and that is your Outside the Box reading today.

Michael Burry: Bernanke Can’t Use ‘Poison as the Cure’

Found via GuruFocus.

Michael Burry, the former hedge-fund manager who predicted the housing market’s plunge, said Federal Reserve Chairman Ben S. Bernanke is trying to use “poison as the cure” by pumping more cash into the economy to spur growth.

Bernanke’s Fed pledged this week to use $600 billion in additional Treasury purchases to help lower a 9.6 percent unemployment rate, close to a 26-year high, and to avert deflation.

The attempt to bolster growth is reminiscent of Alan Greenspan’s actions to revive the economy after 2001, Burry said in a telephone interview from Cupertino, California. The former Fed chairman helped create an unsustainable boom in U.S. property prices with his policies, leading to the worst global financial crisis since the Great Depression, he said.

Boosting the economy “was the point of inflating the housing bubble,” Burry said yesterday. “It was the intent that the house would become the ATM machine, and help us through those rough times, post-dot-com, -Enron, -WorldCom, -Iraq and - 9/11. That’s why I say they’re using the poison as the cure.”

Burry, who now manages his own money after shuttering his fund in 2008, said in a Sept. 6 interview with Bloomberg Television that he was investing in farmable land and gold, as well as small technology companies. He said yesterday he hasn’t changed his tactics as a result of recent events, including the Fed’s second round of so-called quantitative easing, dubbed QE2.

“I’ve expected Bernanke to act as he’s acting,” he said. “So with QE2, anything I was doing I expect will work even better.”

While it would damage the economy in the short-term, Burry said he would focus on curbing government spending to prevent harsher measures later.

“It was the problem with the housing bubble, when do you prick it? The earlier you pricked it, the better it would have been for all of us,” he said.

Business Insider Interview with Chris Anderson

Prior to joining Wired as its Editor-in-Chief, Chris Anderson swore to himself that he would never become a journalist. Why? Because his parents were also journalists.

So he went and got a degree in physics and a job at Los Alamos.

In the end, his lineage won out and he ended up working for the journals Nature and Science before moving on to The Economist. Then, in 2000, Chris Anderson was recruited by Conde Nast to run its technology magazine Wired. Anderson's reign at Wired started off shaky, but he notes that in retrospect, the end of the dot com bubble was the best time for him to take over the magazine.

"I was able to screw up because in those days you could not succeed in that environment," Anderson told us. "So, if you're going to fail, fail in an environment where it's impossible to succeed."

Anderson made a bet that the Internet would continue to grow despite the stock market crashing, and time and time again he had his magazine declare the Internet had become ubiquitous. No one believed this positive spin however; so, the magazine had to do something different.

"Eventually, it was science that saved us," Anderson declared.

With 18 months of experience under his belt as Wired's Editor-in-Chief, Anderson released an issue of the magazine that strayed away from technology and focused on the cultural differences between science and religion. This issue served as the launching pad for Wired's longstanding dominance in the technology magazine industry.

Today, Chris Anderson is still Editor-in-Chief of Wired, a best-selling author, and the founder of a robot-manufacturing company. And he has 5 kids.

Our exclusive 40-minute interview with Chris Anderson in presented in its entirety below. We'll also publish highlights from it over the next few days.