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Archive for December, 2008

News on paper?

by henrycopeland
Sunday, December 14th, 2008

Though I love the experience of paging through a thick newspaper, the concept is clearly on in trouble. The WSJ reports:

Detroit’s major dailies are considering ending home delivery on most days of the week, as they battle a sharp falloff in advertising revenue. More newspapers are contemplating similar moves as the erosion of advertising and rising costs of print and delivery have brought publishers to their knees.

How long before some kid says “Daddy, why did they call it news if they took the time to put it on paper?”

We are all Kerviel Madoff

by henrycopeland
Sunday, December 14th, 2008

And so it goes. From the FT.

Investors around the world were rushing on Friday to assess potential losses from what could be Wall Street’s biggest fraud – a multi-billion-dollar scheme allegedly perpetrated by investment manager Bernard Madoff.

The case threatens to stoke fears among investors and encourage withdrawals from hedge funds struggling to raise cash to meet redemptions. …

“These people went to sleep Wednesday night thinking they had a comfortable retirement and now they are thrown into a spiral of horror,” said Stephen Weiss, a lawyer representing people who had invested a combined $1bn with Mr Madoff. “Some of these people don’t know how they are going to pay their mortgage.”

The number being bandied around is $50 billion.

Scroll back 10 months. At that point, the world was horrified that fraud by a young French trader, Jerome Kerviel, had cost one of Europe’s biggest banks $7 billion. How could this happen? As I wrote then

Kerviel — speculating wildly, way beyond his limits, hiding his speculation from everyone with a series of offsetting paper trades — is a near perfect metaphor for our entire economy. Everyone is in on it and nobody wants to look too closely at how rotten the whole scheme is.

With Madoff’s fraud, the trend becomes ever more evident. Multiple giant hedge funds were happy pad their portfolio’s with his easy, steady returns: borrow at 5% and get a guaranteed 10% return year-in and year-out? Why not do a couple billion of that trade? The SEC, which got multiple tipoffs that Madoff’s business was giga-Ponzi scheme, failed to follow through. The old idiot had to turn himself in.

There’s a pattern here people. Kerviel loses $7 billion in February; Madoff loses $50 billion in December. Citigroup asks for $25 billion in government aid; then 6 weeks later needs $300 billion. The government asks for $700 billion to bailout banks, then lends them $2 trillion behind the scenes.

The rule of thumb is add a zero every 6 to 12 months. Where does the next zero take us?

As I mentioned a few weeks back, it’s $65 trillion. That’s the size of the credit default swap market, the hidden metastatic cancer that oozes through every pore of our financial system. At some point soon, that sinkhole is going to swallow all the girders we’ve bolted together around its borders, all the concrete we’ve tried to pour to stabilize the inexorable earthward sucking.

We’re engaged in a game of mutual self-deception — things can’t be that bad. Can they?

Can they?


We’re living a giant Ponzi scheme.

House buyers knowingly and eagerly borrowed more than they could afford, believing that some new sucker would come to bail them out of their houses.

Banks knowingly lent money to uncredit-worthy borrowers in the pursuit of next quarter’s bonus.

Insurance companies and other premium hungry miscreants wrote insurance promises against the failure of other businesses, called Credit Default Swaps (CDS), creating liabilities that far exceed their assets. These liabilities don’t offset each other, they are lined up like dominoes and will tumble quickly when the right wind blows. The hand of God would not be powerful enough to turn back the tsunami of defaults that a few large defaults will set off. (In total, CDS liabilities are $65 trillion, five times bigger than the entire US GDP.)

Now, governments give “temporary” aid to banks that are known to have irreparable (unless there’s a violent paroxysm of inflation) holes in their balance sheets. Free market Republicans grab money intended to shore up housing prices to bailout automakers. Bernanke says, in almost as many words, that we’ll just have inflate our way out of housing defaults.

Prudent folks will head for the hills or prepare for hyperinflation.

Others will just keep grinning like Madoff’s investors when they went to bed last Thursday night.

What is your super-power?

by henrycopeland
Thursday, December 11th, 2008

I had fun answering questions from our neighbors Newfangled, who build websites for mid-size ad agencies’ clients. My favorite: “what is your super-power?”

Google snowflakes: natural or agency made?

by henrycopeland
Thursday, December 11th, 2008

I saw this video on logging into my gmail account.

At first glance, this seems just to be another example of the good old-fashion uber-casual geeky fun Googlers like to have with their own tools. “Just sharin’ somethin’ cool with the community, ya know.”

But watch again and you see agency values slathered on thick… the music, the pulse, the final screen’s typing and canned message.

It’s a bad sign when GOOG no longer trusts itself to be naturally appealing.


by henrycopeland
Thursday, December 11th, 2008

Initial unemployment claims, the best leading indicator we’ve got:

In the week ending Dec. 6, the advance figure for seasonally adjusted initial claims was 573,000, an increase of 58,000 from the previous week’s revised figure of 515,000. The 4-week moving average was 540,500, an increase of 14,250 from the previous week’s revised average of 526,250.

Expect to hear things like “teetering on the edge of a depression” from hysterical commentators later today.

Golden future: $1500 an ounce

by henrycopeland
Thursday, December 11th, 2008

Though this seems counter-intuitive in a deflationary period, I think one of these days gold is going to pop to $1500 an ounce… maybe even $10k.

Investors are desperately seeking something, anything that holds its value from month to month.

Currencies crumble. Companies collapse. Oil oscillates. Real estate rots. Banks rupture.

Desperate for a safe haven for their savings, investors bought $32 billion in T-bills yesterday at a 0% interest rate.

Gold could become a refuge for panicking investors.

But gold has no real use, you say.

Well, what practical use is a $10 bill for anything other than kindling a fire?

Currency has value because everyone believes it has value and agrees to use it as a token of exchange. If or when that perceived value erodes, there’s going to be a mad scramble into some new token of value.

Gold has been a traditional proxy for economic value for 1000s of years. Why? It’s uniform and portable. It’s not so scarce that it can’t be used — in a sliver — to buy a loaf of bread. Yet it’s relatively finite and can’t be printed by governments desperately trying to buy off angry voters.

If you don’t think the next stable haven is gold, please write me and tell me what you think is a safe harbor for economic value.

Shotgun shells? Bottled water? Penicillin? It sure isn’t Picassos or Porsches or penthouses.

Greece teeters

by henrycopeland
Thursday, December 11th, 2008

Erudite Ambrose Evans-Pritchard sums it up:

Greece’s euro membership has now led to a warped economy. The current account deficit is 15pc of GDP, the eurozone’s highest by far. Indeed, the deficit ($53bn) is the sixth biggest in the world in absolute terms — quite a feat for a country of 11m people.

Year after year of high inflation has eroded the competitive base of the economy. This is an insidious and slow effect, and very hard to reverse. Tourists are slipping away to Turkey, or Croatia. It will take a long time to lure them back.

The underlying rot was disguised by the global credit bubble, and by the Greek property boom. It is now being laid bare.

Greece has a public debt of 93 per cent of GDP, well above the Maastricht limit. This did not matter in 2007 when bond spreads over German Bunds were around 26 basis points, meaning that investors were willing to treat all eurozone debt as more or less equivalent.

It matters now. The credit default swaps on Greek sovereign debt were trading around 250 today (compared to 52 for Germany, 62 for the US, 120 for the UK, and 178 for Italy). It has moved into a class of its own.

This is potentially dangerous because Greece needs to tap the capital markets for 40bn euros next year to roll over debt and fund the budget deficit, as well as 15bn euros or so in bond issuance by banks under the state’s new guarantee.

Heather again

by henrycopeland
Wednesday, December 10th, 2008

Always stunning.

Ye Olde Economist

by henrycopeland
Friday, December 5th, 2008

The Economist is bullish about online advertising, though not exactly sure which kind of online advertising.

Paris will always have us

by henrycopeland
Thursday, December 4th, 2008

A friend wrote to ask for swift advice for a Paris visit with g-friend. My answer, the distillation of 4 years of fond memories, is always basically the same, so I’ll bookmark for future use:

Dude — I envy! Lunch at Minh Chau, amazing Vietnamese close to Pompidou, cheapest luxury in Paris. Drinks in the PM at George on top of Pompidou for great, relatively cheap view. See museums during the sequential night openings — Louvre, Musee du Paris, Tokyo, Pompidou — basically private showings. (I hate layout of Orsee day or night.) Our favorite spot for dinner is Brasserie Balthasar, full of young and old folk, rapscallion waiters. (Read Paris to the Moon for overview of the place — Gopnik claims it was ruined, but we saw no difference pre/post.) Flea market is good — be ready to brawl with pickpockets. Walk through the Palais Royale and the Luxembourg gardens when the pale winter light is unredeemably Parisian. Walk up the Eiffel Tower and along the Champs Elysee at night. Ramble in the Marais. Take pictures. Finally a literary must: reread The Sun Also Rises. Forget you’re reading a cliche — you’re reading a weirdly woven piece of tragic literature. Watch the number of times “money” is mentioned.

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