Just a few random snapshots and video clips from our weekend (July 2010) with friends down south in Sweden. Thomas rented a house for a few weeks so he could visit his friends and family and also have his own place/space for chilling out with friends. Perfect!

Videos (just playing with my new waterproof toy – left the DSLR at home):

• Compilation (1 minute)
• Happy cat (2.75 minutes)
• Yes, the camera is waterproof (46 seconds – near where we live)

Pics:

Left to right: One of Thomas’ brothers (he has two), his wife, Thomas, Dad, Mom:

Viking stuff:

This is a mixed set, including pictures from the island Ven (Wikipedia), as well as the mainland (the aerial picture is of the mainland). The second half of the set includes pics from around here (Gothenburg).  And here’s a video I made with this waterproof video camera.

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Gothenburg and surrounding areas and islands:

View from our balcony (Kallebäck neighborhood of Gothenburg, Sweden).

It’s a 63-square meter 1-bedroom co-op that we own and may be renting or selling in the next year or two, as our family appears to be growing from two to three. See PS #3, at the bottom of this post for more information about the apartment. Get in touch if you may be interested in buying or renting.

I’ve been interested in Soros ever since reading “The Alchemy of Finance” in the early ’90s and an even bigger fan since seeing him speak at the “Secretary’s Open Forum” at the U.S. Department of State in 2003.  The following is a clear, concise, and up-to-date explanation of his main theories and their implications for financial markets and their participants and regulators.

This Is “Act 2″ of the Crisis
George Soros
2010-6-14

In the week following the bankruptcy of Lehman Brothers on Sept. 15, 2008 — global financial markets actually broke down, and by the end of the week, they had to be put on artificial life support. The life support consisted of substituting sovereign credit for the credit of financial institutions, which ceased to be acceptable to counterparties.

As Mervyn King of the Bank of England brilliantly explained, the authorities had to do in the short term the exact opposite of what was needed in the long term: they had to pump in a lot of credit to make up for the credit that disappeared, and thereby reinforce the excess credit and leverage that had caused the crisis in the first place. Only in the longer term, when the crisis had subsided, could they drain the credit and re-establish macroeconomic balance.

This required a delicate two-phase maneuver just as when a car is skidding. First you have to turn the car into the direction of the skid and only when you have regained control can you correct course.

The first phase of the maneuver has been successfully accomplished — a collapse has been averted. In retrospect, the temporary breakdown of the financial system seems like a bad dream. There are people in the financial institutions that survived who would like nothing better than to forget it and carry on with business as usual. This was evident in their massive lobbying effort to protect their interests in the Financial Reform Act that just came out of Congress. But the collapse of the financial system as we know it is real, and the crisis is far from over.

Indeed, we have just entered Act II of the drama, when financial markets started losing confidence in the credibility of sovereign debt.  Greece and the euro have taken center stage, but the effects are liable to be felt worldwide.

Doubts about sovereign credit are forcing reductions in budget deficits at a time when the banks and the economy may not be strong enough to permit the pursuit of fiscal rectitude. We find ourselves in a situation eerily reminiscent of the 1930s. Keynes has taught us that budget deficits are essential for counter cyclical policies, yet many governments have to reduce them under pressure from financial markets. This is liable to push the global economy into a double dip.

It is important to realize that the crisis in which we find ourselves is not just a market failure but also a regulatory failure, and even more importantly, a failure of the prevailing dogma about financial markets. I have in mind the Efficient Market Hypothesis and Rational Expectation Theory. These economic theories guided, or more exactly misguided, both the regulators and the financial engineers who designed the derivatives and other synthetic financial instruments and quantitative risk management systems which have played such an important part in the collapse. To gain a proper understanding of the current situation and how we got to where we are, we need to go back to basics and re-examine the foundation of economic theory.

I have developed an alternative theory about financial markets which asserts that financial markets do not necessarily tend toward equilibrium; they can just as easily produce asset bubbles. Nor are markets capable of correcting their own excesses. Keeping asset bubbles within bounds have to be an objective of public policy. I propounded this theory in my first book, “The Alchemy of Finance,” in 1987. It was generally dismissed at the time, but the current financial crisis has proven, not necessarily its validity, but certainly its superiority to the prevailing dogma.

Let me briefly recapitulate my theory for those who are not familiar with it. It can be summed up in two propositions. First, financial markets, far from accurately reflecting all the available knowledge, always provide a distorted view of reality. This is the principle of fallibility. The degree of distortion may vary from time to time. Sometimes it’s quite insignificant, at other times it is quite pronounced. When there is a significant divergence between market prices and the underlying reality I speak of far from equilibrium conditions. That is where we are now.

Second, financial markets do not play a purely passive role; they can also affect the so-called fundamentals they are supposed to reflect. These two functions that financial markets perform work in opposite directions. In the passive or cognitive function, the fundamentals are supposed to determine market prices. In the active or manipulative function market, prices find ways of influencing the fundamentals. When both functions operate at the same time, they interfere with each other. The supposedly independent variable of one function is the dependent variable of the other, so that neither function has a truly independent variable. As a result, neither market prices nor the underlying reality is fully determined. Both suffer from an element of uncertainty that cannot be quantified. I call the interaction between the two functions reflexivity. Frank Knight recognized and explicated this element of unquantifiable uncertainty in a book published in 1921, but the Efficient Market Hypothesis and Rational Expectation Theory have deliberately ignored it. That is what made them so misleading.

Reflexivity sets up a feedback loop between market valuations and the so-called fundamentals which are being valued. The feedback can be either positive or negative. Negative feedback brings market prices and the underlying reality closer together. In other words, negative feedback is self-correcting. It can go on forever, and if the underlying reality remains unchanged, it may eventually lead to an equilibrium in which market prices accurately reflect the fundamentals. By contrast, a positive feedback is self-reinforcing. It cannot go on forever because eventually, market prices would become so far removed from reality that market participants would have to recognize them as unrealistic. When that tipping point is reached, the process becomes self-reinforcing in the opposite direction. That is how financial markets produce boom-bust phenomena or bubbles. Bubbles are not the only manifestations of reflexivity, but they are the most spectacular.

In my interpretation equilibrium, which is the central case in economic theory, turns out to be a limiting case where negative feedback is carried to its ultimate limit. Positive feedback has been largely assumed away by the prevailing dogma, and it deserves a lot more attention.

I have developed a rudimentary theory of bubbles along these lines. Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend. When a positive feedback develops between the trend and the misconception, a boom-bust process is set in motion. The process is liable to be tested by negative feedback along the way, and if it is strong enough to survive these tests, both the trend and the misconception will be reinforced. Eventually, market expectations become so far removed from reality that people are forced to recognize that a misconception is involved. A twilight period ensues during which doubts grow and more and more people lose faith, but the prevailing trend is sustained by inertia. As Chuck Prince, former head of Citigroup, said, “As long as the music is playing, you’ve got to get up and dance. We are still dancing.” Eventually a tipping point is reached when the trend is reversed; it then becomes self-reinforcing in the opposite direction.

Typically bubbles have an asymmetric shape. The boom is long and slow to start. It accelerates gradually until it flattens out again during the twilight period. The bust is short and steep because it involves the forced liquidation of unsound positions. Disillusionment turns into panic, reaching its climax in a financial crisis.

The simplest case of a purely financial bubble can be found in real estate. The trend that precipitates it is the availability of credit; the misconception that continues to recur in various forms is that the value of the collateral is independent of the availability of credit. As a matter of fact, the relationship is reflexive. When credit becomes cheaper, activity picks up and real estate values rise. There are fewer defaults, credit performance improves, and lending standards are relaxed. So at the height of the boom, the amount of credit outstanding is at its peak, and a reversal precipitates false liquidation, depressing real estate values.

The bubble that led to the current financial crisis is much more complicated. The collapse of the subprime bubble in 2007 set off a chain reaction, much as an ordinary bomb sets off a nuclear explosion. I call it a superbubble. It has developed over a longer period of time, and it is composed of a number of simpler bubbles. What makes the superbubble so interesting is the role that the smaller bubbles have played in its development.

The prevailing trend in the superbubble was the ever-increasing use of credit and leverage. The prevailing misconception was the belief that financial markets are self-correcting and should be left to their own devices. President Reagan called it the “magic of the marketplace,” and I call it market fundamentalism. It became the dominant creed in the 1980s. Since market fundamentalism was based on false premises, its adoption led to a series of financial crises. Each time, the authorities intervened, merged away, or otherwise took care of the failing financial institutions, and applied monetary and fiscal stimuli to protect the economy. These measures reinforced the prevailing trend of ever-increasing credit and leverage, and as long as they worked, they also reinforced the prevailing misconception that markets can be safely left to their own devices. The intervention of the authorities is generally recognized as creating amoral hazard; more accurately it served as a successful test of a false belief, thereby inflating the superbubble even further.

It should be emphasized that my theories of bubbles cannot predict whether a test will be successful or not. This holds for ordinary bubbles as well as the superbubble. For instance, I thought the emerging market crisis of 1997-98 would constitute the tipping point for the superbubble, but I was wrong. The authorities managed to save the system and the superbubble continued growing. That made the bust that eventually came in 2007-8 all the more devastating.

What are the implications of my theory for the regulation of the financial system?

First and foremost, since markets are bubble-prone, the financial authorities have to accept responsibility for preventing bubbles from growing too big. Alan Greenspan and other regulators have expressly refused to accept that responsibility. If markets can’t recognize bubbles, Greenspan argued, neither can regulators — and he was right. Nevertheless, the financial authorities have to accept the assignment, knowing full well that they will not be able to meet it without making mistakes. They will, however, have the benefit of receiving feedback from the markets, which will tell them whether they have done too much or too little. They can then correct their mistakes.

Second, in order to control asset bubbles it is not enough to control the money supply; you must also control the availability of credit. This cannot be done by using only monetary tools; you must also use credit controls. The best-known tools are margin requirements and minimum capital requirements. Currently, they are fixed irrespective of the market’s mood, because markets are not supposed to have moods. Yet they do, and the financial authorities need to vary margin and minimum capital requirements in order to control asset bubbles.

Regulators may also have to invent new tools or revive others that have fallen into disuse. For instance, in my early days in finance, many years ago, central banks used to instruct commercial banks to limit their lending to a particular sector of the economy, such as real estate or consumer loans, because they felt that the sector was overheating. Market fundamentalists consider that kind of intervention unacceptable, but they are wrong. When our central banks used to do it, we had no financial crises to speak of. The Chinese authorities do it today, and they have much better control over their banking system. The deposits that Chinese commercial banks have to maintain at the People’s Bank of China were increased 17 times during the boom, and when the authorities reversed course, the banks obeyed them with alacrity.

Third, since markets are potentially unstable, there are systemic risks in addition to the risks affecting individual market participants. Participants may ignore these systemic risks in the belief that they can always dispose of their positions, but regulators cannot ignore them because if too many participants are on the same side, positions cannot be liquidated without causing a discontinuity or a collapse. They have to monitor the positions of participants in order to detect potential imbalances. That means that the positions of all major market participants, including hedge funds and sovereign wealth funds, need to be monitored. The drafters of the Basel Accords made a mistake when they gave securities held by banks substantially lower risk ratings than regular loans: they ignored the systemic risks attached to concentrated positions in securities. This was an important factor aggravating the crisis. It has to be corrected by raising the risk ratings of securities held by banks. That will probably discourage loans, which is not such a bad thing.

Fourth, derivatives and synthetic financial instruments perform many useful functions, but they also carry hidden dangers. For instance, the securitization of mortgages was supposed to reduce risk through geographical diversification. In fact, it introduced a new risk by separating the interest of the agents from the interest of the owners. Regulators need to fully understand how these instruments work before they allow them to be used, and they ought to impose restrictions guard against those hidden dangers. For instance, agents packaging mortgages into securities ought to be obliged to retain sufficient ownership to guard against the agency problem.

Credit-default swaps (C.D.S.) are particularly dangerous. They allow people to buy insurance on the survival of a company or a country while handing them a license to kill. C.D.S. ought to be available to buyers only to the extent that they have a legitimate insurable interest. Generally speaking, derivatives ought to be registered with a regulatory agency just as regular securities have to be registered with the S.E.C. or its equivalent. Derivatives traded on exchanges would be registered as a class; those traded over-the-counter would have to be registered individually. This would provide a powerful inducement to use exchange traded derivatives whenever possible.

Finally, we must recognize that financial markets evolve in a one-directional, nonreversible manner. The financial authorities, in carrying out their duty of preventing the system from collapsing, have extended an implicit guarantee to all institutions that are “too big to fail.” Now they cannot credibly withdraw that guarantee. Therefore, they must impose regulations that will ensure that the guarantee will not be invoked. Too-big-to-fail banks must use less leverage and accept various restrictions on how they invest the depositors’ money. Deposits should not be used to finance proprietary trading. But regulators have to go even further. They must regulate the compensation packages of proprietary traders to ensure that risks and rewards are properly aligned. This may push proprietary traders out of banks, into hedge funds where they properly belong. Just as oil tankers are compartmentalized in order to keep them stable, there ought to be firewalls between different markets. It is probably impractical to separate investment banking from commercial banking as the Glass-Steagall Act of 1933 did. But there have to be internal compartments keeping proprietary trading in various markets separate from each other. Some banks that have come to occupy quasi-monopolistic positions may have to be broken up.

While I have a high degree of conviction on these five points, there are many questions to which my theory does not provide an unequivocal answer. For instance, is a high degree of liquidity always desirable? To what extent should securities be marked to market? Many answers that followed automatically from the Efficient Market Hypothesis need to be re-examined.

It is clear that the reforms currently under consideration do not fully satisfy the five points I have made, but I want to emphasize that these five points apply only in the long run. As Mervyn King explained, the authorities had to do in the short run the exact opposite of what was required in the long run. And as I said earlier, the financial crisis is far from over. We have just ended Act II. The euro has taken center stage, and Germany has become the lead actor. The European authorities face a daunting task: they must help the countries that have fallen far behind the Maastricht criteria to regain their equilibrium while they must also correct the deficiencies of the Maastricht Treaty which have allowed the imbalances to develop. The euro is in what I call a far-from-equilibrium situation. But I prefer to discuss this subject in Germany, which is the lead actor, and I plan to do so at the Humboldt University in Berlin on June 23. I hope you will forgive me if I avoid the subject until then.

As some of you know, Nouriel Roubini and David Einhorn are, IMHO, two of the best minds in their fields and I’ve been posting some of their stuff on here since at least 2006 (list of posts here).  Here are their latest articles:

• Einhorn in the NYT: “Easy Money, Hard Truths”
• Roubini in the FT: “Solutions for a crisis in its sovereign stage”

Easy Money, Hard Truths

By DAVID EINHORN
2010-5-26
nytimes.com

Are you worried that we are passing our debt on to future generations? Well, you need not worry.

Before this recession it appeared that absent action, the government’s long-term commitments would become a problem in a few decades. I believe the government response to the recession has created budgetary stress sufficient to bring about the crisis much sooner. Our generation — not our grandchildren’s — will have to deal with the consequences.

According to the Bank for International Settlements, the United States’ structural deficit — the amount of our deficit adjusted for the economic cycle — has increased from 3.1 percent of gross domestic product in 2007 to 9.2 percent in 2010. This does not take into account the very large liabilities the government has taken on by socializing losses in the housing market. We have not seen the bills for bailing out Fannie Mae and Freddie Mac and even more so the Federal Housing Administration, which is issuing government-guaranteed loans to non-creditworthy borrowers on terms easier than anything offered during the housing bubble. Government accounting is done on a cash basis, so promises to pay in the future — whether Social Security benefits or loan guarantees — do not count in the budget until the money goes out the door.

A good percentage of the structural increase in the deficit is because last year’s “stimulus” was not stimulus in the traditional sense. Rather than a one-time injection of spending to replace a cyclical reduction in private demand, the vast majority of the stimulus has been a permanent increase in the base level of government spending — including spending on federal jobs. How different is the government today from what General Motors was a decade ago? Government employees are expensive and difficult to fire. Bloomberg News reported that from the last peak businesses have let go 8.5 million people, or 7.4 percent of the work force, while local governments have cut only 141,000 workers, or less than 1 percent.

Public sector jobs used to offer greater job security but lower pay. Not anymore. In 2008, according to the Cato Institute, the average federal civilian salary with benefits was $119,982, compared with $59,909 for the average private sector worker; the disparity has grown enormously over the last decade.

The question we need to ask is this: If we don’t change direction, how long can we travel down this path without having a crisis? The answer lies in two critical issues. First, how long will the capital markets continue to finance government borrowings that may be refinanced but never repaid on reasonable terms? And second, to what extent can obligations that are not financed through traditional fiscal means be satisfied through central bank monetization of debts — that is, by the printing of money?

The recent United States credit crisis was attributable in large measure to capital requirements and risk models that incorrectly assumed AAA-rated securities were exempt from default risk. We learned the hard way that when the market ignores credit risk, the behavior of borrowers and lenders becomes distorted.

It was once unthinkable that “risk-free” institutions could fail — so unthinkable that the chief executives of the companies that recently did fail probably didn’t realize when they crossed the line from highly creditworthy to eventually insolvent. Surely, had they seen the line, they would, to a man, have stopped on the solvent side.

Our government leaders are faced with the same risk today. At what level of government debt and future commitments does government default go from being unthinkable to inevitable, and how does our government think about that risk?

I recently posed this question to one of the president’s senior economic advisers. He answered that the government is different from financial institutions because it can print money, and statistically the United States is not as bad off as some other countries. For an investor, these responses do not inspire confidence.

He went on to say that the government needs to focus on jobs now, because without an economic recovery, the rest does not matter. It’s a valid point, but an insufficient excuse for holding off on addressing the long-term structural deficit. If we are going to spend more now, it is imperative that we lay out a credible plan to avoid falling into a debt trap. Even using the administration’s optimistic 10-year forecast, it is clear that we will have problematic deficits for the next decade, which ends just as our commitments to baby boomers accelerate.

Modern Keynesianism works great until it doesn’t. No one really knows where the line is. One obvious lesson from the economic crisis is that we should get rid of the official credit ratings that inspire false confidence and, worse, are pro-cyclical, aggravating slowdowns and inflating booms. Congress has a rare opportunity in the current regulatory reform effort to eliminate the rating system. For now, it does not appear interested in taking sufficiently aggressive action. The big banks and bond buyers have told Congress they want to continue the current system.

As William Gross, the managing director of the bond management company Pimco, put it in his last newsletter, “Firms such as Pimco with large credit staffs of their own can bypass, anticipate and front run all three [rating agencies], benefiting from their timidity and lack of common sense.”

Given how sophisticated bond buyers use the credit rating system to take advantage of more passive market participants, it is no wonder they stress the continued need to preserve the status quo.

It would be better to have each investor individually assess credit-seeking entities. Certainly, the creditworthiness of governments should not be determined by a couple of rating agency committees.

Consider this: When Treasury Secretary Timothy Geithner promises that the United States will never lose its AAA rating, he chooses to become dependent on the whims of the Standard & Poor’s ratings committee rather than the diverse views of the many participants in the capital markets. It is not hard to imagine a crisis where just as the Treasury secretary seeks buyers of government debt in the face of deteriorating market confidence, a rating agency issues an untimely downgrade, setting off a rush of sales by existing bondholders. This has been the experience of many troubled corporations, where downgrades served as the coup de grâce.

The current upset in the European sovereign debt market is a prequel to what might happen here. Banks can hold government debt with a so-called zero-risk weighting, which means zero capital requirements. As a result, European banks stocked up on Greek debt, and sold sovereign credit default swaps, and now need to be bailed out to avoid another banking crisis.

As we saw first in Dubai and now in Greece, it appears that governments’ response to the failure of Lehman Brothers is to use any means necessary to avoid another Lehman-like event. This policy transfers risk from the weak to the strong — or at least the less weak — setting up the possibility of the crisis ultimately spreading from the “too small to fails,” like Greece, to “too big to bails,” like members of the Group of 7 industrialized nations.

We should have learned by now that each credit — no matter how unthinkable its failure would be — has risk and requires capital. Just as trivial capital charges encouraged lenders and borrowers to overdo it with AAA-rated collateral debt obligations, the same flawed structure in the government debt market encourages and therefore practically ensures a repeat of this behavior — leading to an even larger crisis.

I don’t believe a United States debt default is inevitable. On the other hand, I don’t see the political will to steer the country away from crisis. If we wait until the markets force action, as they have in Greece, we might find ourselves negotiating austerity programs with foreign creditors.

Some believe this could be avoided by printing money. Despite the promises by the Federal Reserve chairman, Ben Bernanke, not to print money or “monetize” the debt, when push comes to shove, there is a good chance the Fed will do so, at least to the point where significant inflation shows up even in government statistics.

That the recent round of money printing has not led to headline inflation may give central bankers the confidence that they can pursue this course without inflationary consequences. However, printing money can go only so far without creating inflation.

Government statistics are about the last place one should look to find inflation, as they are designed to not show much. Over the last 35 years the government has changed the way it calculates inflation several times. According to the Web site Shadow Government Statistics, using the pre-1980 method, the Consumer Price Index would be over 9 percent, compared with about 2 percent in the official statistics today.

While the truth probably lies somewhere in the middle, this doesn’t even take into account inflation we ignore by using a basket of goods that don’t match the real-world cost of living. (For example, health care costs are one-sixth of G.D.P. but only one-sixteenth of the price index, and rising income and payroll taxes do not count as inflation at all.)

Why does the government understate rising costs? Low official inflation benefits the government by reducing inflation-indexed payments, including Social Security. Lower official inflation means higher reported real G.D.P., higher reported real income and higher reported productivity.

Subdued reported inflation also enables the Fed to rationalize easy money. The Fed wants to have low interest rates to fight unemployment, which, in a new version of the trickle-down theory, it believes can be addressed through higher stock prices. The Fed hopes that by denying savers an adequate return in risk-free assets like savings deposits, it will force them to speculate in stocks and other “risky assets.” This speculation drives stock prices higher, which creates a “wealth effect” when the lucky speculators spend some of their gains on goods and services. The purchases increase aggregate demand and lead to job creation.

Easy money also aids the banks, helping them earn back their still unacknowledged losses. This has the perverse effect of discouraging banks from making new loans. If banks can lend to the government, with no capital charge and no perceived risk and earn an adequate spread, then they have little incentive to lend to small businesses or consumers. (For this reason, higher short-term rates could very well stimulate additional lending to the private sector.)

Easy money also helps the fiscal position of the government. Lower borrowing costs mean lower deficits. In effect, negative real interest rates are indirect debt monetization. Allowing borrowers, including the government, to get addicted to unsustainably low rates creates enormous solvency risks when rates eventually rise.

While one can debate where we are in the recovery, one thing is clear — the worst of the last crisis has passed. Nominal G.D.P. growth is running in the mid-single digits. The emergency has passed and yet the Fed continues with an emergency zero-interest rate policy. Perhaps easy money is still appropriate — but a zero-rate policy creates enormous distortions in incentives and increases the likelihood of a significant crisis later. It was not lost on the market that during this month’s sell-off, with rates around zero, there is no room for further cuts should the economy roll over.

EASY money has negative consequences in addition to the risk of inflation and devaluing the dollar. It can also feed asset bubbles. In recent years, we have gone from one bubble and bailout to the next. Each bailout has rewarded those who acted imprudently. This has encouraged additional risky behavior, feeding the creation of new, larger bubbles.

The Fed bailed out the equity markets after the crash of 1987, which fed a boom ending with the Mexican crisis and bailout. That Treasury-financed bailout started a bubble in emerging market debt, which ended with the Asian currency crisis and Russian default. The resulting organized rescue of Long-Term Capital Management’s counterparties spurred the Internet bubble. After that popped, the rescue led to the housing and credit bubble. The deflationary aspects of that bubble popping created a bubble in sovereign debt, despite the fiscal strains created by the bailouts. The Greek crisis may be the first sign of the sovereign debt bubble bursting.

Though we don’t know what’s going to happen next, the good news for our grandchildren is that we will have to face our own debts. If we realize that our own future is at risk, we might be more serious about changing course. If we don’t, Mr. Geithner and others might regret having never said never about America’s rating.

David Einhorn is the president of Greenlight Capital, a hedge fund, and the author of “Fooling Some of the People All of the Time.” Investment accounts managed by Greenlight may have a position (long or short) in the securities discussed in this article.

Solutions for a crisis in its sovereign stage

By Nouriel Roubini and Arnab Das
2010-5-31
financialtimes.com

The largest financial crisis in history is spreading from private to sovereign entities. At best, Europe’s recovery will suffer and the collapsing euro will subtract from growth in its key trading partners. At worst, a disintegration of the single currency or a wave of disorderly defaults could unhinge the financial system and precipitate a double-dip recession.

How did it come to this? Starting in the 1970s, financial liberalisation and innovation eased credit constraints on the public and private sectors. Households in advanced economies – where real income growth was anaemic – could use debt to spend beyond their means. The process was fed by ever laxer regulation, increasingly frequent and expensive government and International Monetary Fund bail-outs in response to increasingly frequent and expensive crises, and easy monetary policy from the 1990s. Political support for this democratisation of credit and home-ownership compounded the trend after 2000.

Paradigm shifts were invoked to justify debt-fuelled global growth: the transition from cold war to Washington Consensus; the re-integration of emerging markets into the global economy; the “Goldilocks” combination of high growth and low inflation; a much-ballyhooed convergence ahead of monetary union across Europe; and rapid financial innovation.

The result was a consumption binge in deficit countries and an export surge in surplus countries, with vendor financing courtesy of the latter. Global output and growth, corporate profits, household income and wealth, and public revenue and spending temporarily shot well above equilibrium. Wishful thinking allowed asset prices to reach absurd heights and pushed risk premiums to incredible lows. When the asset and credit bubbles burst, it became clear that the world faced a lower speed limit on growth than we had banked on.

Now, governments everywhere are releveraging to socialise private losses and jump-start private demand. But public debt is ultimately a private burden: governments subsist by taxing private income and wealth, or through the ultimate capital levy of inflation or outright default. Eventually governments must deleverage too, or else public debt will explode, precipitating further, deeper public and private-sector crises.

This is already happening in the front-line of the crisis, eurozone sovereign debt. Greece is first over the edge; Ireland, Portugal and Spain trail close behind. Italy, while not yet illiquid, faces solvency risks. Even France and Germany have rising deficits. UK budget cuts are starting. Eventually Japan and the US will have to cut too.

In the early part of the crisis, governments acted in unison to restore confidence and economic activity. The Group of 20 coalesced after the crash of 2008-09; we all were in the same boat together, sinking fast.

But in 2010, national imperatives reasserted themselves. Co-ordination is now lacking: Germany is banning naked short selling unilaterally and the US is pursuing its own financial sector reform. Surplus countries are unwilling to stimulate consumption, while deficit countries are building unsustainable public debt.

The eurozone offers an object lesson in how not to respond to a systemic crisis. Member states started going it alone when they carved up pan-European banks along national lines in 2008. After much dithering and denial over Greece, leaders orchestrated an overwhelming show of force; a €750bn bail-out bolstered confidence for one day. But the rules went out of the window. Sovereign rescues are legitimised by an escape clause from the “no bail-out” rule intended for acts of God, not man-made debt. The European Central Bank began buying government bonds days after insisting it would not. Tensions in the Franco-German axis are palpable.

Instead of Balkanised local responses, we need a comprehensive solution to this global problem.

First, the eurozone must get its act together. It must deregulate, liberalise, reform the south and stoke demand in the north to restore dynamism and growth; ease monetary policy to prevent deflation and boost competitiveness; implement sovereign debt restructuring mechanisms to limit moral hazard from bail-outs; and put expansion of the eurozone on ice.

Second, creditors need to take a hit, and debtors adjust. This is a solvency problem, demanding a grand work-out. Greece is the tip of the iceberg; banks in Spain and elsewhere in Europe stand knee-deep in bad debt, while problems persist in US residential and global commercial property.

Third, fiscal sustainability must be restored, with a focus on timetables and scenarios for revenues and spending, ageing-related costs and contingencies for future shocks, rather than on fiscal rules.

Fourth, it is time for radical reform of finance. The majority of proposals on the table are inadequate or irrelevant. Large financial institutions must be unbundled; they are too big, interconnected and complex to manage. Investors and customers can find all the traditional banking, investment banking, hedge fund, mutual fund and insurance services they need in specialised firms. We need to go back to Glass-Steagal on steroids.

Last, the global economy must be rebalanced. Deficit countries need to boost savings and investment; surplus countries to stimulate consumption. The quid pro quo for fiscal and financial reform in deficit countries must be deregulation of product, service and labour markets to boost incomes in surplus countries.

Nouriel Roubini is founder and chairman of Roubini Global Economics. Arnab Das is RGE’s managing director for market research and strategy

Why an ’80s themed birthday party?  Because Lena and Magnus both turned 40 and 40+40=80.  Good times!

We had a great week visiting my mother, who consults for the UN.  We got to see some of Susanne’s friends, go to the Opera, tour the UN, go to a reception, and eat some great food, hear some great music, and more.

We were in town for the excellent FrozenRails conference.

This morning’s diversion (the creation of this video) started with me pondering the question: “Might Eyjafjallajokull’s ash cloud jeopardize the warm weather we’re starving for after a long winter in Europe?”

Based on this article, it sounds like the current plume isn’t big enough to have much of a global impact.  That’s the good news.  The bad news is that northern Europe will likely suffer some ill effects, even if the volcano is done erupting (last time the eruptions went on for over a year).

2010-5-5 Update: Bido ran out of runway and put itself on the auction block today (details here).

Since discovering and testing Bido over the past few months, I’ve decided that it’s the best way to quickly and easily trim down my domain name portfolio, especially sub-$500 domain names (that’s because Bido has no minimum commission, whereas Sedo has a $50 minimum).

While Bido is still young, with it’s share of little bugs, it’s developers are rapidly iterating and improving the site, which is one reason why it’s growing so fast, taking market share from the larger players, such as Sedo. They’re also friendly and helpful and will respond rapidly and personally should you have any questions, comments, etc.

How Bido works

1. Sellers submit domain names for consideration by the community.
2. The community votes to send names to auction.
3. Bido runs the auctions and provides the escrow service for the Buyers and Sellers.

That’s basically it (there are more advanced features to explore later).  To reward the community for participating in the selection process, Bido has created an innovative system that works like this: Every time an item you voted for sells, you get a percentage of the sale price. The earliest voters earn the most, and you can earn up to 0.77% of the sale price.

What I have listed on Bido right now

• Upcoming auctions (place a pre-bid or bid)
• Possible future auctions (vote to send them to auction)

Conclusion

I know I titled this blog post “Bido vs. Sedo,” but, for my use case at least, there is no comparison.  Bido works, Sedo doesn’t, especially for domain names sales under $500, where Sedo’s $50 minimum commission is always higher than Bido’s 10% commission, with no minimum.

That said, if you have a super-premium domain name, you should contact all the big players and invite them to a beauty contest (i.e., have them make a custom presentation and offer).  What you need is maximum market exposure through a polished, professional, and personal sales team and process.  You also want a tiered commission structure that aligns interests properly (see “Bootstrap or Die” for my colorful rant that touches on that point, among others).  They should each give you a custom presentation, in person and/or by video/web conference, laying out their strategy and sales process for your particular domain name, who will execute it, how, when, and for how much.  A clear winner should emerge from that process.  Then negotiate and sign the deal (I use EchoSign.com to get documents signed electronically — works great and is free for up to five contracts per month).

For those of you selling medium value names, I see no clear Sedo/Bido winner.  If you do, please share your experience and reasoning in the comments section.  Thanks.

Note: If you’re a do-it-yourselfer, or a serious domainer, and you are selling a valuable domain, you should probably be running your own “direct to end user” sales process, such as described here: “Domain Sale to an End User” (also see Elliot’s other articles and links).

April updates (on my recent sales and coming inventory):

1. LoanManager.com auction just sold for $451, after receiving 29 bids.  Bido took a $45.10 (10%) commission.
2. FatBuzz.com sold $300 on Sedo after a brief negotiation.  Sedo took a $50 (17%) commission.  That is why Bido is better for sales below $500.
3. Someone just pre-bid LaunchOrDie.com at Bido. That auction is on May 3rd at 12:36 PM EST time.  I’m also selling BootstrapOrDie.com.
4. More domains going on the block next week.  Check the Bido links above (under the “What I have listed on Bido right now” heading).
5. Next, I’ll be putting together a prospect list and selling 20009.com to a Realtor in my old hood in Washington, DC.  Even back in 2004, when I bought that name to sell my co-op directly, Realtors were calling and emailing about it.  That name, and the crude website I built and hosted there, sold my apartment for $30,000 more than the highest offer the Realtor brought me before I “let her go.”  So $30,000 is the minimum I will consider accepting.The top Realtors — individual people — in that zip code sell $20+ million in real estate each.  The top companies in the hundreds of millions.  The most natural buyer is, therefore, a company or a group of Realtors.  Maybe I will put it into a company and sell them shares in the name, which they can trade freely.  Hmmm.  Could be good for my mortgage names as well.  Form a company or cooperative and sell rights or leads to loan officers or companies, who can themselves buy/sell those rights (and pay a transfer fee for that).  I’ll pool their resources to get good prices on media buys to drive traffic to the website.  Will need a means to collect the annual marketing budget (membership fees or commissions or what).  Maybe a cooperative or association structure.  Hmmm.

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Just messing around on this beautiful, snowy day here in Sweden. The weather, music, and mood all came together. Plus a new tripod (thanks, Hugo).

Click that first picture or here to see the snow falling outside our window. I’m glad I decided to stop to smell the flowers (thanks, Cici), and to watch, listen, and feel the snow and wind, and to hear, for the first time, a new rendition of an all-time favorite song. That’s what sealed the deal, the Floyd cover (thanks, Christy).

More pics after the jump.  The first one (below) is from Monday (2/22), the second one is from Thursday (2/25) and the third one is from Tuesday (2/23). The tulip pics and video (above) are from Saturday (2/20). The video cover shot is from Sunday (2/21).

“Nature does not hurry, yet everything is accomplished.”
~ Lao Tzu

PS #1: Since some of you asked, I added the wind that you hear come in when he sings “blown on the steel breeze” (around 50 seconds in).  The wind is the actual wind from the snow storm you see, recorded with that video.  I set up the tripod on our balcony and opened the window and left it for five minutes.  I removed the wind from the video after 45 seconds to get back to the pure music, and because a European Magpie (only non-mammal capable of recognizing itself in a mirror) started cackling, which disrupted the Zen-meditation-like feeling of the video.  Also for those who asked, here’s the CD with the song: Christy Moore: “Listen” (Amazon.com link).

PS #2: This post is getting a lot of visitors. If any of you professional photographers/writers who may be interested in collaborating with me and a seasoned and professional marketer on an HDR project, please get in touch.

PS #3: If you live in (or will live in) Gothenburg and might be interested in renting our 63-square meter (678-square feet) apartment in the future, get in touch. It’s located in Kalleback, walking distance to downtown in one direction and a golf course and huge lake in the other (here’s an animated trail map with pics I made of our favorite loop from the apartment building up to the lake and back).  Many other amenities withing a few minutes walk, including three super markets (ICA Maxi, Willys, Netto), one gym (SportLife), bike/ski shop, two gas stations, 7-11, post office, restaurants (pizza place is literally two minutes away), and a lot more. Besides the great view, the inside of the apartment was almost completely renovated in 2009: brand new kitchen and bathroom, new paint and wall paper everywhere, new kitchen floor, new appliances, more.  Pics here.  Not sure if or when it will become available, but maybe later this year.  The apartment will be rented partially furnished: sofa, coffee table, kitchen table and chairs, bookshelves, great wardrobes, a sideboard/cabinet, and a killer bed. Rent will probably be somewhere around 9000kr per month and include periodic professional apartment cleaning and window cleaning. There you have it.

Things might be pretty quite around here for a while (at least). Why, because I’m super busy with various projects and using Facebook, Twitter, and FriendFeed more than this blog .

I’ve also started experimenting with Blogger.com, which I like better than WordPress.com for hosted blogs. Here’s the first real post on Bootstrappy: “Bootstrap or Die: Lessons Learned From a Web Startup’s Murder/Suicide” (that’s the post that the chart above belongs to).

Cheers!

Here’s how to geotag your pics and make an animated map of your own:

1. Get a GPS tracker (or other device) and learn how to use it.  I have, and like, the Columbus V-900 GPS Data Logger.  Here it is on Amazon.com and here are some review links from Google. I especially found this review, and it’s comments, helpful and interesting.
2. Take pictures with your digital camera. Make sure the clock on your camera is set accurately (as close as you can get to the exact correct time). And, make sure the camera and the format is compatible with your software (just use JPG format and you should be fine).
3. Upload your GPS log file and pictures to your computer.
4. Use the software that came with your device (or other software) to geotag your pics.  The software matches your pics to your data points using the time (that’s why you need to make sure your camera clock is set as accurately as possible).
5. Upload everything to EveryTrail.com or one of the other free sites (there are others, right?).

That’s it. Use the documentation that came with your GPS, Google, and trial-and-error to perfect your workflow. Cheers!

It’s been like watching a slow motion train wreak build momentum these past eight years. And now we’re past the event horizon. Click the graphic and read the article for details. Also see Krugman’s 2009-11-22 article: “The Phantom Menace” and this time-lapse map showing the unemployment rate from January 2007 to September 2009.

PAYBACK TIME
Wave of Debt Payments Facing U.S. Government
By Edmund L. Andrews
2009-11-23
NY Times

WASHINGTON — The United States government is financing its more than trillion-dollar-a-year borrowing with i.o.u.’s on terms that seem too good to be true. But that happy situation, aided by ultralow interest rates, may not last much longer. Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.

Even as Treasury officials are racing to lock in today’s low rates by exchanging short-term borrowings for long-term bonds, the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages.

With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.

In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.

The potential for rapidly escalating interest payouts is just one of the wrenching challenges facing the United States after decades of living beyond its means.

The surge in borrowing over the last year or two is widely judged to have been a necessary response to the financial crisis and the deep recession, and there is still a raging debate over how aggressively to bring down deficits over the next few years. But there is little doubt that the United States’ long-term budget crisis is becoming too big to postpone.

Americans now have to climb out of two deep holes: as debt-loaded consumers, whose personal wealth sank along with housing and stock prices; and as taxpayers, whose government debt has almost doubled in the last two years alone, just as costs tied to benefits for retiring baby boomers are set to explode.

The competing demands could deepen political battles over the size and role of the government, the trade-offs between taxes and spending, the choices between helping older generations versus younger ones, and the bottom-line questions about who should ultimately shoulder the burden.

“The government is on teaser rates,” said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates lower deficits. “We’re taking out a huge mortgage right now, but we won’t feel the pain until later.”

So far, the demand for Treasury securities from investors and other governments around the world has remained strong enough to hold down the interest rates that the United States must offer to sell them. Indeed, the government paid less interest on its debt this year than in 2008, even though it added almost $2 trillion in debt.

The government’s average interest rate on new borrowing last year fell below 1 percent. For short-term i.o.u.’s like one-month Treasury bills, its average rate was only sixteen-hundredths of a percent.

“All of the auction results have been solid,” said Matthew Rutherford, the Treasury’s deputy assistant secretary in charge of finance operations. “Investor demand has been very broad, and it’s been increasing in the last couple of years.”

The problem, many analysts say, is that record government deficits have arrived just as the long-feared explosion begins in spending on benefits under Medicare and Social Security. The nation’s oldest baby boomers are approaching 65, setting off what experts have warned for years will be a fiscal nightmare for the government.

“What a good country or a good squirrel should be doing is stashing away nuts for the winter,” said William H. Gross, managing director of the Pimco Group, the giant bond-management firm. “The United States is not only not saving nuts, it’s eating the ones left over from the last winter.”

The current low rates on the country’s debt were caused by temporary factors that are already beginning to fade. One factor was the economic crisis itself, which caused panicked investors around the world to plow their money into the comparative safety of Treasury bills and notes. Even though the United States was the epicenter of the global crisis, investors viewed Treasury securities as the least dangerous place to park their money.

On top of that, the Fed used almost every tool in its arsenal to push interest rates down even further. It cut the overnight federal funds rate, the rate at which banks lend reserves to one another, to almost zero. And to reduce longer-term rates, it bought more than $1.5 trillion worth of Treasury bonds and government-guaranteed securities linked to mortgages.

Those conditions are already beginning to change. Global investors are shifting money into riskier investments like stocks and corporate bonds, and they have been pouring money into fast-growing countries like Brazil and China.

The Fed, meanwhile, is already halting its efforts at tamping down long-term interest rates. Fed officials ended their $300 billion program to buy up Treasury bonds last month, and they have announced plans to stop buying mortgage-backed securities by the end of next March.

Eventually, though probably not until at least mid-2010, the Fed will also start raising its benchmark interest rate back to more historically normal levels.

The United States will not be the only government competing to refinance huge debt. Japan, Germany, Britain and other industrialized countries have even higher government debt loads, measured as a share of their gross domestic product, and they too borrowed heavily to combat the financial crisis and economic downturn. As the global economy recovers and businesses raise capital to finance their growth, all that new government debt is likely to put more upward pressure on interest rates.

Even a small increase in interest rates has a big impact. An increase of one percentage point in the Treasury’s average cost of borrowing would cost American taxpayers an extra $80 billion this year — about equal to the combined budgets of the Department of Energy and the Department of Education.

But that could seem like a relatively modest pinch. Alan Levenson, chief economist at T. Rowe Price, estimated that the Treasury’s tab for debt service this year would have been $221 billion higher if it had faced the same interest rates as it did last year.

The White House estimates that the government will have to borrow about $3.5 trillion more over the next three years. On top of that, the Treasury has to refinance, or roll over, a huge amount of short-term debt that was issued during the financial crisis. Treasury officials estimate that about 36 percent of the government’s marketable debt — about $1.6 trillion — is coming due in the months ahead.

To lock in low interest rates in the years ahead, Treasury officials are trying to replace one-month and three-month bills with 10-year and 30-year Treasury securities. That strategy will save taxpayers money in the long run. But it pushes up costs drastically in the short run, because interest rates are higher for long-term debt.

Adding to the pressure, the Fed is set to begin reversing some of the policies it has been using to prop up the economy. Wall Street firms advising the Treasury recently estimated that the Fed’s purchases of Treasury bonds and mortgage-backed securities pushed down long-term interest rates by about one-half of a percentage point. Removing that support could in itself add $40 billion to the government’s annual tab for debt service.

This month, the Treasury Department’s private-sector advisory committee on debt management warned of the risks ahead.

“Inflation, higher interest rate and rollover risk should be the primary concerns,” declared the Treasury Borrowing Advisory Committee, a group of market experts that provide guidance to the government, on Nov. 4.

“Clever debt management strategy,” the group said, “can’t completely substitute for prudent fiscal policy.”

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Just time for a quick update on the action that began last month (see previous blog or TwitPic):

• See annotations on the above and below chart for today’s updates.
• My short position this time is double what it was last time (reinvesting profit), but I’ll keep it on a short leash.

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I consider this a must read article. It’s basically analogous to Roubini’s February 2008 article “The Twelve Steps to Financial Disaster,” which I posted back then (you can download the PDF from the first link here).

Excerpt: So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles.

“Mother of all carry trades faces an inevitable bust”
By Nouriel Roubini
2009-11-1
Financial Times (original)

Since March there has been a massive rally in all sorts of risky assets – equities, oil, energy and commodity prices – a narrowing of high-yield and high-grade credit spreads, and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply , while government bond yields have gently increased but stayed low and stable.

This recovery in risky assets is in part driven by better economic fundamentals. We avoided a near depression and financial sector meltdown with a massive monetary, fiscal stimulus and bank bail-outs. Whether the recovery is V-shaped, as consensus believes, or U-shaped and anaemic as I have argued, asset prices should be moving gradually higher.

But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.

So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions.

Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March.

People’s sense of the value at risk (VAR) of their aggregate portfolios ought, instead, to have been increasing due to a rising correlation of the risks between different asset classes, all of which are driven by this common monetary policy and the carry trade. In effect, it has become one big common trade – you short the dollar to buy any global risky assets.

Yet, at the same time, the perceived riskiness of individual asset classes is declining as volatility is diminished due to the Fed’s policy of buying everything in sight – witness its proposed $1,800bn (£1,000bn, €1,200bn) purchase of Treasuries, mortgage-backed securities (bonds guaranteed by a government-sponsored enterprise such as Fannie Mae) and agency debt. By effectively reducing the volatility of individual asset classes, making them behave the same way, there is now little diversification across markets – the VAR again looks low.

So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles.

While this policy feeds the global asset bubble it is also feeding a new US asset bubble. Easy money, quantitative easing, credit easing and massive inflows of capital into the US via an accumulation of forex reserves by foreign central banks makes US fiscal deficits easier to fund and feeds the US equity and credit bubble. Finally, a weak dollar is good for US equities as it may lead to higher growth and makes the foreign currency profits of US corporations abroad greater in dollar terms.

The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy. Near-zero policy rates and quantitative easing were already in place in the UK, eurozone, Japan, Sweden and other advanced economies, but the dollar weakness is making this global monetary easing worse. Central banks in Asia and Latin America are worried about dollar weakness and are aggressively intervening to stop excessive currency appreciation. This is keeping short-term rates lower than is desirable. Central banks may also be forced to lower interest rates through domestic open market operations. Some central banks, concerned about the hot money driving up their currencies, as in Brazil, are imposing controls on capital inflows. Either way, the carry trade bubble will get worse: if there is no forex intervention and foreign currencies appreciate, the negative borrowing cost of the carry trade becomes more negative. If intervention or open market operations control currency appreciation, the ensuing domestic monetary easing feeds an asset bubble in these economies. So the perfectly correlated bubble across all global asset classes gets bigger by the day.

But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.

Why will these carry trades unravel? First, the dollar cannot fall to zero and at some point it will stabilise; when that happens the cost of borrowing in dollars will suddenly become zero, rather than highly negative, and the riskiness of a reversal of dollar movements would induce many to cover their shorts. Second, the Fed cannot suppress volatility forever – its $1,800bn purchase plan will be over by next spring. Third, if US growth surprises on the upside in the third and fourth quarters, markets may start to expect a Fed tightening to come sooner, not later. Fourth, there could be a flight from risk prompted by fear of a double dip recession or geopolitical risks, such as a military confrontation between the US/Israel and Iran. As in 2008, when such a rise in risk aversion was associated with a sharp appreciation of the dollar, as investors sought the safety of US Treasuries, this renewed risk aversion would trigger a dollar rally at a time when huge short dollar positions will have to be closed.

This unraveling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.

The writer is a professor at New York University’s Stern School of Business and chairman of Roubini Global Economics

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2009-10-29 UPDATE: Updated NASDAQ chart and comments.

Just time quick post. The annotations on the chart are self explanatory. Coming after a 7-month, 73% rally, they represent a yellow flag (caution). See also this weekly chart I posted last month, when we were at this same level, the one I posted yesterday, and the one shown below:

The mother of all moral hazards?

I’ll close with a quote from Mervyn King (Bank of England): “Bank bailouts created the ‘biggest moral hazard in history.'”  Indeed!

The GMO Quarterly Letter

“Just Deserts and Markets Being Silly Again” (PDF).  Good read.

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1a) The image above (except for my comments) came from Mary Meeker’s “Economy + Internet Trends” report (PDF). It’s is pretty much the same stuff her and her interns have been pumping out since the ’90s. Check it out for a regurgitation and updating of conventional “wisdom.”

1b) Comparing Rallies: 2009 vs. 1974-75 vs. 1938-39: Click to view.

2) Now on to the fun stuff: Chuck Norris on the downturn (finance humor):

• Chuck Norris has killed black swans with his bare hands.
• Chuck Norris rubs the VIX into his chest.
• Chuck Norris continues to short the Aussie market.

• Chuck Norris flies First Class.
• Chuck Norris fought gamma in nam and won.
• Chuck Norris still has his PB balances with Lehman. Don’t mess with him.
• Chuck Norris doesn’t use gates. He stops investors with one hand.
• Chuck Norris thinks 2 & 20 is soft.
• Chuck Norris will sub-underwrite Iceland.
• Chuck Norris isn’t scared by crowded trades.
• Chuck Norris will trade with any counter-party.
• Chuck Norris takes Iron Ore as a vitamin supplement.
• Chuck Norris trades currency with Citic.
• Chuck Norris thinks Fannie & Freddie should toughen up, and use some real leverage.
• Chuck Norris thinks Credit Crunch is a breakfast cereal.
• Chuck Norris’s subprime CDO is par bid.
• Only Chuck Norris can rollover commercial paper.
• Chuck Norris funds at Libor flat.
• Chuck Norris Asset Management is hiring and paying top dollar.
• Chuck Norris sold Countrywide cds at +1200 and bought it back at+350
• Chuck Norris can borrow at the discount window.
• Chuck Norris can sell $300bln in high yield loans before lunch.
• Chuck Norris’s curves are never inverted.
• Chuck Norris doesn’t hedge. He waits.
• Chuck Norris doesn’t mark to market. The market marks to Chuck Norris.

Bonus tidbits:

• The mother of all moral hazards? Bank of England’s Mervyn King: “Bank bailouts created ‘biggest moral hazard in history.'”
• PBS’s “Warning” uses the same Greenspan/Bush pic I used on AlansBubble.com (see its 2005 mention in the Financial Times).

Bonus random Chuck Norris jokes:

• Chuck Norris once had an erection while lying face down and struck oil.
• Chuck Norris once ate a whole cake before his friends could tell him there was a stripper in it.
• The Great Wall of China was originally created to keep Chuck Norris out. It failed miserably.
• The last digit of pi is Chuck Norris. He is the end of all things.
• The quickest way to a man’s heart is Chuck Norris’s fist.
• There is no ‘ctrl’ button on Chuck Norris’s computer; He is always in control.
• Chuck Norris does not need to jail break his iPhone.

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