ON a Friday evening last month, the day after New York University's class of 2007 graduated, about 15 men and women assembled in front of Third Avenue North, an N.Y.U. dormitory on Third Avenue and 12th Street. They had come to take advantage of the university's end-of-the-year move-out, when students' discarded items are loaded into big green trash bins by the curb.
New York has several colleges and universities, of course, but according to Janet Kalish, a Queens resident who was there that night, N.Y.U.'s affluent student body makes for unusually profitable Dumpster diving. So perhaps it wasn't surprising that the gathering at the Third Avenue North trash bin quickly took on a giddy shopping-spree air, as members of the group came up with one first-class find after another.
Ben Ibershoff, a dapper man in his 20s wearing two bowler hats, dug deep and unearthed a Sharp television. Autumn Brewster, 29, found a painting of a Mediterranean harbor, which she studied and handed down to another member of the crowd.
Darcie Elia, a 17-year-old high school student with a half-shaved head, was clearly pleased with a modest haul of what she called “random housing stuff” — a desk lamp, a dish rack, Swiffer dusters — which she spread on the sidewalk, drawing quizzical stares from passers-by.
Ms. Elia was not alone in appreciating the little things. “The small thrills are when you see the contents of someone's desk and find a book of stamps,” said Ms. Kalish, 44, as she stood knee deep in the trash bin examining a plastic toiletries holder.
A few of those present had stumbled onto the scene by chance (including a janitor from a nearby homeless center, who made off with a working iPod and a tube of body cream), but most were there by design, in response to a posting on the Web site freegan.info.
The site, which provides information and listings for the small but growing subculture of anticonsumerists who call themselves freegans — the term derives from vegans, the vegetarians who forsake all animal products, as many freegans also do — is the closest thing their movement has to an official voice. And for those like Ms. Elia and Ms. Kalish, it serves as a guide to negotiating life, and making a home, in a world they see as hostile to their values.
Freegans are scavengers of the developed world, living off consumer waste in an effort to minimize their support of corporations and their impact on the planet, and to distance themselves from what they see as out-of-control consumerism. They forage through supermarket trash and eat the slightly bruised produce or just-expired canned goods that are routinely thrown out, and negotiate gifts of surplus food from sympathetic stores and restaurants.
They dress in castoff clothes and furnish their homes with items found on the street; at freecycle.com, where users post unwanted items; and at so-called freemeets, flea markets where no money is exchanged. Some claim to hold themselves to rigorous standards. “If a person chooses to live an ethical lifestyle it's not enough to be vegan, they need to absent themselves from capitalism,” said Adam Weissman, 29, who started freegan.info four years ago and is the movement's de facto spokesman.
Freeganism dates to the mid-'90s, and grew out of the antiglobalization and environmental movements, as well as groups like Food Not Bombs, a network of small organizations that serve free vegetarian and vegan food to the hungry, much of it salvaged from food market trash. It also has echoes of groups like the Diggers, an anarchist street theater troupe based in Haight-Ashbury in San Francisco in the 1960's, which gave away food and social services.
According to Bob Torres, a sociology professor at St. Lawrence University in Canton, N.Y., who is writing a book about the animal rights movement — which shares many ideological positions with freeganism — the freegan movement has become much more visible and increasingly popular over the past year, in part as a result of growing frustrations with mainstream environmentalism.
Environmentalism, Mr. Torres said, “is becoming this issue of, consume the right set of green goods and you're green,” regardless of how much in the way of natural resources those goods require to manufacture and distribute.
“If you ask the average person what can you do to reduce global warming, they'd say buy a Prius,” he added.
There are freegans all over the world, in countries as far afield as Sweden, Brazil, South Korea, Estonia and England (where much has been made of what The Sun recently called the “wacky new food craze” of trash-bin eating), and across the United States as well .
In Southern California, for example, “you can find just about anything in the trash, and on a consistent basis, too,” said Marko Manriquez, 28, who has just graduated from the University of California at San Diego with a bachelor's degree in media studies and is the creator of “Freegan Kitchen,” a video blog that shows gourmet meals being made from trash-bin ingredients. “This is how I got my futon, chair, table, shelves. And I'm not talking about beat-up stuff. I mean it's not Design Within Reach, but it's nice.”
But New York City in particular — the financial capital of the world's richest country — has emerged as a hub of freegan activity, thanks largely to Mr. Weissman's zeal for the cause and the considerable free time he has to devote to it. (He doesn't work and lives at home in Teaneck, N.J., with his father and elderly grandparents.)
Freegan.info sponsors organize Trash Tours that typically attract a dozen or more people, as well as feasts at which groups of about 20 people gather in apartments around the city to share food and talk politics.
In the last year or so, Mr. Weissman said, the site has increased the number and variety of its events, which have begun attracting many more first-time participants. Many of those who have taken part in one new program, called Wild Foraging Walks — workshops that teach people to identify edible plants in the wilderness — have been newcomers, he said.
The success of the movement in New York may also be due to the quantity and quality of New York trash. As of 2005, individuals, businesses and institutions in the United States produced more than 245 million tons of municipal solid waste, according to the E.P.A. That means about 4.5 pounds per person per day. The comparable figure for New York City, meanwhile, is about 6.1 pounds, according to statistics from the city's Sanitation Department.
“We have a lot of wealthy people, and rich people throw out more trash than poor people do,” said Elizabeth Royte, whose book “Garbage Land” (Little, Brown, 2005) traced the route her trash takes through the city. “Rich people are also more likely to throw things out based on style obsolescence — like changing the towels when you're tired of the color.”
At the N.Y.U. Dorm Dive, as the event was billed, the consensus was that this year's spoils weren't as impressive as those in years past. Still, almost anything needed to decorate and run a household — a TV cart, a pillow, a file cabinet, a half-finished bottle of Jägermeister — was there for the taking, even if those who took them were risking health, safety and a $100 fine from the Sanitation Department.
Ms. Brewster and her mother, who had come from New Jersey, loaded two area rugs into their cart. Her mother, who declined to give her name, seemed to be on a search for laundry detergent, and was overjoyed to discover a couple of half-empty bottles of Trader Joe's organic brand. (Free and organic is a double bonus). Nearby, a woman munched on a found bag of Nature's Promise veggie fries.
As people stuffed their backpacks, Ms. Kalish, who organized the event (Mr. Weissman arrived later), demonstrated the cooperative spirit of freeganism, asking the divers to pass items down to people on the sidewalk and announcing her finds for anyone in need of, say, a Hoover Shop-Vac.
“Sometimes people will swoop in and grab something, especially when you see a half-used bottle of Tide detergent,” she said. “Who wouldn't want it? But most people realize there's plenty to go around.” She rooted around in the trash bin and found several half-eaten jars of peanut butter. “It's a never-ending supply,” she said.
Many freegans are predictably young and far to the left politically, like Ms. Elia, the 17-year-old, who lives with her father in Manhattan. She said she became a freegan both for environmental reasons and because “I'm not down with capitalism.”
There are also older freegans, like Ms. Kalish, who hold jobs and appear in some ways to lead middle-class lives. A high school Spanish teacher, Ms. Kalish owns a car and a two-family house in Queens, renting half of it as a “capitalist landlord,” she joked. Still, like most freegans, she seems attuned to the ecological effects of her actions. In her house, for example, she has laid down a mosaic of freegan carpet parcels instead of replacing her aging wooden floor because, she said, “I'd have to take trees from the forest.”
Not buying any new manufactured products while living in the United States is, of course, basically impossible, as is avoiding everything that requires natural resources to create, distribute or operate. Don't freegans use gas or electricity to cook, for example, or commercial products to brush their teeth?
“Once in a while I may buy a box of baking soda for toothpaste,” Mr. Weissman said. “And, sure, getting that to market has negative impacts, like everything.” But, he said, parsing the point, a box of baking soda is more ecologically friendly than a tube of toothpaste, because its cardboard container is biodegradable.
These contradictions and others have led some people to suggest that freegans are hypocritical, making use of the capitalist system even as they rail against it. And even Mr. Weissman, who is often doctrinaire about the movement, acknowledges when pushed that absolute freeganism is an impossible dream.
Mr. Torres said: “I think there's a conscious recognition among freegans that you can never live perfectly.” He added that generally freegans “try to reduce the impact.”
It's not that freeganism doesn't require serious commitment. For freegans, who believe that the production and transport of every product contributes to economic and social injustice, usually in multiple ways, any interaction with the marketplace is fraught. And for some freegans in particular — for instance, Madeline Nelson, who until recently was living an upper-middle-class Manhattan life with all the attendant conveniences and focus on luxury goods — choosing this way of life involves a considerable, even radical, transformation.
Ms. Nelson, who is 51, spent her 20s working in restaurants and living in communal houses, but by 2003 she was earning a six-figure salary as a communications director for Barnes & Noble. That year, while demonstrating against the Iraq war, she began to feel hypocritical, she said, explaining: “I thought, isn't this safe? Here I am in my corporate job, going to protests every once in a while. And part of my job was to motivate the sales force to sell more stuff.”
After a year of progressively scaling back — no more shopping at Eileen Fisher, no more commuting by means other than a bike — Ms. Nelson, who had a two-bedroom apartment with a mortgage in Greenwich Village, quit her job in 2005 to devote herself full-time to political activism and freeganism.
She sold her apartment, put some money into savings, and bought a one-bedroom in Flatbush, Brooklyn, that she owns outright.
“My whole point is not to be paying into corporate America, and I hated paying a big loan to a bank,” she said while fixing lunch in her kitchen one recent afternoon. The meal — potato and watercress soup and crackers and cheese — had been made entirely from refuse left outside various grocery stores in Manhattan and Brooklyn.
The bright and airy prewar apartment Ms. Nelson shares with two cats doesn't look like the home of someone who spends her evenings rooting through the garbage. But after some time in the apartment, a visitor begins to see the signs of Ms. Nelson's anticonsumerist way of life.
An old lampshade in the living room has been trimmed with fabric to cover its fraying parts, leaving a one-inch gap where the material ran out. The ficus tree near the window came not from a florist, Ms. Nelson said, but from the trash, as did the CD rack. A 1920s loveseat belonged to her grandmother, and an 18th-century, Louis XVI-style armoire in the bedroom is a vestige of her corporate life.
The kitchen cabinets and refrigerator are stuffed with provisions — cornmeal, Pirouline cookies, vegetarian cage-free eggs — appropriate for a passionate cook who entertains often. All were free.
She longs for a springform pan in which to make cheesecakes, but is waiting for one to come up on freecycle.com. There are no new titles on the bookshelves; she hasn't bought a new book in six months. “Books were my impulse buy,” said Ms. Nelson, whose short brown hair and glasses frame a youthful face. Now she logs onto bookcrossing.com, where readers share used books, or goes to the public library.
But isn't she depriving herself unnecessarily? And what's so bad about buying books, anyway? “I do have some mixed feelings,” Ms. Nelson said. “It's always hard to give up class privilege. But freegans would argue that the capitalist system is not sustainable. You're exploiting resources.” She added, “Most people work 40-plus hours a week at jobs they don't like to buy things they don't need.”
Since becoming a freegan, Ms. Nelson has spent her time posting calendar items and other information online and doing paralegal work on behalf of bicyclists arrested at Critical Mass anticar rallies. “I'm not sitting in the house eating bonbons,” she said. “I'm working. I'm just not working for money.”
She is also spending a lot of time making rounds for food and supplies at night, and has come to know the cycles of the city's trash. She has learned that fruit tends to get thrown out more often in the summer (she freezes it and makes sorbet), and that businesses are a source for envelopes. A reliable spot to get bread is Le Pain Quotidien, a chain of bakery-restaurants that tosses out six or seven loaves a night. But Ms. Nelson doesn't stockpile. “The sad fact is you don't need to,” she said. “More trash will be there tomorrow.”
By and large, she said, her friends have been understanding, if not exactly enthusiastic about adopting freeganism for themselves. “When she told me she was doing this I wasn't really surprised — Madeline is a free spirit,” said Eileen Dolan, a librarian at a Manhattan law firm who has known Ms. Nelson since their college days at Stony Brook. But while Ms. Dolan agrees that society is wasteful, she said that going freegan is not something she would ever do. “It's a huge time commitment,” she said.
ONE evening a week after the Dorm Dive, a group of about 20 freegans gathered in a sparely furnished, harshly lit basement apartment in Bushwick, Brooklyn, to hold a feast. It was an egalitarian affair with no one officially in charge, but Mr. Weissman projected authority, his blue custodian-style work pants and fuzzy black beard giving him the air of a Latin American revolutionary as he wandered around, trailed by a Korean television crew.
Ms. Kalish stood over the sink, slicing vegetables for a stir-fry with a knife she had found in a trash bin at N.Y.U. A pot of potatoes simmered on the stove. These, like much of the rest of the meal, had been gathered two nights earlier, when Mr. Weissman, Ms. Kalish and others had met in front of a Food Emporium in Manhattan and rummaged through the store's clear garbage bags.
The haul had been astonishing in its variety: sealed bags of organic vegetable medley, bagged salad, heirloom tomatoes, key limes, three packaged strawberries-and-chocolate-dip kits, carrots, asparagus, grapes, a carton of organic soy milk (expiration date: July 9), grapefruit, mushrooms and, for those willing to partake, vacuum-packed herb turkey breast. (Some freegans who avoid meat will nevertheless eat it rather than see it go to waste.)
As operatic music played on a radio, people mingled and pitched in. One woman diced onions, rescuing pieces that fell on floor. Another, who goes by the name Petal, emptied bags of salad into a pan. As rigorous and radical as the freegan world view can be, there is also something quaint about the movement, at least the version that Mr. Weissman promotes, with its embrace of hippie-ish communal activities and its household get-togethers that rely for diversion on conversation rather electronic entertainment.
Making things last is part of the ethos. Christian Gutierrez, a 33-year-old former model and investment banker, sat at the small kitchen table, chatting. Mr. Gutierrez, who quit his banking job at Matthews Morris & Company in 2004 to pursue filmmaking, became a freegan last year, and opened a free workshop on West 36th Street in Manhattan to teach bicycle repair. He plans to add lessons in fixing home computers in the near future.
Mr. Gutierrez's lifestyle, like Ms. Nelson's, became gradually more constricted in the absence of a steady income. He lived in a Midtown loft until last year, when, he said, he got into a legal battle with his landlord over a rent increase — a relationship “ruined by greed,” he said. After that, he lived in his van for a while, then found an illegal squat in SoHo, which he shares with two others. Mr. Gutierrez had a middle-class upbringing in Dallas, and he said he initially found freeganism off-putting. But now he is steadfastly devoted to the way of life.
As people began to load plates of food, he leaned in and offered a few words of wisdom: “Opening that first bag of trash,” he said, “is the biggest step.”
21 June 2007
Market Ticker - housing dog crap.
Market Ticker: "Permits and housing starts came in like dogcrap, as expected. My shorts on the builders continue to look good, and I continue to ride that wave downward. In potentially very ominous news the western region of the nation showed the biggest decline in permits and starts; the western region has held up the best so far in the housing downturn. If we are now seeing this roll through to the west, we may be now seeing 'reality' intrude into the 'teflon' part of the nation, which bodes ill for future trends in this sector for the next six to twelve months.
On the goofy news page WaMu is losing some of its gains from yesterday on the clearly bogus buyout rumors. This sort of thing is getting to be so commonplace that I have to wonder if the companies are actually starting or participating in these rumors on their own! That, of course, could be highly illegal - but the pattern here, now going on for months, has to lead one to wonder.......
Potentially big, the 10 has broken the trading channel to the downside on yield. But it has also decoupled from equities - this sort of move a few days ago would have resulted in a monster rally in equities - its not happening now, with all the indices ignoring it today. As a consequence we have to take the 10 off the list of 'market movers' for the time being. The next few days are 'do or die' in terms of "
On the goofy news page WaMu is losing some of its gains from yesterday on the clearly bogus buyout rumors. This sort of thing is getting to be so commonplace that I have to wonder if the companies are actually starting or participating in these rumors on their own! That, of course, could be highly illegal - but the pattern here, now going on for months, has to lead one to wonder.......
Potentially big, the 10 has broken the trading channel to the downside on yield. But it has also decoupled from equities - this sort of move a few days ago would have resulted in a monster rally in equities - its not happening now, with all the indices ignoring it today. As a consequence we have to take the 10 off the list of 'market movers' for the time being. The next few days are 'do or die' in terms of "
BAD NEWS BEAR By RODDY BOYD - Business News | Financial | Business and Money
BAD NEWS BEAR By RODDY BOYD - Business News | Financial | Business and Money: "June 20, 2007 -- The end came yesterday for a Bear Stearns hedge fund that had been teetering on the edge of solvency for a week, when Merrill Lynch announced that an $850 million auction designed to recoup some of its loans to the fund was back on.
The fate of Bear's High- Grade Structured Credit Strategies Enhanced Leverage fund - forced to suspend redemptions after reporting a 23 percent loss - had been the focus of intense negotiations between Bear and its biggest rivals. While sporting $600 million under management, the Bear fund was massively levered, bringing its portfolio size to over $6 billion.
On Monday, Merrill delayed an auction in order to give Bear and its adviser Blackstone a chance to put together a bailout plan. Bear's plan, presented yesterday afternoon, had too many strings attached for the fund's lenders. The firm offered to pump $1.5 billion in life-saving cash into the fund, but only if its creditors agreed to hold off on margin calls and chip in another $500 million.
A Bear spokesman declined comment.
The bond market's most battered players - the hedge funds and trading desks specializing in mortgage-backed securities - now have to handle a total of $2 billion or more hitting a market that is still licking its wounds from the f"
The fate of Bear's High- Grade Structured Credit Strategies Enhanced Leverage fund - forced to suspend redemptions after reporting a 23 percent loss - had been the focus of intense negotiations between Bear and its biggest rivals. While sporting $600 million under management, the Bear fund was massively levered, bringing its portfolio size to over $6 billion.
On Monday, Merrill delayed an auction in order to give Bear and its adviser Blackstone a chance to put together a bailout plan. Bear's plan, presented yesterday afternoon, had too many strings attached for the fund's lenders. The firm offered to pump $1.5 billion in life-saving cash into the fund, but only if its creditors agreed to hold off on margin calls and chip in another $500 million.
A Bear spokesman declined comment.
The bond market's most battered players - the hedge funds and trading desks specializing in mortgage-backed securities - now have to handle a total of $2 billion or more hitting a market that is still licking its wounds from the f"
Commodities Are for Crafy Investors" by Dudley Baker
FSU Editorial: "Commodities Are for Crafy Not Crazy Investors" by Dudley Baker 06/20/2007: "First, contrary to all the real experts, I can't predict the future of the economy and financial markets with any degree of certainty. I especially can't time anything that would make sense on which to base trading decisions. Equally I can't compete with the smart guys, the institutions with all their specialized people, formulas, software and money to do everything top drawer. Nor can I beat them to the trigger or the exits. So attempts to time the market, alter my portfolio balance between sectors, investment vehicles and geographic regions is pretty much hopeless for me. I therefore do not trade, rather I attempt to invest.
When I take a position it pretty much stays in place with a little pruning now and then, here and there. What I look for is capital preservation before growth. I look for risk minimization rather than making the big score. I come to my conclusions mainly by informing myself of economic and political fundamentals. Hence technical charts used by traders tend to be of marginal value to me, but are nonetheless a serious curiosity.
What I do know are some very large and unassailable global economic realities...such as peak oil and permanently high energy prices, the power of environmentalists and the man made CO2 boogeyman on public policy and politicians, the time horizons of public policy decision makers being the length of time to the next election, that inflation begins with money supply and credit that is in excess of real economic growth, that the conflict between pluralist and secularist cultures with Islamic fundamentalism is only beginning and will present huge problems for the foreseeable future, that Asia in particular is increasingly driving the fundamentals of the global economy with huge internal demand for infrastructure and internal consumer growth, that the demand driven by that growth has placed the resource/commodities sector in a long term secular growth mode which has more than several years yet to run, that both agricultural commodities and most minerals fit into this category, that subsidizing of corn based ethanol is an agribusiness and political wet dream, a huge technological bummer, does nothing for energy self sufficiency, doesn't add any net energy to world supply and will cause the price of animal feed and human food to dramatically escalate in price. I also add governmental budgetary and trade deficits, debt and huge magnitudes of unfunded liabilities coupled with highly leveraged private sector debt, much of which is unregulated and not even understood....... Enough of this, but I can add many more and discuss the implications of each at a later date.
What I conclude is that our infamous Goldilocks economy of the past and present cannot last forever when we have "givens" of the kind noted above.
Therefore I protect my equity with precious metals in their various forms and grow it with key commodities such as those with tight supply/demand fundamentals. Energy and in particular oil, uranium and natural gas head the list. Certain base metals critical to the production of infrastructure which use copious quantities of steel and ancillary products top my list of growth potential. While I haven't taken a position, I think certain agricultural commodities must also be on one's "must have" list.
Summary? Carefully select key commodities and investment products and companies from locations with stable politics and currency growth that reflects economic growth - read Canada and Australia. Sit tight and watch the inevitable. What is that? Clearly currencies growing at 3+ X the rate of their economies create conditions for future price inflation and perhaps hyperinflation given the growing concerns over declining values of the currencies of those countries. I look to the future where serious crises will be currency and interest rate driven emanating from reckless financial policies and practices. In the meantime I carry on with life convinced of the merits of my analysis and not at all worried about the short term rhythms of the S&P, DOW, NASDAQ or bonds. To me their machinations are nothing more than background noise which deflects one from the key issues.
I am currently fully invested, confident in my analyses as outlined above, and sitting back enjoying life to the fullest...good wine, good friends and good times - as my choice of commodities continue to escalate in value. Yes, as someone once said 'I am crazy like a fox' and laughing all the way to the bank!"
When I take a position it pretty much stays in place with a little pruning now and then, here and there. What I look for is capital preservation before growth. I look for risk minimization rather than making the big score. I come to my conclusions mainly by informing myself of economic and political fundamentals. Hence technical charts used by traders tend to be of marginal value to me, but are nonetheless a serious curiosity.
What I do know are some very large and unassailable global economic realities...such as peak oil and permanently high energy prices, the power of environmentalists and the man made CO2 boogeyman on public policy and politicians, the time horizons of public policy decision makers being the length of time to the next election, that inflation begins with money supply and credit that is in excess of real economic growth, that the conflict between pluralist and secularist cultures with Islamic fundamentalism is only beginning and will present huge problems for the foreseeable future, that Asia in particular is increasingly driving the fundamentals of the global economy with huge internal demand for infrastructure and internal consumer growth, that the demand driven by that growth has placed the resource/commodities sector in a long term secular growth mode which has more than several years yet to run, that both agricultural commodities and most minerals fit into this category, that subsidizing of corn based ethanol is an agribusiness and political wet dream, a huge technological bummer, does nothing for energy self sufficiency, doesn't add any net energy to world supply and will cause the price of animal feed and human food to dramatically escalate in price. I also add governmental budgetary and trade deficits, debt and huge magnitudes of unfunded liabilities coupled with highly leveraged private sector debt, much of which is unregulated and not even understood....... Enough of this, but I can add many more and discuss the implications of each at a later date.
What I conclude is that our infamous Goldilocks economy of the past and present cannot last forever when we have "givens" of the kind noted above.
Therefore I protect my equity with precious metals in their various forms and grow it with key commodities such as those with tight supply/demand fundamentals. Energy and in particular oil, uranium and natural gas head the list. Certain base metals critical to the production of infrastructure which use copious quantities of steel and ancillary products top my list of growth potential. While I haven't taken a position, I think certain agricultural commodities must also be on one's "must have" list.
Summary? Carefully select key commodities and investment products and companies from locations with stable politics and currency growth that reflects economic growth - read Canada and Australia. Sit tight and watch the inevitable. What is that? Clearly currencies growing at 3+ X the rate of their economies create conditions for future price inflation and perhaps hyperinflation given the growing concerns over declining values of the currencies of those countries. I look to the future where serious crises will be currency and interest rate driven emanating from reckless financial policies and practices. In the meantime I carry on with life convinced of the merits of my analysis and not at all worried about the short term rhythms of the S&P, DOW, NASDAQ or bonds. To me their machinations are nothing more than background noise which deflects one from the key issues.
I am currently fully invested, confident in my analyses as outlined above, and sitting back enjoying life to the fullest...good wine, good friends and good times - as my choice of commodities continue to escalate in value. Yes, as someone once said 'I am crazy like a fox' and laughing all the way to the bank!"
20 June 2007
KPMG warned of ‘death spiral’ in tax shelter fraud case-Business-Industry Sectors-Banking & Finance-TimesOnline
KPMG warned of ‘death spiral’ in tax shelter fraud case-Business-Industry Sectors-Banking & Finance-TimesOnline: "KPMG, the accountancy firm, told the US Justice Department that it would unleash a “nuclear bomb” that would leave more than 1,000 companies without an auditor, if it indicted the firm for selling fraudulent tax shelters, according to newly released internal documents.
The Justice Department began to investigate KPMG in 2004 for allegedly helping wealthy clients to save money by setting up illegal tax shelters. The investigation came after Arthur Andersen’s indictment in 2002 for obstructing the US Government’s inquiry into Enron.
Roger Bennett, KPMG’s lawyer, argued that his client’s indictment could wipe out one of the four remaining large accounting groups, as the Enron inquiry had eradicated Andersen.
Mr Bennett told prosecutors at a meeting on March 22, 2005, that “a death spiral is going to start, and KPMG will be out of business”."
The Justice Department began to investigate KPMG in 2004 for allegedly helping wealthy clients to save money by setting up illegal tax shelters. The investigation came after Arthur Andersen’s indictment in 2002 for obstructing the US Government’s inquiry into Enron.
Roger Bennett, KPMG’s lawyer, argued that his client’s indictment could wipe out one of the four remaining large accounting groups, as the Enron inquiry had eradicated Andersen.
Mr Bennett told prosecutors at a meeting on March 22, 2005, that “a death spiral is going to start, and KPMG will be out of business”."
Droughts here and coming
Winter (Economic & Market) Watch » Droughts: "The Treasury International Capital Flows for April showed some major shifts in allocation. Net capital flows into the US were a whopping $111.8 billion for the month of April. That was in comparison to $30.1 for March. It is interesting to note here that foreign buys of US Treasuries were almost non-existent. They came in at a mere $376 million or a year low. That was in comparison to $30.51 billion for March and $18.57 billion for February. China actually decreased their treasury holdings to $414 billion from $419.8 billion last month.
Actually we can take this a step further using Fed custodial data and see that since April 5th, FCBs have liquidated $6.3 billion in Treasuries but have bought a stunning $58.3 billion in housing agencies. I have been arguing that it is this activity that is distorting markets and keeping yields or risk premiums artificially low on mortgages, right as credit conditions in housing are worsening."
Actually we can take this a step further using Fed custodial data and see that since April 5th, FCBs have liquidated $6.3 billion in Treasuries but have bought a stunning $58.3 billion in housing agencies. I have been arguing that it is this activity that is distorting markets and keeping yields or risk premiums artificially low on mortgages, right as credit conditions in housing are worsening."
19 June 2007
Got to agree with Edmund here..
Edmund M. McCarthy is President and CEO of Financial Risk Management Advisors Company. This piece was originally published in his newsletter.
Prudent Bear
Five Years Of Supposed Prosperity! Cost? Possibly The End Of About A Century Of Hegemony Inducing Growth?
China buys a piece of Blackstone, a company being perhaps the ultimate in capitalistic finance. When the Yellow Peril/Communists start buying the private equity players, something has certainly changed. Not too long after the gang in Beijing joined the rush to have their investments complemented by participation in leveraged buyout players, global interest rates started a significant climb. Coincidence? Time will tell but there has to be a suspicion that there is some congruity.
If you are a Kudlow and Co. disciple, the natural reaction is to continue to embrace “goldilocks” and utter or mutter, the old Mad comic’s character, Alfred E. Neuman’s” phrase, “What! Me Worry?”
If ridiculously Big numbers, comprising monstrous aggregations of capital/liquidity alarm you, the new acronym, SWF or Sovereign Wealth Funds comes very much to mind. Global reserve assets, including the pitiful $78 billion in the U.S., now total (Another Monstrous number), about $5.4 TRILLION. Of that total, approximately $2.5 Trillion are in or headed for one of these SWF creations. The purpose of having such an instrument for the sovereign creator is to enhance return on the pile. This isn’t done by continuing to sit in U.S. Treasuries where the return has been denuded by the crowded trade already in there with you.
We had the dotcom/telecom etc. bubble succeeded by the GSE induced residential bubble, succeeded by the structured finance/financial engineering residential bubble, succeeded by the CRE/financial engineering bubble, succeeded by the private equity/leveraged buyout/return of the conglomerateurs/no covenant, no guarantee bubble, and they were all looking a bit exhausted. Are we now to witness the SWF buys all of the foregoing bubble? Since the total amount of reserves available for growth and movement into these SWF’s is more or less the annual amount of the United States Current Account Deficit of $1 Trillion, on top of the aforementioned $2.5 Trillion approximately already thrown in, this could be an incredible self-sustaining bubble if only viewed from the aspect of resources and liquidity. In some of the more obscure financial publications, there has recently been some cognizance of this possibility. All this in aid of finding the next bubble since our past thoughts that we would run out of big enough new bubbles to keep the game humming have obviously been in error. It is also worthy of note that a requisite of a successor bubble is to have resource and leverage sufficient to equal or exceed its fading predecessor. Also, for the last five years or so, beneficent interest rates globally have been, at a minimum, a strong aid, perhaps an inherent necessity to this leverage addicted wealth creation methodology.
Most of the liquidity/inflation generated by the massive $1 Trillion+ U.S. annual foreign deficit has, so far, been channeled into: first U.S. Treasuries and Agencies, and then corporate or other debt, with the local currency generated to purchase the $ going, until recently, into residential or commercial real estate and/or local equity markets. Neither the ROW (Rest of the World as it is called in the Federal Reserve Z1 report), nor the bubble blower (The United States) has had terribly painful domestic inflation at the consumer level. In fact, asset inflation in houses and investment indexes has been a pleasant trend for all of these nations.
As the ability to extend asset inflation bubbles reaches or exceeds market possibility, the inflation increasingly spills over into the more visible parts of the consumption economy. Central banks are increasingly forced to recognize the Hydra-headed monster they have accommodated, and raise rates/tighten liquidity. Some such as Kuwait and Syria have been so extreme as to sever their link to the $. New Zealand shocked the markets with an 8% short term rate. Euro rates and other global rates are up and/or rising and, it can be argued, are pushing up U.S. rates concomitantly. This is the counter force that we would argue will constrain the potential glee in the markets in anticipation of the Petro states, and The BRIC (Brazil, Russia, India and China) nations, as well as reserve rich others, such as Korea, Taiwan, maybe even Japan, from all buying their very own Blackstones. Obviously, should they be such buyers, with the leverage the Blackstone’s can employ, the limits to an SWF bubble are imponderable but truly immense.
Another restraint to this emerging new global bubble is the question of to whom do these reserve rich players sell their enormous holdings of U.S.$ Treasuries and Agencies, purchased, at the best, at breakeven yields today, with much of the portfolio surely underwater with Greenspan rates in effect for many of the last five years.
With the U.S creating well over a $Trillion of new sovereign paper in recent years, obligating the buyers thereof to create the equivalent in local currency and find a home for the dollars bought, the merry-go-round has been continuously working with the recycling of those dollars back into the sovereign or near sovereign (Agencies) debt of the U.S. There was thus a natural purchaser as the dollars issued by the U.S. Treasury. The SWF’s can be a disturbance on the merry-go-round as they look for Yale Endowment yields.
Yet another potential problem for those embracing “goldilocks” (Particularly for those surveying the global scene from behind the diaphanous blur of the United States knowledge screen) is the perhaps invidious state of the longstanding global reserve currency, the United States $. For going on a century, Seigneurage privileges (globally accepted) have enabled the U.S. to print money to pay global debts. This is a rare historic privilege accorded few sovereign entities. Even more rare is the status accorded the currency on emergence from World War II; that of sole hegemonic issuer. More rare still was continuing global acceptance when “Guns and Butter” Nixonian policies severed the currency’s last link to outside control of issuance, the supposed redemption availability in bullion. Basically, at that point, the global reserve currency stands on “The full faith and credit” of the U.S. Government. We forswear politics in these ramblings but would not be surprised if “some of the people, some of the time” are not as completely convinced of the value of such full faith and credit.
After a series of successes from the 1987 dip onward at thwarting any economic downturn with lowered rates and tsunami’s of liquidity, the Fedheads really went to an extreme with their 1% interest rates more than 5 years ago, ushering in the most massive global debt bubble, arguably, in the history of mankind. This crescendo of debt permits the globe to have simultaneously expanding economies virtually everywhere, a couple of exceptions such as Lebanon and Zimbabwe out there to be noticed by the few still thinking that a debt culture must eventually be constrained. As noted above, deluging liquidity everywhere has enabled simultaneous global expansion, unusual phenomena in the history of mankind.
A couple of thoughts here. The U.S. expansion, driven by the Fed cuts, and largely centered in 1.Real estate of all varieties 2. Buy-out/M&A/Leveraged lending. 3. Financial Engineering/Structured Finance creation, distribution and fee administration and investment and 4. The massive expenditures on Defense related and Security related to prosecute the ever-expanding utilization of militant activities. The cuts of interest rates by the Fed bought this going. (Oh, we have forgotten the “saving” temporarily of such industries as “auto” with low interest rates.) There are signs of satiation and aggravating credit risk in the credit sensitive areas of these sectors. Oh, by the way, do any readers actually give credence to the Commerce Dept. consumer inflation statistics (If so, read John Williams’ “Shadow Government Statistics” to find the 10.2% REAL consumer inflation rate in the U.S.) In any event, the reported (not the nonsensical core) rates last week were demonstrating that lifestyle is being negatively impacted in the U.S. by dripover inflation.
The foreign central banks largely followed ours into the trough of rates. And their expansion started a little later. Asset inflation, as in the U.S., took over first. The two culprits in the U.S. stand out in the foreign markets: residential real estate and equity markets.
Nevertheless, the inevitable occurs; housing bubbles, affordability problems, equity bubbles that produce P/E’s that are untoward and, finally, lifestyle inflation that impinges on the central banks. As an example, the ECB, a central bank that actually has an inflation containment mandate in its constitution, is raising rates and warning of probable necessity to do more. A rising rate currency looks attractive to a stable one, possibly accounting for some $ defection in the recent past.
I met a young entrepreneur who opened and expanded a bikini factory in Brazil some years ago. The enterprise was/is a success, however, the climbing real is rendering him non-competitive. His solution: sell out to one or another of the private equity guys currently soliciting and go into the wealth management business. Such examples and the potential consequences are seldom seen in the U.S. media.
The Belief In Our Own Worldview Is Our Own Most Powerful Intellectual Imperative!
Here we hearken back to what we believe to be the consensus “worldview” in the U.S.; most particularly in the financial sectors thereof. Obviously not universal and imbued with the author’s prejudices, a construct thereof follows:
The U.S. economy is emerging from a “soft” landing. Although occasioned by the residential bubble in significant part, particularly sub-prime, that area is contained without widespread contagion and employment, production, efficiencies through privatization, growing exports and technological breakthroughs will lead to a new, burgeoning expansion.
Accompanying this renewal of “Goldilocks” seems to be a guiding belief that once out of the trough, another expansion similar to the pleasant 2002-2006 will follow as night follows day as has occurred for approximately 20 years.
This worldview, predicated on the Universal Empire the U. S. was at the beginning of the new millennia, is not a worldview shared by the ROW!
1. This 5-year period of prosperity, kicked off by the massively excessive Fed rate cuts and ensuing global liquidity started from a pitiful foreign reserve assets number globally (Much of which had been accumulated by Japan as it sought to recover from the bubble we taught them). The budget surpluses in the U.S. more than offset the then midget trade deficit, and the currency stood on a pinnacle. With the aforementioned exception of Japan and the inscrutable Swiss, the reserves and currencies of most of the rest of the world ranged from pitiful to disastrous. Argentina went on to a sovereign default and theft from creditors, Brazil devalued, Russia defaulted etc.,etc.
Five years later, the players have the aforementioned $5.4 Trillion in reserves and the U.S. currency is held aloft on generosity after an average fall in the 30% range. The domestic economy, driven by the afore-mentioned continuous bubble machines, has exhausted a debt laden U. S. consumer to continue to propel the machine. Foreclosures and defaults are hitting new records, not at the bottom of a recession but with record low unemployment rates. The only game still running at breakneck speed is the leveraged private equity play, still battening on low relative rates and tax advantages. The press of ROW, by and large, see and present this worldview in contrast to Bubblevision and Goldilocks.
2. We normally eschew the “It’s Different this time” approach as an exegesis for a thesis but find it necessary when confronted by the unprecedented.
Five years ago, the financial sector, both within the U.S. and globally, while having small entries into some of the following fields of risk and finance, was struggling to recover from the blows of the Asian debacle, the Russian default, 9/11 (although it actually served as an economic expansion ignition.), the 2000/2001 U.S. Recession and the afore-mentioned Latin imbroglios. True, the U.S. banking system had been hit by some, many or all of these, depending on the institution. Frankly, this opened the door for the previously intermediary giant Broker and Universal banks to vault into the new world of Financial Engineering/Structured Finance on a global basis.
Five years later, world finance has significantly and nearly totally changed. As an example, Fed NY Governor Corrigan only had to hit the rolodex for a dozen and a half names to suck up $4 Billion to stop the panic about LTCM. Today he admits that the number affected by a systemic event could go into very large numbers.
There really is no infrastructure in place to deal with a contagional systemic financial crisis! One has not yet occurred in the era of RMBS’S, ABS’S, CDO’S, CLO’S, SYNTHETIC CDO’, ‘S’S and the legions of forms of CDS’S and their progeny, CPDO’S, CPPS’S etc.
I recently looked at an 190 page report on this “market” which has enough other gibberish in it to confound any but the math ph’d’s who create, manipulate sell, buy and, occasionally run from this stuff. It is mindboggling. In previous efforts, we have described how BBB- securities can be transformed into 80% AAA. The weekend WSJ described how a fund of some of this stuff is coming unglued. One of the players, Merrill, has seized and is auctioning some of the collateral, impolitely screwing up “rescue” loans and other attempts to salvage. Mixed in will be some of the insurers, in front of the pension funds, endowments, foundations etc. presumably the ultimate owners of this smoldering wreck. Remember, we are at the beginning of the problem in residential real estate with still record unemployment! There is only some $7 Billion directly and peripherally mixed up in this Bear Stern’s directed vehicle, but it could serve as a eye-opening lesson as it burns on the way to sinking.
3. We mentioned the insurers above. At the beginning of the decade and in the early stages of the post 2000 downturn, these two entities guaranteed and/or absorbed into portfolios hundreds of billions per year in mortgages and mortgage-backed securities. Then it became apparent that the Financial results reported by these entities were suspect, that Management possessed less integrity and they were clueless as to the risks they were assuming. Investigations, Resignations and ability to provide limitless buying strength for the mortgage origination world disappeared!
The world of Financial Engineering/Structured Finance has largely operated without the two prior foremost liquidity providers, Fannie and Freddie, as they languished in Congressional hearings on their fraudulent or incompetent doings. They have recently re-emerged as large players as investigations came to a close, reparations were determined and some semblance of financial reporting was re-instated. The recent return of the yield curve to a positive slope has also been a tremendous help to these inveterate players of this type of curve with their Congress-given subsidy and their willingness to make noises about the alleviation of the Brokers sub-prime default and foreclosure-laden results to years of Financial Engineering/Structured Finance garbage.
In order to perform the legerdemain necessary to take less than investment grade and other slightly unsavory assets to the public type buyers described above, they had to throw in some sauce. This came, in the absence of the GSE’s from the private world of insurance, the AMBAC’s, MBIA’s, MGIC’s, RADIAN’s etc. Functioning in a not dissimilar way to the rating Agencies, these worthies would look a prospective issue over and then insure the higher rated tranches. Much like a GSE guarantee, such insurance would serve to make the issue palatable to the institutional buyer as all the due diligence necessary.
We were recently privileged to read an in depth credit review of the Insurer group with particular emphasis on the Ambac and MBIA numbers. We remember a scholarly look at MBIA a couple of years ago which would have given pause to thoughtful analysts except for coincidence with the Greenspan rush to Zero rate structure. The insurers have responded to slow times in the low rate environment by diving headlong into the Structured Finance world. The thing about insuring munis is that you either have taxing power (full faith and credit) or revenue generating capability (toll roads, airports) etc. It is not clear that these worthies fully understood that, in the absence of the appreciation which appeared to happen inevitably to houses in the immediate period in which they leapt headlong into insuring CDO’s composed of BBB- or equivalent to get them to AAA, that houses don’t mystically create debt service revenue, they eat it!
The leverage these critters have taken on historically may have been speculative when they were playing muni’s but it is outright outlandish in the game of Structured Finance. 900 to 1 leverage makes LTCM look cautious. Equity and Reserves are infinitesimal and not growing in proportion to the non-muni game they are playing.
The afore-mentioned analysis asks: “Who is holding the bag?” In the game, and points to the insurers. Since a 10% drop in house prices wipes out their equity, we agree with the analysis that they are too slender a reed to support the ratings they carry and that there is going to be tremendous disillusionment when the axe falls. We would then repeat the question, Who is holding the bag? The ultimate buyers of these things are the ultimate bag holders, pension funds, the equivalent of Orange Counties all over the country, university endowments trying to emulate Yale, maybe the Gates Foundation but certainly the foundation industry and others seeking the yield in alternative investments that will pay for their commitments.
Not to be forgotten are the latter day monopolists, the rating agencies, Moody’s S&P, Finch etc. Their revenue streams went ballistic when Wall Street created the Age Of Structured Finance. They get paid for rating. Isn’t there a conflict in here somewhere? In my days as a practicing credit guy, the watchword was that the rating agencies were a lagging indicator. I will never forget classifying a then fabled Texas bank substandard after a merger in the ‘80’s, only to have a giant argument with headquarters when Moody’s gave them a AA rating. They failed. Put all of this together and maybe this time it Is Different! Only not the kind of different I want to be a creditor of!
4. What else has happened while the United States happily built houses, bought cars and remodeled for the last five years as the Financial sector, particularly Wall Street emerged as the most significant earnings stream in the S&P? Well, going back to that word used before, “worldview,” the U.S. convinced itself that the most important problem internationally was something called “The War on Terror. Hey, I’m against terror too. I just think it’s necessary to know and be sure who it is we need to go to war with. We don’t seem to have done too good a job on that front. It has been expensive but not effective. In a different “worldview”, the costs might have been ascertained in advance. The swing from a Federal surplus to a deficit, the curtailment of a current account deficit before it headed into dangerous territory, the maintenance of a sound currency, the maintenance of world/global respect and, at least, reasonably cordial relations with sovereign states all have a value to be measured, before lost, in pursuit of consumption and the War On Terror.
During this semi decade, the ROW, on its proverbial back when we began this crusade, reinvigorated. A possible “worldview” NOW must encompass a China with $1.3 Trillion in reserves and an industrial/manufacturing base of unbelievable proportions. Courtesy of Chian Kai Shek, their WW2 leader, they sit on the Security Council and are in a position to permit Iran to become what it wishes. Five years ago would have been a more propitious time for being bellicose about Iran. On the same Council is a Russia with $400 Billion in reserves, risen from the defaulting dead.
I don’t know a thing about Putin’s “soul” but I do know he and his Administration are ex-KGB, jingoistic about their nation, loaded with petroleum and still a powerhouse in terms of weaponry. We probably could have bought the weapons five years ago with a fraction of the funds since gone in the aforementioned War and its counterpart, the War on Drugs.
Net net, in the opinion of the writer, there is a very real danger that our worldview for the last five years has risked a century long hegemony as the reserve currency nation as well as creating a Credit Bubble, largely Unregulated, that has expanded far beyond the worst nightmares of the writer. It is also our opinion, as a long time credit troglodyte, that this bubble is leaking air and is in danger of bursting. With no infrastructure to deal with the first truly global bubble, we have an interesting time in front of us.
Prudent Bear
Five Years Of Supposed Prosperity! Cost? Possibly The End Of About A Century Of Hegemony Inducing Growth?
China buys a piece of Blackstone, a company being perhaps the ultimate in capitalistic finance. When the Yellow Peril/Communists start buying the private equity players, something has certainly changed. Not too long after the gang in Beijing joined the rush to have their investments complemented by participation in leveraged buyout players, global interest rates started a significant climb. Coincidence? Time will tell but there has to be a suspicion that there is some congruity.
If you are a Kudlow and Co. disciple, the natural reaction is to continue to embrace “goldilocks” and utter or mutter, the old Mad comic’s character, Alfred E. Neuman’s” phrase, “What! Me Worry?”
If ridiculously Big numbers, comprising monstrous aggregations of capital/liquidity alarm you, the new acronym, SWF or Sovereign Wealth Funds comes very much to mind. Global reserve assets, including the pitiful $78 billion in the U.S., now total (Another Monstrous number), about $5.4 TRILLION. Of that total, approximately $2.5 Trillion are in or headed for one of these SWF creations. The purpose of having such an instrument for the sovereign creator is to enhance return on the pile. This isn’t done by continuing to sit in U.S. Treasuries where the return has been denuded by the crowded trade already in there with you.
We had the dotcom/telecom etc. bubble succeeded by the GSE induced residential bubble, succeeded by the structured finance/financial engineering residential bubble, succeeded by the CRE/financial engineering bubble, succeeded by the private equity/leveraged buyout/return of the conglomerateurs/no covenant, no guarantee bubble, and they were all looking a bit exhausted. Are we now to witness the SWF buys all of the foregoing bubble? Since the total amount of reserves available for growth and movement into these SWF’s is more or less the annual amount of the United States Current Account Deficit of $1 Trillion, on top of the aforementioned $2.5 Trillion approximately already thrown in, this could be an incredible self-sustaining bubble if only viewed from the aspect of resources and liquidity. In some of the more obscure financial publications, there has recently been some cognizance of this possibility. All this in aid of finding the next bubble since our past thoughts that we would run out of big enough new bubbles to keep the game humming have obviously been in error. It is also worthy of note that a requisite of a successor bubble is to have resource and leverage sufficient to equal or exceed its fading predecessor. Also, for the last five years or so, beneficent interest rates globally have been, at a minimum, a strong aid, perhaps an inherent necessity to this leverage addicted wealth creation methodology.
Most of the liquidity/inflation generated by the massive $1 Trillion+ U.S. annual foreign deficit has, so far, been channeled into: first U.S. Treasuries and Agencies, and then corporate or other debt, with the local currency generated to purchase the $ going, until recently, into residential or commercial real estate and/or local equity markets. Neither the ROW (Rest of the World as it is called in the Federal Reserve Z1 report), nor the bubble blower (The United States) has had terribly painful domestic inflation at the consumer level. In fact, asset inflation in houses and investment indexes has been a pleasant trend for all of these nations.
As the ability to extend asset inflation bubbles reaches or exceeds market possibility, the inflation increasingly spills over into the more visible parts of the consumption economy. Central banks are increasingly forced to recognize the Hydra-headed monster they have accommodated, and raise rates/tighten liquidity. Some such as Kuwait and Syria have been so extreme as to sever their link to the $. New Zealand shocked the markets with an 8% short term rate. Euro rates and other global rates are up and/or rising and, it can be argued, are pushing up U.S. rates concomitantly. This is the counter force that we would argue will constrain the potential glee in the markets in anticipation of the Petro states, and The BRIC (Brazil, Russia, India and China) nations, as well as reserve rich others, such as Korea, Taiwan, maybe even Japan, from all buying their very own Blackstones. Obviously, should they be such buyers, with the leverage the Blackstone’s can employ, the limits to an SWF bubble are imponderable but truly immense.
Another restraint to this emerging new global bubble is the question of to whom do these reserve rich players sell their enormous holdings of U.S.$ Treasuries and Agencies, purchased, at the best, at breakeven yields today, with much of the portfolio surely underwater with Greenspan rates in effect for many of the last five years.
With the U.S creating well over a $Trillion of new sovereign paper in recent years, obligating the buyers thereof to create the equivalent in local currency and find a home for the dollars bought, the merry-go-round has been continuously working with the recycling of those dollars back into the sovereign or near sovereign (Agencies) debt of the U.S. There was thus a natural purchaser as the dollars issued by the U.S. Treasury. The SWF’s can be a disturbance on the merry-go-round as they look for Yale Endowment yields.
Yet another potential problem for those embracing “goldilocks” (Particularly for those surveying the global scene from behind the diaphanous blur of the United States knowledge screen) is the perhaps invidious state of the longstanding global reserve currency, the United States $. For going on a century, Seigneurage privileges (globally accepted) have enabled the U.S. to print money to pay global debts. This is a rare historic privilege accorded few sovereign entities. Even more rare is the status accorded the currency on emergence from World War II; that of sole hegemonic issuer. More rare still was continuing global acceptance when “Guns and Butter” Nixonian policies severed the currency’s last link to outside control of issuance, the supposed redemption availability in bullion. Basically, at that point, the global reserve currency stands on “The full faith and credit” of the U.S. Government. We forswear politics in these ramblings but would not be surprised if “some of the people, some of the time” are not as completely convinced of the value of such full faith and credit.
After a series of successes from the 1987 dip onward at thwarting any economic downturn with lowered rates and tsunami’s of liquidity, the Fedheads really went to an extreme with their 1% interest rates more than 5 years ago, ushering in the most massive global debt bubble, arguably, in the history of mankind. This crescendo of debt permits the globe to have simultaneously expanding economies virtually everywhere, a couple of exceptions such as Lebanon and Zimbabwe out there to be noticed by the few still thinking that a debt culture must eventually be constrained. As noted above, deluging liquidity everywhere has enabled simultaneous global expansion, unusual phenomena in the history of mankind.
A couple of thoughts here. The U.S. expansion, driven by the Fed cuts, and largely centered in 1.Real estate of all varieties 2. Buy-out/M&A/Leveraged lending. 3. Financial Engineering/Structured Finance creation, distribution and fee administration and investment and 4. The massive expenditures on Defense related and Security related to prosecute the ever-expanding utilization of militant activities. The cuts of interest rates by the Fed bought this going. (Oh, we have forgotten the “saving” temporarily of such industries as “auto” with low interest rates.) There are signs of satiation and aggravating credit risk in the credit sensitive areas of these sectors. Oh, by the way, do any readers actually give credence to the Commerce Dept. consumer inflation statistics (If so, read John Williams’ “Shadow Government Statistics” to find the 10.2% REAL consumer inflation rate in the U.S.) In any event, the reported (not the nonsensical core) rates last week were demonstrating that lifestyle is being negatively impacted in the U.S. by dripover inflation.
The foreign central banks largely followed ours into the trough of rates. And their expansion started a little later. Asset inflation, as in the U.S., took over first. The two culprits in the U.S. stand out in the foreign markets: residential real estate and equity markets.
Nevertheless, the inevitable occurs; housing bubbles, affordability problems, equity bubbles that produce P/E’s that are untoward and, finally, lifestyle inflation that impinges on the central banks. As an example, the ECB, a central bank that actually has an inflation containment mandate in its constitution, is raising rates and warning of probable necessity to do more. A rising rate currency looks attractive to a stable one, possibly accounting for some $ defection in the recent past.
I met a young entrepreneur who opened and expanded a bikini factory in Brazil some years ago. The enterprise was/is a success, however, the climbing real is rendering him non-competitive. His solution: sell out to one or another of the private equity guys currently soliciting and go into the wealth management business. Such examples and the potential consequences are seldom seen in the U.S. media.
The Belief In Our Own Worldview Is Our Own Most Powerful Intellectual Imperative!
Here we hearken back to what we believe to be the consensus “worldview” in the U.S.; most particularly in the financial sectors thereof. Obviously not universal and imbued with the author’s prejudices, a construct thereof follows:
The U.S. economy is emerging from a “soft” landing. Although occasioned by the residential bubble in significant part, particularly sub-prime, that area is contained without widespread contagion and employment, production, efficiencies through privatization, growing exports and technological breakthroughs will lead to a new, burgeoning expansion.
Accompanying this renewal of “Goldilocks” seems to be a guiding belief that once out of the trough, another expansion similar to the pleasant 2002-2006 will follow as night follows day as has occurred for approximately 20 years.
This worldview, predicated on the Universal Empire the U. S. was at the beginning of the new millennia, is not a worldview shared by the ROW!
1. This 5-year period of prosperity, kicked off by the massively excessive Fed rate cuts and ensuing global liquidity started from a pitiful foreign reserve assets number globally (Much of which had been accumulated by Japan as it sought to recover from the bubble we taught them). The budget surpluses in the U.S. more than offset the then midget trade deficit, and the currency stood on a pinnacle. With the aforementioned exception of Japan and the inscrutable Swiss, the reserves and currencies of most of the rest of the world ranged from pitiful to disastrous. Argentina went on to a sovereign default and theft from creditors, Brazil devalued, Russia defaulted etc.,etc.
Five years later, the players have the aforementioned $5.4 Trillion in reserves and the U.S. currency is held aloft on generosity after an average fall in the 30% range. The domestic economy, driven by the afore-mentioned continuous bubble machines, has exhausted a debt laden U. S. consumer to continue to propel the machine. Foreclosures and defaults are hitting new records, not at the bottom of a recession but with record low unemployment rates. The only game still running at breakneck speed is the leveraged private equity play, still battening on low relative rates and tax advantages. The press of ROW, by and large, see and present this worldview in contrast to Bubblevision and Goldilocks.
2. We normally eschew the “It’s Different this time” approach as an exegesis for a thesis but find it necessary when confronted by the unprecedented.
Five years ago, the financial sector, both within the U.S. and globally, while having small entries into some of the following fields of risk and finance, was struggling to recover from the blows of the Asian debacle, the Russian default, 9/11 (although it actually served as an economic expansion ignition.), the 2000/2001 U.S. Recession and the afore-mentioned Latin imbroglios. True, the U.S. banking system had been hit by some, many or all of these, depending on the institution. Frankly, this opened the door for the previously intermediary giant Broker and Universal banks to vault into the new world of Financial Engineering/Structured Finance on a global basis.
Five years later, world finance has significantly and nearly totally changed. As an example, Fed NY Governor Corrigan only had to hit the rolodex for a dozen and a half names to suck up $4 Billion to stop the panic about LTCM. Today he admits that the number affected by a systemic event could go into very large numbers.
There really is no infrastructure in place to deal with a contagional systemic financial crisis! One has not yet occurred in the era of RMBS’S, ABS’S, CDO’S, CLO’S, SYNTHETIC CDO’, ‘S’S and the legions of forms of CDS’S and their progeny, CPDO’S, CPPS’S etc.
I recently looked at an 190 page report on this “market” which has enough other gibberish in it to confound any but the math ph’d’s who create, manipulate sell, buy and, occasionally run from this stuff. It is mindboggling. In previous efforts, we have described how BBB- securities can be transformed into 80% AAA. The weekend WSJ described how a fund of some of this stuff is coming unglued. One of the players, Merrill, has seized and is auctioning some of the collateral, impolitely screwing up “rescue” loans and other attempts to salvage. Mixed in will be some of the insurers, in front of the pension funds, endowments, foundations etc. presumably the ultimate owners of this smoldering wreck. Remember, we are at the beginning of the problem in residential real estate with still record unemployment! There is only some $7 Billion directly and peripherally mixed up in this Bear Stern’s directed vehicle, but it could serve as a eye-opening lesson as it burns on the way to sinking.
3. We mentioned the insurers above. At the beginning of the decade and in the early stages of the post 2000 downturn, these two entities guaranteed and/or absorbed into portfolios hundreds of billions per year in mortgages and mortgage-backed securities. Then it became apparent that the Financial results reported by these entities were suspect, that Management possessed less integrity and they were clueless as to the risks they were assuming. Investigations, Resignations and ability to provide limitless buying strength for the mortgage origination world disappeared!
The world of Financial Engineering/Structured Finance has largely operated without the two prior foremost liquidity providers, Fannie and Freddie, as they languished in Congressional hearings on their fraudulent or incompetent doings. They have recently re-emerged as large players as investigations came to a close, reparations were determined and some semblance of financial reporting was re-instated. The recent return of the yield curve to a positive slope has also been a tremendous help to these inveterate players of this type of curve with their Congress-given subsidy and their willingness to make noises about the alleviation of the Brokers sub-prime default and foreclosure-laden results to years of Financial Engineering/Structured Finance garbage.
In order to perform the legerdemain necessary to take less than investment grade and other slightly unsavory assets to the public type buyers described above, they had to throw in some sauce. This came, in the absence of the GSE’s from the private world of insurance, the AMBAC’s, MBIA’s, MGIC’s, RADIAN’s etc. Functioning in a not dissimilar way to the rating Agencies, these worthies would look a prospective issue over and then insure the higher rated tranches. Much like a GSE guarantee, such insurance would serve to make the issue palatable to the institutional buyer as all the due diligence necessary.
We were recently privileged to read an in depth credit review of the Insurer group with particular emphasis on the Ambac and MBIA numbers. We remember a scholarly look at MBIA a couple of years ago which would have given pause to thoughtful analysts except for coincidence with the Greenspan rush to Zero rate structure. The insurers have responded to slow times in the low rate environment by diving headlong into the Structured Finance world. The thing about insuring munis is that you either have taxing power (full faith and credit) or revenue generating capability (toll roads, airports) etc. It is not clear that these worthies fully understood that, in the absence of the appreciation which appeared to happen inevitably to houses in the immediate period in which they leapt headlong into insuring CDO’s composed of BBB- or equivalent to get them to AAA, that houses don’t mystically create debt service revenue, they eat it!
The leverage these critters have taken on historically may have been speculative when they were playing muni’s but it is outright outlandish in the game of Structured Finance. 900 to 1 leverage makes LTCM look cautious. Equity and Reserves are infinitesimal and not growing in proportion to the non-muni game they are playing.
The afore-mentioned analysis asks: “Who is holding the bag?” In the game, and points to the insurers. Since a 10% drop in house prices wipes out their equity, we agree with the analysis that they are too slender a reed to support the ratings they carry and that there is going to be tremendous disillusionment when the axe falls. We would then repeat the question, Who is holding the bag? The ultimate buyers of these things are the ultimate bag holders, pension funds, the equivalent of Orange Counties all over the country, university endowments trying to emulate Yale, maybe the Gates Foundation but certainly the foundation industry and others seeking the yield in alternative investments that will pay for their commitments.
Not to be forgotten are the latter day monopolists, the rating agencies, Moody’s S&P, Finch etc. Their revenue streams went ballistic when Wall Street created the Age Of Structured Finance. They get paid for rating. Isn’t there a conflict in here somewhere? In my days as a practicing credit guy, the watchword was that the rating agencies were a lagging indicator. I will never forget classifying a then fabled Texas bank substandard after a merger in the ‘80’s, only to have a giant argument with headquarters when Moody’s gave them a AA rating. They failed. Put all of this together and maybe this time it Is Different! Only not the kind of different I want to be a creditor of!
4. What else has happened while the United States happily built houses, bought cars and remodeled for the last five years as the Financial sector, particularly Wall Street emerged as the most significant earnings stream in the S&P? Well, going back to that word used before, “worldview,” the U.S. convinced itself that the most important problem internationally was something called “The War on Terror. Hey, I’m against terror too. I just think it’s necessary to know and be sure who it is we need to go to war with. We don’t seem to have done too good a job on that front. It has been expensive but not effective. In a different “worldview”, the costs might have been ascertained in advance. The swing from a Federal surplus to a deficit, the curtailment of a current account deficit before it headed into dangerous territory, the maintenance of a sound currency, the maintenance of world/global respect and, at least, reasonably cordial relations with sovereign states all have a value to be measured, before lost, in pursuit of consumption and the War On Terror.
During this semi decade, the ROW, on its proverbial back when we began this crusade, reinvigorated. A possible “worldview” NOW must encompass a China with $1.3 Trillion in reserves and an industrial/manufacturing base of unbelievable proportions. Courtesy of Chian Kai Shek, their WW2 leader, they sit on the Security Council and are in a position to permit Iran to become what it wishes. Five years ago would have been a more propitious time for being bellicose about Iran. On the same Council is a Russia with $400 Billion in reserves, risen from the defaulting dead.
I don’t know a thing about Putin’s “soul” but I do know he and his Administration are ex-KGB, jingoistic about their nation, loaded with petroleum and still a powerhouse in terms of weaponry. We probably could have bought the weapons five years ago with a fraction of the funds since gone in the aforementioned War and its counterpart, the War on Drugs.
Net net, in the opinion of the writer, there is a very real danger that our worldview for the last five years has risked a century long hegemony as the reserve currency nation as well as creating a Credit Bubble, largely Unregulated, that has expanded far beyond the worst nightmares of the writer. It is also our opinion, as a long time credit troglodyte, that this bubble is leaking air and is in danger of bursting. With no infrastructure to deal with the first truly global bubble, we have an interesting time in front of us.
Cognitive Biases: A Short List
The Big Picture | Cognitive Biases: A Short List: "# Bandwagon effect - the tendency to do (or believe) things because many other people do (or believe) the same. Related to groupthink, herd behaviour, and manias. Carl Jung pioneered the idea of the collective unconscious which is considered by Jungian psychologists to be responsible for this cognitive bias.
# Bias blind spot - the tendency not to compensate for one’s own cognitive biases.
# Choice-supportive bias - the tendency to remember one’s choices as better than they actually were.
# Confirmation bias - the tendency to search for or interpret information in a way that confirms one’s preconceptions.
# Congruence bias - the tendency to test hypotheses exclusively through direct testing.
# Contrast effect - the enhancement or diminishment of a weight or other measurement when compared with recently observed contrasting object.
# Déformation professionnelle - the tendency to look at things according to the conventions of one’s own profession, forgetting any broader point of view.
# Disconfirmation bias - the tendency for people to extend critical scrutiny to information which contradicts their prior beliefs and uncritically accept information that is congruent with their prior beliefs.
# Endowment effect - the tendency for people to value something more as soon as they own it.
# Focusing effect - prediction bias occurring when people place too much importance on one aspect of an event; causes error in accurately predicting the utility of a future outcome.
# Hyperbolic discounting - the tendency for people to have a stronger preference for more immediate payoffs relative to later payoffs, the closer to the present both payoffs are.
# Illusion of control - the tendency for human beings to believe they can control or at least influence outcomes which they clearly cannot.
# Impact bias - the tendency for people to overestimate the length or the intensity of the impact of future feeling states.
# Information bias - the tendency to seek information even when it cannot affect action.
# Loss aversion - the tendency for people to strongly prefer avoiding losses over acquiring gains (see also sunk cost effects)
# Neglect of probability - the tendency to completely disregard probability when making a decision under uncertainty.
# Mere exposure effect - the tendency for people to express undue liking for things merely because they are familiar with them.
# Omission bias - The tendency to judge harmful actions as worse, or less moral, than equally harmful omissions (inactions).
# Outcome bias - the tendency to judge a decision by its eventual outcome instead of based on the quality of the decision at the time it was made.
# Planning fallacy - the tendency to underestimate task-completion times.
# Post-purchase rationalization - the tendency to persuade oneself through rational argument that a purchase was a good value.
# Pseudocertainty effect - the tendency to make risk-averse choices if the expected outcome is positive, but make risk-seeking choices to avoid negative outcomes.
# Selective perception - the tendency for expectations to affect perception.
# Status quo bias - the tendency for people to like things to stay relatively the same.
# Von Restorff effect - the tendency for an item that “stands out like a sore thumb” to be more likely to be remembered than other items.
# Zero-risk bias - preference for reducing a small risk to zero over a greater reduction in a larger risk.
# Bias blind spot - the tendency not to compensate for one’s own cognitive biases.
# Choice-supportive bias - the tendency to remember one’s choices as better than they actually were.
# Confirmation bias - the tendency to search for or interpret information in a way that confirms one’s preconceptions.
# Congruence bias - the tendency to test hypotheses exclusively through direct testing.
# Contrast effect - the enhancement or diminishment of a weight or other measurement when compared with recently observed contrasting object.
# Déformation professionnelle - the tendency to look at things according to the conventions of one’s own profession, forgetting any broader point of view.
# Disconfirmation bias - the tendency for people to extend critical scrutiny to information which contradicts their prior beliefs and uncritically accept information that is congruent with their prior beliefs.
# Endowment effect - the tendency for people to value something more as soon as they own it.
# Focusing effect - prediction bias occurring when people place too much importance on one aspect of an event; causes error in accurately predicting the utility of a future outcome.
# Hyperbolic discounting - the tendency for people to have a stronger preference for more immediate payoffs relative to later payoffs, the closer to the present both payoffs are.
# Illusion of control - the tendency for human beings to believe they can control or at least influence outcomes which they clearly cannot.
# Impact bias - the tendency for people to overestimate the length or the intensity of the impact of future feeling states.
# Information bias - the tendency to seek information even when it cannot affect action.
# Loss aversion - the tendency for people to strongly prefer avoiding losses over acquiring gains (see also sunk cost effects)
# Neglect of probability - the tendency to completely disregard probability when making a decision under uncertainty.
# Mere exposure effect - the tendency for people to express undue liking for things merely because they are familiar with them.
# Omission bias - The tendency to judge harmful actions as worse, or less moral, than equally harmful omissions (inactions).
# Outcome bias - the tendency to judge a decision by its eventual outcome instead of based on the quality of the decision at the time it was made.
# Planning fallacy - the tendency to underestimate task-completion times.
# Post-purchase rationalization - the tendency to persuade oneself through rational argument that a purchase was a good value.
# Pseudocertainty effect - the tendency to make risk-averse choices if the expected outcome is positive, but make risk-seeking choices to avoid negative outcomes.
# Selective perception - the tendency for expectations to affect perception.
# Status quo bias - the tendency for people to like things to stay relatively the same.
# Von Restorff effect - the tendency for an item that “stands out like a sore thumb” to be more likely to be remembered than other items.
# Zero-risk bias - preference for reducing a small risk to zero over a greater reduction in a larger risk.
18 June 2007
Technology Review: Ultraefficient Photovoltaics
Technology Review: Ultraefficient Photovoltaics: "A solar cell more than twice as efficient as typical rooftop solar panels has been developed by Spectrolab, a Boeing subsidiary based in Sylmar, CA. It makes use of a highly customizable and virtually unexplored class of materials that could lead to further jumps in efficiency over the next decade, making solar power less expensive than grid electricity in much of the country.
The cell, which employs new 'metamorphic' materials, is designed for photovoltaic systems that use lenses and mirrors to concentrate the sun's rays onto small, high-efficiency solar cells, thereby requiring far less semiconductor material than conventional solar panels. Last month Spectrolab published in the journal Applied Physics Letters the first details on its record-setting cell, initially disclosed in December, which converts 40.7 percent of incoming light into electricity at 240-fold solar concentration--a healthy 1.4 percent increase over the company's previous world-record cell. Other groups are developing promising cells based on the new type of materials, including researchers at the Department of Energy's National Renewable Energy Laboratory (NREL), in Golden, CO. The NREL researchers will soon publish results in the same journal showing that their NREL's designs are tracking Spectrolab's, improving from 37.9 percent efficiency in early 2005 to 38.9 percent efficiency today."
The cell, which employs new 'metamorphic' materials, is designed for photovoltaic systems that use lenses and mirrors to concentrate the sun's rays onto small, high-efficiency solar cells, thereby requiring far less semiconductor material than conventional solar panels. Last month Spectrolab published in the journal Applied Physics Letters the first details on its record-setting cell, initially disclosed in December, which converts 40.7 percent of incoming light into electricity at 240-fold solar concentration--a healthy 1.4 percent increase over the company's previous world-record cell. Other groups are developing promising cells based on the new type of materials, including researchers at the Department of Energy's National Renewable Energy Laboratory (NREL), in Golden, CO. The NREL researchers will soon publish results in the same journal showing that their NREL's designs are tracking Spectrolab's, improving from 37.9 percent efficiency in early 2005 to 38.9 percent efficiency today."
Money for Nothin’ and Your Chicks for Free
Winter (Economic & Market) Watch » Money for Nothin’ and Your Chicks for Free: "The fees for arranging loans are as alluring for the commercial banks as they were for subprime lenders. “It’s like crack cocaine for them,” says the unnamed private equity partner. In LBO deals, “the banks don’t care any more about the [quality of] credit. As long as they can sell it all, they’re fine.
Why do bond investors put up with this? “They don’t really have much choice…..if you’re managing a high-yield bond fund, there’s really not an option of going to 25 per cent cash. So you have to invest in the best deals that you can find. And because there’s so much money out there, the issuers can say, ‘You want to argue about covenants? The deal’s oversubscribed 3 to 1. See you on the next one”…..
If that strategy explodes in their faces because they end up holding some worthless junk debt, so be it. For as long as it lasts, it’s an easy route to profits. Hedge funds get into trouble and are forced to close shop all the time, but no one ever asks them to return their fees. “Why would you not just take the highest possible risk with other people’s money? If there’s literally no downside, it’s the rational thing for you to do…"
Why do bond investors put up with this? “They don’t really have much choice…..if you’re managing a high-yield bond fund, there’s really not an option of going to 25 per cent cash. So you have to invest in the best deals that you can find. And because there’s so much money out there, the issuers can say, ‘You want to argue about covenants? The deal’s oversubscribed 3 to 1. See you on the next one”…..
If that strategy explodes in their faces because they end up holding some worthless junk debt, so be it. For as long as it lasts, it’s an easy route to profits. Hedge funds get into trouble and are forced to close shop all the time, but no one ever asks them to return their fees. “Why would you not just take the highest possible risk with other people’s money? If there’s literally no downside, it’s the rational thing for you to do…"
speculative credit excess
Bears' Chat - Welcome: "In a foreword to the report, Crispin Odey, CEO of Odey Asset Management, says: 'Not only does he [Chancellor] make a cogent and persuasive case that current trends are unsustainable, but his unique knowledge of the hinterland of previous periods of speculative credit excess also illuminates the range of potential outcomes...There is no question that financial markets are not priced for the sorts of risks that Chancellor identifies.'
Well, Chancellor's latest: Inefficient Market: Blackstone Letter, may indeed prove prescient. It was posted here earlier, and presents what to me is a plausible outcome to the financial madness so rampant today. Once again, the salient points:
'Looking back over this difficult period, most of our problems can be ascribed to deteriorating economic conditions; extraordinary convulsions in the credit markets; a worsening political and legal environment for the buyout industry; and the consequences of what is now commonly referred to as the 'private equity bubble.' I will briefly examine each of these issues in turn.'
1. The Macro-Economic Climate: When Blackstone came to the market in the summer of 2007, economic conditions were remarkably benign. Most economists agree that the decision by Congress to impose punitive tariffs on Chinese imports during the "
Well, Chancellor's latest: Inefficient Market: Blackstone Letter, may indeed prove prescient. It was posted here earlier, and presents what to me is a plausible outcome to the financial madness so rampant today. Once again, the salient points:
'Looking back over this difficult period, most of our problems can be ascribed to deteriorating economic conditions; extraordinary convulsions in the credit markets; a worsening political and legal environment for the buyout industry; and the consequences of what is now commonly referred to as the 'private equity bubble.' I will briefly examine each of these issues in turn.'
1. The Macro-Economic Climate: When Blackstone came to the market in the summer of 2007, economic conditions were remarkably benign. Most economists agree that the decision by Congress to impose punitive tariffs on Chinese imports during the "
Suddenly, the bees are simply vanishing - Los Angeles Times
Suddenly, the bees are simply vanishing - Los Angeles Times: "The dead bees under Dennis vanEngelsdorp's microscope were like none he had ever seen.
He had expected to see mites or amoebas, perennial pests of bees. Instead, he found internal organs swollen with debris and strangely blackened. The bees' intestinal tracts were scarred, and their rectums were abnormally full of what appeared to be partly digested pollen. Dark marks on the sting glands were telltale signs of infection.
'The more you looked, the more you found,' said VanEngelsdorp, the acting apiarist for the state of Pennsylvania. 'Each thing was a surprise.'
VanEngelsdorp's examination of the bees in November was one of the first scientific glimpses of a mysterious honeybee die-off that has launched an intense search for a cure.
The puzzling phenomenon, known as Colony Collapse Disorder, or CCD, has been reported in 35 states, five Canadian provinces and several European countries. The die-off has cost U.S. beekeepers about $150 million in losses and an uncertain amount for farmers scrambling to find bees to pollinate their crops.
Scientists have scoured the country, finding eerily abandoned hives in which the bees seem to have simply left their honey and broods of baby bees."
He had expected to see mites or amoebas, perennial pests of bees. Instead, he found internal organs swollen with debris and strangely blackened. The bees' intestinal tracts were scarred, and their rectums were abnormally full of what appeared to be partly digested pollen. Dark marks on the sting glands were telltale signs of infection.
'The more you looked, the more you found,' said VanEngelsdorp, the acting apiarist for the state of Pennsylvania. 'Each thing was a surprise.'
VanEngelsdorp's examination of the bees in November was one of the first scientific glimpses of a mysterious honeybee die-off that has launched an intense search for a cure.
The puzzling phenomenon, known as Colony Collapse Disorder, or CCD, has been reported in 35 states, five Canadian provinces and several European countries. The die-off has cost U.S. beekeepers about $150 million in losses and an uncertain amount for farmers scrambling to find bees to pollinate their crops.
Scientists have scoured the country, finding eerily abandoned hives in which the bees seem to have simply left their honey and broods of baby bees."
Global Grain Production Falls Behind Demand
Global Grain Production Falls Behind Demand: "SASKATOON, Sask.-Today, the United States Department of Agriculture (USDA) released its first projections of world grain supply and demand for the coming crop year: 2007/08. USDA predicts supplies will plunge to a 53-day equivalent-their lowest level in the 47-year period for which data exists.
'The USDA projects global grain supplies will drop to their lowest levels on record. Further, it is likely that, outside of wartime, global grain supplies have not been this low in a century, perhaps longer,' said NFU Director of Research Darrin Qualman.
Most important, 2007/08 will mark the seventh year out of the past eight in which global grain production has fallen short of demand. This consistent shortfall has cut supplies in half-down from a 115-day supply in 1999/00 to the current level of 53 days. 'The world is consistently failing to produce as much grain as it uses,' said Qualman. He continued: 'The current low supply levels are not the result of a transient weather event or an isolated production problem: low supplies are the result of a persistent drawdown trend.'"
'The USDA projects global grain supplies will drop to their lowest levels on record. Further, it is likely that, outside of wartime, global grain supplies have not been this low in a century, perhaps longer,' said NFU Director of Research Darrin Qualman.
Most important, 2007/08 will mark the seventh year out of the past eight in which global grain production has fallen short of demand. This consistent shortfall has cut supplies in half-down from a 115-day supply in 1999/00 to the current level of 53 days. 'The world is consistently failing to produce as much grain as it uses,' said Qualman. He continued: 'The current low supply levels are not the result of a transient weather event or an isolated production problem: low supplies are the result of a persistent drawdown trend.'"
The Life of the Chinese Gold Farmer
Looking for online gold.
By JULIAN DIBBELL
It was an hour before midnight, three hours into the night shift with nine more to go. At his workstation in a small, fluorescent-lighted office space in Nanjing, China, Li Qiwen sat shirtless and chain-smoking, gazing purposefully at the online computer game in front of him. The screen showed a lightly wooded mountain terrain, studded with castle ruins and grazing deer, in which warrior monks milled about. Li, or rather his staff-wielding wizard character, had been slaying the enemy monks since 8 p.m., mouse-clicking on one corpse after another, each time gathering a few dozen virtual coins — and maybe a magic weapon or two — into an increasingly laden backpack.
Twelve hours a night, seven nights a week, with only two or three nights off per month, this is what Li does — for a living. On this summer night in 2006, the game on his screen was, as always, World of Warcraft, an online fantasy title in which players, in the guise of self-created avatars — night-elf wizards, warrior orcs and other Tolkienesque characters — battle their way through the mythical realm of Azeroth, earning points for every monster slain and rising, over many months, from the game's lowest level of death-dealing power (1) to the highest (70). More than eight million people around the world play World of Warcraft — approximately one in every thousand on the planet — and whenever Li is logged on, thousands of other players are, too. They share the game's vast, virtual world with him, converging in its towns to trade their loot or turning up from time to time in Li's own wooded corner of it, looking for enemies to kill and coins to gather. Every World of Warcraft player needs those coins, and mostly for one reason: to pay for the virtual gear to fight the monsters to earn the points to reach the next level. And there are only two ways players can get as much of this virtual money as the game requires: they can spend hours collecting it or they can pay someone real money to do it for them.
At the end of each shift, Li reports the night's haul to his supervisor, and at the end of the week, he, like his nine co-workers, will be paid in full. For every 100 gold coins he gathers, Li makes 10 yuan, or about $1.25, earning an effective wage of 30 cents an hour, more or less. The boss, in turn, receives $3 or more when he sells those same coins to an online retailer, who will sell them to the final customer (an American or European player) for as much as $20. The small commercial space Li and his colleagues work in — two rooms, one for the workers and another for the supervisor — along with a rudimentary workers' dorm, a half-hour's bus ride away, are the entire physical plant of this modest $80,000-a-year business. It is estimated that there are thousands of businesses like it all over China, neither owned nor operated by the game companies from which they make their money. Collectively they employ an estimated 100,000 workers, who produce the bulk of all the goods in what has become a $1.8 billion worldwide trade in virtual items. The polite name for these operations is youxi gongzuoshi, or gaming workshops, but to gamers throughout the world, they are better known as gold farms. While the Internet has produced some strange new job descriptions over the years, it is hard to think of any more surreal than that of the Chinese gold farmer.
The market for massively multiplayer online role-playing games, known as M.M.O.'s, is a fast-growing one, with no fewer than 80 current titles and many more under development, all targeted at a player population that totals around 30 million worldwide. World of Warcraft, produced in Irvine, Calif., by Blizzard Entertainment, is one of the most profitable computer games in history, earning close to $1 billion a year in monthly subscriptions and other revenue. In a typical M.M.O., as in a classic predigital role-playing game like Dungeons & Dragons, each player leads his fantasy character on a life of combat and adventure that may last for months or even years of play. As has also been true since D. & D., however, the romance of this imaginary life stands in sharp contrast to the plodding, mathematical precision with which it proceeds.
Players of M.M.O.'s are notoriously obsessive gamers, not infrequently dedicating more time to the make-believe careers of their characters than to their own real jobs. Indeed, it is no mere conceit to say that M.M.O.'s are just as much economies as games. In every one of them, there is some form of money, the getting and spending of which invariably demands a lot of attention: in World of Warcraft, it is the generic gold coin; in Korea's popular Lineage II, it is the “adena”; in the Japanese hit Final Fantasy XI, it is called “gil.” And in all of these games, it takes a lot of this virtual local currency to buy the gear and other battle aids a player needs to even contemplate a run at the monsters worth fighting. To get it, players have a range of virtual income-generating activities to choose from: they can collect loot from dead monsters, of course, but they can also make weapons, potions and similarly useful items to sell to other players or even gather the herbs and hides and other resources that are the crafters' raw materials. Repetitive and time-intensive by design, these pursuits and others like them are known collectively as “the grind.”
For players lacking time or patience for the grind, there has always been another means of acquiring virtual loot: real money. From the earliest days of M.M.O.'s, players have been willing to trade their hard-earned legal tender — dollars, euros, yen, pounds sterling — for the fruits of other players' grinding. And despite strict rules against the practice in the most popular online games, there have always been players willing to sell. The phenomenon of selling virtual goods for real money is called real-money trading, or R.M.T., and it first flourished in the late 1990s on eBay. M.M.O. players looking to sell their virtual armor, weapons, gold and other items would post them for auction and then, when all the bids were in and payment was made, arrange with the highest bidder to meet inside the game world and transfer the goods from the seller's account to the buyer's.
Until very recently, in fact, eBay was a major clearinghouse for commodities from every virtual economy known to gaming — from venerable sword-and-sorcery stalwarts EverQuest and Ultima Online to up-and-comers like the Machiavellian space adventure Eve Online and the free-form social sandbox Second Life. That all came to an official end this January, when eBay announced a ban on R.M.T. sales, citing, among other concerns, the customer-service issues involved in facilitating transactions that are prohibited by the gaming companies. But by then the market had long since outgrown the tag-sale economics of online auctions. For years now, the vast majority of virtual goods has been brought to retail not by players selling the product of their own gaming but by high-volume online specialty sites like the virtual-money superstores IGE, BroGame and Massive Online Gaming Sales — multimillion-dollar businesses offering one-stop, one-click shopping and instant delivery of in-game cash. These are the Wal-Marts and Targets of this decidedly gray market, and the same economic logic that leads conventional megaretailers to China in search of cheap toys and textiles takes their virtual counterparts to China's gold farms.
Indeed, on the surface, there is little to distinguish gold farming from toy production or textile manufacture or any of the other industries that have mushroomed across China to feed the desires of the Western consumer. The wages, the margins, the worker housing, the long shifts and endless workweeks — all of these are standard practice. Like many workers in China today, most gold farmers are migrants. Li, for example, came to Nanjing, in the country's industry-heavy coastal region, from less prosperous parts. At 30, he is old for the job and feels it. He says he hopes to marry and start a family, he told me, but doesn't see it happening on his current wages, which are not much better than what he made at his last job, fixing cars. The free company housing means his expenses aren't high — food, cigarettes, bus fare, connection fees at the local wang ba (or Internet cafe) where he goes to relax — but even so, Li said, it is difficult to set aside savings. “You can do it,” he said, “but you have to economize a lot.”
This is the quick-sketch picture of the job, however, and it misses much. To sit at Li's side for an hour or two, amid the dreary, functional surroundings of his workplace, as he navigates the Technicolor fantasy world he earns his living in, is to understand that gold farming isn't just another outsourced job.
When the night shift ends and the sun comes up, Li and his co-workers know it only by the slivers of daylight that slip in at the edges of the plastic sheeting taped to the windows against the glare. As Li clocks out, another worker takes his seat, takes control of his avatar and carries on with the same grim routines amid the warrior monks of Azeroth. On most days Li's replacement is 22-year-old Wang Huachen, who has been at this gold farm for a year, ever since he completed his university course in law. Soon, Wang told me, he will take the test for his certificate to practice, but he seems in no particular hurry to.
“I will miss this job,” he said. “It can be boring, but I still have sometimes a playful attitude. So I think I will miss this feeling.”
Two workstations away, Wang's co-worker Zhou Xiaoguang, who is 24, also spends the day shift massacring monks. To watch his face as he plays, you wouldn't guess there was anything like fun involved in this job, and perhaps “fun” isn't exactly the word. As anyone who has spent much time among video-gamers knows, the look on a person's face as he or she plays can be a curiously serious one, reflective of the absorbing rigors of many contemporary games. It is hard, in any case, for Zhou to say where the line between work and play falls in a gold farmer's daily routines. “I am here the full 12 hours every day,” he told me, offhandedly killing a passing deer with a single crushing blow. “It's not all work. But there's not a big difference between play and work.”
I turned to Wang Huachen, who remained intent on manipulating an arsenal of combat spells, and asked again how it was possible that in these circumstances anybody could, as he put it, “have sometimes a playful attitude”?
He didn't even look up from his screen. “I cannot explain,” he said. “It just feels that way.”
In 2001, Edward Castronova, an economist at the University of Indiana and at the time an EverQuest player, published a paper in which he documented the rate at which his fellow players accumulated virtual goods, then used the current R.M.T. prices of those goods to calculate the total annual wealth generated by all that in-game activity. The figure he arrived at, $135 million, was roughly 25 times the size of EverQuest's R.M.T. market at the time. Updated and more broadly applied, Castronova's results suggest an aggregate gross domestic product for today's virtual economies of anywhere from $7 billion to $12 billion, a range that puts the economic output of the online gamer population in the company of Bolivia's, Albania's and Nepal's.
Not quite the big time, no, but the implications are bigger, perhaps, than the numbers themselves. Castronova's estimate of EverQuest's G.D.P. showed that online games — even when there is no exchange of actual money — can produce actual wealth. And in doing so Castronova also showed that something curious has happened to the classic economic distinction between play and production: in certain corners of the world, it has melted away. Play has begun to do real work.
This development has not been universally welcomed. In the eyes of many gamers, in fact, real-money trading is essentially a scam — a form of cheating only slightly more refined than, say, offering 20 actual dollars for another player's Boardwalk and Park Place in Monopoly. Some players, and quite a few game designers, see the problem in more systemic terms. Real-money trading harms the game, they argue, because the overheated productivity of gold farms and other profit-seeking operations makes it harder for beginning players to get ahead. Either way, the sense of a certain economic injustice at work breeds resentment. In theory this resentment would be aimed at every link in the R.M.T. chain, from the buyers to the retailers to the gold-farm bosses. And, indeed, late last month American WoW players filed a class-action suit against the dominant virtual-gold retailer, IGE, the first of its kind.
But as a matter of everyday practice, it is the farmers who catch it in the face. Consider, for example, a typical interlude in the workday of the 21-year-old gold farmer Min Qinghai. Min spends most of his time within the confines of a former manufacturing space 200 miles south of Nanjing in the midsize city of Jinhua. He works two floors below the plywood bunks of the workers' dorm where he sleeps. In two years of 84-hour farming weeks, he has rarely stepped outside for longer than it takes to eat a meal. But he has died more times than he can count. And last September on a warm afternoon, halfway between his lunch and dinner breaks, it was happening again.
The World of Warcraft monsters he faces down — ferocious, gray-furred warriors of the Timbermaw clan of bearmen — are no match for his high-level characters, but they do fight back and sometimes they get the better of him. And so it appeared they had just done. Distracted from his post for a moment, Min returned to find his hunter-class character at the brink of death, the scene before him a flurry of computer-animated weapon blows. It wasn't until the fight had run its course and the hunter lay dead that Min could make out exactly what had happened. The game's chat window displayed a textual record of the blows landed and the cost to Min in damage points. The record was clear: the monsters hadn't acted alone. In the middle of the fight another player happened by, sneaked up on Min and brought him down.
Min leaned back and stretched, then set about the tedious business of resurrecting his character, a drawn-out sequence of operations that can put a player out of action for as long as 10 minutes. In farms with daily production quotas, too much time spent dead instead of farming gold can put the worker's job at risk. And in shops where daily wages are tied to daily harvests, every minute lost to death is money taken from the farmer's pocket. But there are times when death is more than just an economic setback for a gold farmer, and this was one of them. As Min returned to his corpse — checking to make sure his attacker wasn't waiting around to fall on him again the moment he resurrected — what hurt more than the death itself was how it happened, or more precisely, what made it happen: another player.
It isn't that WoW players don't frequently kill other players for fun and kill points. They do. But there is usually more to it when the kill in question is a gold farmer. In part because gold farmers' hunting patterns are so repetitive, they are easy to spot, making them ready targets for pent-up anti-R.M.T. hostility, expressed in everything from private sarcastic messages to gratuitous ambushes that can stop a farmer's harvesting in its tracks. In homemade World of Warcraft video clips that circulate on YouTube or GameTrailers, with titles like “Chinese Gold Farmers Must Die” and “Chinese Farmer Extermination,” players document their farmer-killing expeditions through that same Timbermaw-ridden patch of WoW in which Min does his farming — a place so popular with farmers that Western players sometimes call it China Town. Nick Yee, an M.M.O. scholar based at Stanford, has noted the unsettling parallels (the recurrence of words like “vermin,” “rats” and “extermination”) between contemporary anti-gold-farmer rhetoric and 19th-century U.S. literature on immigrant Chinese laundry workers.
Min's English is not good enough to grasp in all its richness the hatred aimed his way. But he gets the idea. He feels a little embarrassed around regular players and sometimes says he thinks about how he might explain himself to those who believe he has no place among them, if only he could speak their language. “I have this idea in mind that regular players should understand that people do different things in the game,” he said. “They are playing. And we are making a living.”
It is a distinction that game companies understand all too well. Like the majority of M.M.O. companies, Blizzard has chosen to align itself with the customers who abhor R.M.T. rather than the ones who use it. A year ago, Blizzard announced it had identified and banned more than 50,000 World of Warcraft accounts belonging to farmers. It was the opening salvo in a continuing eradication campaign that has effectively swept millions in farmed gold from the market, sending the exchange rate rocketing from a low of 6 cents per gold coin last spring to a high of 35 cents in January.
Of course, nobody expected the farmers' equally rule-breaking customers to be punished too. Among players, the R.M.T. debate may revolve around questions of fairness, but among game companies, the only question seems to be what is good for business. Cracking down on R.M.T. buyers makes poorer marketing sense than cracking down on sellers, in much the same way that cracking down on illegal drug suppliers is a better political move than cracking down on users. (Only a few companies have found a way to make R.M.T. part of their business model. Sony Online Entertainment, which publishes EverQuest, has started earning respectable revenues from an experimental in-game auction system that charges players a small transaction fee for real-money trades.) As Mark Jacobs, vice president at Electronic Arts and creator of the classic M.M.O. Dark Age of Camelot, put it: “Are you going to get more sympathy from busting 50,000 Chinese farmers or from busting 10,000 Americans that are buying? It's not a racial thing at all. If you bust the buyers, you're busting the guys who are paying to play your game, who you want to keep as customers and who will then go on the forums and say really nasty things about your company and your game.”
The cost to farmers of being expelled from WoW can be steep. At the very least, it means a temporary drop in productivity, because the character has to be to built up all over again, as well as the loss of all the loot accumulated in that character's account. Given the stakes, some Chinese gold farms have found that the best way to get around their farmers' pursuers is to make it hard to distinguish professionals from players in the first place. One business that specializes in doing just that is located a few blocks from the gold farm where Min Qinghai works. The shop floor is about the same size, with about the same number of computers in the same neat rows, but you can tell just walking through the place that it is a more serious operation. For one thing, there are a lot more workers: typically 25 on the day shift, 25 on the night shift, each crew punching in and out at a time clock just inside the entrance. Nobody works without a shirt here; quite a few, in fact, wear a standard-issue white polo shirt with the company initials on it. There is also a crimson version of the shirt, reserved for management and worn at all times by the shift supervisor, who, when he isn't prowling the floor, sits at his desk before a broad white wall emblazoned with foot-high Chinese characters in red that spell: unity, collaboration, integrity, efficiency.
The name of the business is Donghua Networks, and its specialty is what gamers call “power leveling.” Like regular gold farming, power leveling offers customers an end run around the World of Warcraft grind — except that instead of providing money and other items, the power leveler simply does the work for you. Hand over your account name, password and about $300, and get on with your real life for a while: in a marathon of round-the-clock monster-bashing, a team of power levelers will raise your character from the lowest level to the highest, accomplishing in four weeks or less what at a normal rate of play would take at least four months.
For Donghua's owners — 26-year-old Fei Jianfeng and 36-year-old Bao Donghua, both former gold-farm wage workers themselves — moving the business out of farming and into leveling was an easy call. Among other advantages, they say, power leveling means fewer banned accounts. Because the only game accounts used are the customers' own, there is much less risk of losing access to the virtual work site. For their workers, however, the advantages are mixed. Though there is a greater variety of quests and quarries to pursue, the pay isn't any better, and some workers chafe at the constraints of playing a stranger's character, preferring the relative autonomy of farming gold.
As one Donghua power leveler said of his old gold-farming job, “I had more room to play for myself.”
It may seem strange that a wage-working loot farmer would still care about the freedom to play. But it is not half as strange as the scene that unfolded one evening at 9 o'clock in the Internet cafe on the ground floor of the building where Donghua has its offices. Scattered around the stifling, dim wang ba, 10 power levelers just off the day shift were merrily gaming away. Not all of them were playing World of Warcraft. A big, silent lug named Mao sat mesmerized by a very pink-and-purple Japanese schoolgirls' game, in which doe-eyed characters square off in dancing contests with other online players. But the rest had chosen, to a man, to log into their personal World of Warcraft accounts and spend these precious free hours right back where they had spent every other hour of the day: in Azeroth.
Such scenes are not at all unusual. At the end of almost any working day or night in a Chinese gaming workshop, workers can be found playing the same game they have been playing for the last 12 hours, and to some extent gold-farm operators depend on it. The game is too complex for the bosses to learn it all themselves; they need their workers to be players — to find out all the tricks and shortcuts, to train themselves and to train one another. “When I was a worker,” Fan Yangwen, who is now 21 and in Donghua's main office providing technical support, told me, “I loved to play because when I was playing, I was learning.” But learning to play or learning to work? I asked. Fan shrugged. “Both.”
Fan himself is a striking case of how off-hours play can serve as a kind of unpaid R. and D. lab for the farming industry. He is that rarest of World of Warcraft obsessives, a Chinese gold farmer who has actually bought farmed gold. (“Sure, I bought 10,000 once,” he said, “I don't have time to farm all that!”) When Fan shows up at the wang ba after work, it is a minor event; the other Donghua workers pull their chairs over to watch him play — his top-level warlock character is an unbelievable powerhouse that no amount of money, real or virtual, can buy.
What makes Fan's dominance so impressive to his peers is that he achieved it in regions of the game that are all but inaccessible to the working gold farmer or power leveler. Therein lies what is known as the end game, the phase of epic challenges that begins only when the player has accumulated the maximum experience points and can level up no more. The rewards for meeting these challenges are phenomenal: rare weapons and armor pieces loaded with massive power boosts and showy graphics. And the greatest cannot be traded or given away; they can only be acquired by venturing into the game's most difficult dungeons. That requires becoming part of a tightly coordinated “raid” group of as many as 40 other players (any fewer than that, and the entire group will almost certainly “wipe” — or die en masse without killing any monsters of note). Each player has a shot at the best items when they drop, and players must negotiate among themselves for the top prizes. These end-game hurdles have some subtle but significant effects. For one thing, they force the growth of “guilds” — teams of dozens, sometimes hundreds, of players who join together to hit high-end dungeons on a regular basis. For another, they shut farmers out from an entire class of virtual goods — the most marketable in the game if only they could be traded.
For a long time the Donghua bosses, Fei and Bao (known even to employees as Little Bai and Brother Bao), could do no more than nurse their envy of the raiding guilds' access to the end game. But Fan's prowess pointed to another way of looking at it: raiding guilds weren't the competition, they realized; they were the solution. Donghua would put together a team of 40 employees. They would train the team in all the hardest dungeons. And then, for a few hundred dollars, the team would escort any customer into the dungeon of his or her choice. And when the customer's longed-for item dropped, the team would stand aside and let the customer take it, no questions asked. Thus would the supposedly unmarketable end-game treasures find their way into the R.M.T. market. And thus would gold farming, of a sort, find its way at last into the end game.
hen Brother Bao and Little Bai put their team together in April of last year, Min Qinghai, a veteran Donghua employee at the time, was among the first to make the roster.
“Before I joined the raiding team, I'd never worked together with so many people,” Min told me. They were 40 young men in three adjoining office spaces, and it was chaotic at first. Two or three supervisors moved among them, calling out orders like generals. A dungeon raid is always a puzzle: figuring out which tactics to use to kill each boss is the main challenge; doing so while coordinating 40 players can be dizzying. But members of the team raided just as diligently as they had power-leveled: 12 hours a day, 7 days a week, making their way through the complexities of a different dungeon every day.
There was a lot of shouting involved, at least in the beginning. Besides the orders called out by the supervisors, there were loud attempts at coordination among the team members themselves. “But then we developed a sense of cooperation, and the shouting grew rarer,” Min said. “By the end, nothing needed to be said.” They moved through the dungeons in silent harmony, 40 intricately interdependent players, each the master of his part. For every fight in every dungeon, the hunters knew without asking exactly when to shoot and at what range; the priests had their healing spells down to a rhythm; wizards knew just how much damage to put in their combat spells.
And Min's role? The translator struggled for a moment to find the word in English, and when I hazarded a guess, Min turned directly to me and repeated it, the only English I ever heard him speak. “Tank,” he said, breaking into a rare, slow smile, and why wouldn't he? The tank — the heavily armored warrior character who holds the attention of the most powerful enemy in the fight, taking all its blows — is the linchpin of any raid. If the tank dies, everybody else will soon die too, as a rule.
“Working together, playing together, it felt nice,” Min said. “Very . . . shuang.” The word means “open, clear, exhilarating.” “You would go in, knowing that you were fighting the bosses that all the guilds in the world dream of fighting; there was a sense of achievement.”
The end arrived without warning. One day word came down from the bosses that the 40-man raids were suspended indefinitely for lack of customers. In the meantime, team members would go back to gold farming, gathering loot in five-man dungeons that once might have thrilled Min but now presented no challenge whatsoever. “We no longer went to fight the big boss monsters,” Min said. “We were ordered to stay in one place doing the same thing again and again. Everyday I was looking at the same thing. I could not stand it.”
Min quit and took the farming job he works at still. The new job, with its rote Timbermaw whacking, could hardly be less exciting. But it is more relaxed than Donghua was, less wearying — “Working 12 hours there was like working 24 here” — and he couldn't have stayed on in any case, surrounded by reminders of the broken promise of tanking for what might have been the greatest guild on Earth.
In the meantime, Min is doing his best to forget that his work has anything at all to do with play or that he ever let himself believe otherwise. But even with a job as monotonous as this one, it isn't easy. On his usual hunt one day, he accidentally backed into combat with a higher-level monster. Losing life fast, he grabbed his mouse and started to flee. He hunched over his keyboard, leaning into his flight, flushed now by the chase. His boss, 26-year-old Liu Haibin, an inveterate gamer himself, wandered by and began to cheer him on: “Yeah, yeah, yeah . . . go!”
Finally the monster quit the chase, and Min got away with no consequence more untoward than having to explain himself. “It's instinctual — you can't help it,” he said. “You want to play.”
Julian Dibbell is the author, most recently, of “Play Money: Or How I Quit My Day Job and Made Millions Trading Virtual Loot.” This is his first article for the magazine.
By JULIAN DIBBELL
It was an hour before midnight, three hours into the night shift with nine more to go. At his workstation in a small, fluorescent-lighted office space in Nanjing, China, Li Qiwen sat shirtless and chain-smoking, gazing purposefully at the online computer game in front of him. The screen showed a lightly wooded mountain terrain, studded with castle ruins and grazing deer, in which warrior monks milled about. Li, or rather his staff-wielding wizard character, had been slaying the enemy monks since 8 p.m., mouse-clicking on one corpse after another, each time gathering a few dozen virtual coins — and maybe a magic weapon or two — into an increasingly laden backpack.
Twelve hours a night, seven nights a week, with only two or three nights off per month, this is what Li does — for a living. On this summer night in 2006, the game on his screen was, as always, World of Warcraft, an online fantasy title in which players, in the guise of self-created avatars — night-elf wizards, warrior orcs and other Tolkienesque characters — battle their way through the mythical realm of Azeroth, earning points for every monster slain and rising, over many months, from the game's lowest level of death-dealing power (1) to the highest (70). More than eight million people around the world play World of Warcraft — approximately one in every thousand on the planet — and whenever Li is logged on, thousands of other players are, too. They share the game's vast, virtual world with him, converging in its towns to trade their loot or turning up from time to time in Li's own wooded corner of it, looking for enemies to kill and coins to gather. Every World of Warcraft player needs those coins, and mostly for one reason: to pay for the virtual gear to fight the monsters to earn the points to reach the next level. And there are only two ways players can get as much of this virtual money as the game requires: they can spend hours collecting it or they can pay someone real money to do it for them.
At the end of each shift, Li reports the night's haul to his supervisor, and at the end of the week, he, like his nine co-workers, will be paid in full. For every 100 gold coins he gathers, Li makes 10 yuan, or about $1.25, earning an effective wage of 30 cents an hour, more or less. The boss, in turn, receives $3 or more when he sells those same coins to an online retailer, who will sell them to the final customer (an American or European player) for as much as $20. The small commercial space Li and his colleagues work in — two rooms, one for the workers and another for the supervisor — along with a rudimentary workers' dorm, a half-hour's bus ride away, are the entire physical plant of this modest $80,000-a-year business. It is estimated that there are thousands of businesses like it all over China, neither owned nor operated by the game companies from which they make their money. Collectively they employ an estimated 100,000 workers, who produce the bulk of all the goods in what has become a $1.8 billion worldwide trade in virtual items. The polite name for these operations is youxi gongzuoshi, or gaming workshops, but to gamers throughout the world, they are better known as gold farms. While the Internet has produced some strange new job descriptions over the years, it is hard to think of any more surreal than that of the Chinese gold farmer.
The market for massively multiplayer online role-playing games, known as M.M.O.'s, is a fast-growing one, with no fewer than 80 current titles and many more under development, all targeted at a player population that totals around 30 million worldwide. World of Warcraft, produced in Irvine, Calif., by Blizzard Entertainment, is one of the most profitable computer games in history, earning close to $1 billion a year in monthly subscriptions and other revenue. In a typical M.M.O., as in a classic predigital role-playing game like Dungeons & Dragons, each player leads his fantasy character on a life of combat and adventure that may last for months or even years of play. As has also been true since D. & D., however, the romance of this imaginary life stands in sharp contrast to the plodding, mathematical precision with which it proceeds.
Players of M.M.O.'s are notoriously obsessive gamers, not infrequently dedicating more time to the make-believe careers of their characters than to their own real jobs. Indeed, it is no mere conceit to say that M.M.O.'s are just as much economies as games. In every one of them, there is some form of money, the getting and spending of which invariably demands a lot of attention: in World of Warcraft, it is the generic gold coin; in Korea's popular Lineage II, it is the “adena”; in the Japanese hit Final Fantasy XI, it is called “gil.” And in all of these games, it takes a lot of this virtual local currency to buy the gear and other battle aids a player needs to even contemplate a run at the monsters worth fighting. To get it, players have a range of virtual income-generating activities to choose from: they can collect loot from dead monsters, of course, but they can also make weapons, potions and similarly useful items to sell to other players or even gather the herbs and hides and other resources that are the crafters' raw materials. Repetitive and time-intensive by design, these pursuits and others like them are known collectively as “the grind.”
For players lacking time or patience for the grind, there has always been another means of acquiring virtual loot: real money. From the earliest days of M.M.O.'s, players have been willing to trade their hard-earned legal tender — dollars, euros, yen, pounds sterling — for the fruits of other players' grinding. And despite strict rules against the practice in the most popular online games, there have always been players willing to sell. The phenomenon of selling virtual goods for real money is called real-money trading, or R.M.T., and it first flourished in the late 1990s on eBay. M.M.O. players looking to sell their virtual armor, weapons, gold and other items would post them for auction and then, when all the bids were in and payment was made, arrange with the highest bidder to meet inside the game world and transfer the goods from the seller's account to the buyer's.
Until very recently, in fact, eBay was a major clearinghouse for commodities from every virtual economy known to gaming — from venerable sword-and-sorcery stalwarts EverQuest and Ultima Online to up-and-comers like the Machiavellian space adventure Eve Online and the free-form social sandbox Second Life. That all came to an official end this January, when eBay announced a ban on R.M.T. sales, citing, among other concerns, the customer-service issues involved in facilitating transactions that are prohibited by the gaming companies. But by then the market had long since outgrown the tag-sale economics of online auctions. For years now, the vast majority of virtual goods has been brought to retail not by players selling the product of their own gaming but by high-volume online specialty sites like the virtual-money superstores IGE, BroGame and Massive Online Gaming Sales — multimillion-dollar businesses offering one-stop, one-click shopping and instant delivery of in-game cash. These are the Wal-Marts and Targets of this decidedly gray market, and the same economic logic that leads conventional megaretailers to China in search of cheap toys and textiles takes their virtual counterparts to China's gold farms.
Indeed, on the surface, there is little to distinguish gold farming from toy production or textile manufacture or any of the other industries that have mushroomed across China to feed the desires of the Western consumer. The wages, the margins, the worker housing, the long shifts and endless workweeks — all of these are standard practice. Like many workers in China today, most gold farmers are migrants. Li, for example, came to Nanjing, in the country's industry-heavy coastal region, from less prosperous parts. At 30, he is old for the job and feels it. He says he hopes to marry and start a family, he told me, but doesn't see it happening on his current wages, which are not much better than what he made at his last job, fixing cars. The free company housing means his expenses aren't high — food, cigarettes, bus fare, connection fees at the local wang ba (or Internet cafe) where he goes to relax — but even so, Li said, it is difficult to set aside savings. “You can do it,” he said, “but you have to economize a lot.”
This is the quick-sketch picture of the job, however, and it misses much. To sit at Li's side for an hour or two, amid the dreary, functional surroundings of his workplace, as he navigates the Technicolor fantasy world he earns his living in, is to understand that gold farming isn't just another outsourced job.
When the night shift ends and the sun comes up, Li and his co-workers know it only by the slivers of daylight that slip in at the edges of the plastic sheeting taped to the windows against the glare. As Li clocks out, another worker takes his seat, takes control of his avatar and carries on with the same grim routines amid the warrior monks of Azeroth. On most days Li's replacement is 22-year-old Wang Huachen, who has been at this gold farm for a year, ever since he completed his university course in law. Soon, Wang told me, he will take the test for his certificate to practice, but he seems in no particular hurry to.
“I will miss this job,” he said. “It can be boring, but I still have sometimes a playful attitude. So I think I will miss this feeling.”
Two workstations away, Wang's co-worker Zhou Xiaoguang, who is 24, also spends the day shift massacring monks. To watch his face as he plays, you wouldn't guess there was anything like fun involved in this job, and perhaps “fun” isn't exactly the word. As anyone who has spent much time among video-gamers knows, the look on a person's face as he or she plays can be a curiously serious one, reflective of the absorbing rigors of many contemporary games. It is hard, in any case, for Zhou to say where the line between work and play falls in a gold farmer's daily routines. “I am here the full 12 hours every day,” he told me, offhandedly killing a passing deer with a single crushing blow. “It's not all work. But there's not a big difference between play and work.”
I turned to Wang Huachen, who remained intent on manipulating an arsenal of combat spells, and asked again how it was possible that in these circumstances anybody could, as he put it, “have sometimes a playful attitude”?
He didn't even look up from his screen. “I cannot explain,” he said. “It just feels that way.”
In 2001, Edward Castronova, an economist at the University of Indiana and at the time an EverQuest player, published a paper in which he documented the rate at which his fellow players accumulated virtual goods, then used the current R.M.T. prices of those goods to calculate the total annual wealth generated by all that in-game activity. The figure he arrived at, $135 million, was roughly 25 times the size of EverQuest's R.M.T. market at the time. Updated and more broadly applied, Castronova's results suggest an aggregate gross domestic product for today's virtual economies of anywhere from $7 billion to $12 billion, a range that puts the economic output of the online gamer population in the company of Bolivia's, Albania's and Nepal's.
Not quite the big time, no, but the implications are bigger, perhaps, than the numbers themselves. Castronova's estimate of EverQuest's G.D.P. showed that online games — even when there is no exchange of actual money — can produce actual wealth. And in doing so Castronova also showed that something curious has happened to the classic economic distinction between play and production: in certain corners of the world, it has melted away. Play has begun to do real work.
This development has not been universally welcomed. In the eyes of many gamers, in fact, real-money trading is essentially a scam — a form of cheating only slightly more refined than, say, offering 20 actual dollars for another player's Boardwalk and Park Place in Monopoly. Some players, and quite a few game designers, see the problem in more systemic terms. Real-money trading harms the game, they argue, because the overheated productivity of gold farms and other profit-seeking operations makes it harder for beginning players to get ahead. Either way, the sense of a certain economic injustice at work breeds resentment. In theory this resentment would be aimed at every link in the R.M.T. chain, from the buyers to the retailers to the gold-farm bosses. And, indeed, late last month American WoW players filed a class-action suit against the dominant virtual-gold retailer, IGE, the first of its kind.
But as a matter of everyday practice, it is the farmers who catch it in the face. Consider, for example, a typical interlude in the workday of the 21-year-old gold farmer Min Qinghai. Min spends most of his time within the confines of a former manufacturing space 200 miles south of Nanjing in the midsize city of Jinhua. He works two floors below the plywood bunks of the workers' dorm where he sleeps. In two years of 84-hour farming weeks, he has rarely stepped outside for longer than it takes to eat a meal. But he has died more times than he can count. And last September on a warm afternoon, halfway between his lunch and dinner breaks, it was happening again.
The World of Warcraft monsters he faces down — ferocious, gray-furred warriors of the Timbermaw clan of bearmen — are no match for his high-level characters, but they do fight back and sometimes they get the better of him. And so it appeared they had just done. Distracted from his post for a moment, Min returned to find his hunter-class character at the brink of death, the scene before him a flurry of computer-animated weapon blows. It wasn't until the fight had run its course and the hunter lay dead that Min could make out exactly what had happened. The game's chat window displayed a textual record of the blows landed and the cost to Min in damage points. The record was clear: the monsters hadn't acted alone. In the middle of the fight another player happened by, sneaked up on Min and brought him down.
Min leaned back and stretched, then set about the tedious business of resurrecting his character, a drawn-out sequence of operations that can put a player out of action for as long as 10 minutes. In farms with daily production quotas, too much time spent dead instead of farming gold can put the worker's job at risk. And in shops where daily wages are tied to daily harvests, every minute lost to death is money taken from the farmer's pocket. But there are times when death is more than just an economic setback for a gold farmer, and this was one of them. As Min returned to his corpse — checking to make sure his attacker wasn't waiting around to fall on him again the moment he resurrected — what hurt more than the death itself was how it happened, or more precisely, what made it happen: another player.
It isn't that WoW players don't frequently kill other players for fun and kill points. They do. But there is usually more to it when the kill in question is a gold farmer. In part because gold farmers' hunting patterns are so repetitive, they are easy to spot, making them ready targets for pent-up anti-R.M.T. hostility, expressed in everything from private sarcastic messages to gratuitous ambushes that can stop a farmer's harvesting in its tracks. In homemade World of Warcraft video clips that circulate on YouTube or GameTrailers, with titles like “Chinese Gold Farmers Must Die” and “Chinese Farmer Extermination,” players document their farmer-killing expeditions through that same Timbermaw-ridden patch of WoW in which Min does his farming — a place so popular with farmers that Western players sometimes call it China Town. Nick Yee, an M.M.O. scholar based at Stanford, has noted the unsettling parallels (the recurrence of words like “vermin,” “rats” and “extermination”) between contemporary anti-gold-farmer rhetoric and 19th-century U.S. literature on immigrant Chinese laundry workers.
Min's English is not good enough to grasp in all its richness the hatred aimed his way. But he gets the idea. He feels a little embarrassed around regular players and sometimes says he thinks about how he might explain himself to those who believe he has no place among them, if only he could speak their language. “I have this idea in mind that regular players should understand that people do different things in the game,” he said. “They are playing. And we are making a living.”
It is a distinction that game companies understand all too well. Like the majority of M.M.O. companies, Blizzard has chosen to align itself with the customers who abhor R.M.T. rather than the ones who use it. A year ago, Blizzard announced it had identified and banned more than 50,000 World of Warcraft accounts belonging to farmers. It was the opening salvo in a continuing eradication campaign that has effectively swept millions in farmed gold from the market, sending the exchange rate rocketing from a low of 6 cents per gold coin last spring to a high of 35 cents in January.
Of course, nobody expected the farmers' equally rule-breaking customers to be punished too. Among players, the R.M.T. debate may revolve around questions of fairness, but among game companies, the only question seems to be what is good for business. Cracking down on R.M.T. buyers makes poorer marketing sense than cracking down on sellers, in much the same way that cracking down on illegal drug suppliers is a better political move than cracking down on users. (Only a few companies have found a way to make R.M.T. part of their business model. Sony Online Entertainment, which publishes EverQuest, has started earning respectable revenues from an experimental in-game auction system that charges players a small transaction fee for real-money trades.) As Mark Jacobs, vice president at Electronic Arts and creator of the classic M.M.O. Dark Age of Camelot, put it: “Are you going to get more sympathy from busting 50,000 Chinese farmers or from busting 10,000 Americans that are buying? It's not a racial thing at all. If you bust the buyers, you're busting the guys who are paying to play your game, who you want to keep as customers and who will then go on the forums and say really nasty things about your company and your game.”
The cost to farmers of being expelled from WoW can be steep. At the very least, it means a temporary drop in productivity, because the character has to be to built up all over again, as well as the loss of all the loot accumulated in that character's account. Given the stakes, some Chinese gold farms have found that the best way to get around their farmers' pursuers is to make it hard to distinguish professionals from players in the first place. One business that specializes in doing just that is located a few blocks from the gold farm where Min Qinghai works. The shop floor is about the same size, with about the same number of computers in the same neat rows, but you can tell just walking through the place that it is a more serious operation. For one thing, there are a lot more workers: typically 25 on the day shift, 25 on the night shift, each crew punching in and out at a time clock just inside the entrance. Nobody works without a shirt here; quite a few, in fact, wear a standard-issue white polo shirt with the company initials on it. There is also a crimson version of the shirt, reserved for management and worn at all times by the shift supervisor, who, when he isn't prowling the floor, sits at his desk before a broad white wall emblazoned with foot-high Chinese characters in red that spell: unity, collaboration, integrity, efficiency.
The name of the business is Donghua Networks, and its specialty is what gamers call “power leveling.” Like regular gold farming, power leveling offers customers an end run around the World of Warcraft grind — except that instead of providing money and other items, the power leveler simply does the work for you. Hand over your account name, password and about $300, and get on with your real life for a while: in a marathon of round-the-clock monster-bashing, a team of power levelers will raise your character from the lowest level to the highest, accomplishing in four weeks or less what at a normal rate of play would take at least four months.
For Donghua's owners — 26-year-old Fei Jianfeng and 36-year-old Bao Donghua, both former gold-farm wage workers themselves — moving the business out of farming and into leveling was an easy call. Among other advantages, they say, power leveling means fewer banned accounts. Because the only game accounts used are the customers' own, there is much less risk of losing access to the virtual work site. For their workers, however, the advantages are mixed. Though there is a greater variety of quests and quarries to pursue, the pay isn't any better, and some workers chafe at the constraints of playing a stranger's character, preferring the relative autonomy of farming gold.
As one Donghua power leveler said of his old gold-farming job, “I had more room to play for myself.”
It may seem strange that a wage-working loot farmer would still care about the freedom to play. But it is not half as strange as the scene that unfolded one evening at 9 o'clock in the Internet cafe on the ground floor of the building where Donghua has its offices. Scattered around the stifling, dim wang ba, 10 power levelers just off the day shift were merrily gaming away. Not all of them were playing World of Warcraft. A big, silent lug named Mao sat mesmerized by a very pink-and-purple Japanese schoolgirls' game, in which doe-eyed characters square off in dancing contests with other online players. But the rest had chosen, to a man, to log into their personal World of Warcraft accounts and spend these precious free hours right back where they had spent every other hour of the day: in Azeroth.
Such scenes are not at all unusual. At the end of almost any working day or night in a Chinese gaming workshop, workers can be found playing the same game they have been playing for the last 12 hours, and to some extent gold-farm operators depend on it. The game is too complex for the bosses to learn it all themselves; they need their workers to be players — to find out all the tricks and shortcuts, to train themselves and to train one another. “When I was a worker,” Fan Yangwen, who is now 21 and in Donghua's main office providing technical support, told me, “I loved to play because when I was playing, I was learning.” But learning to play or learning to work? I asked. Fan shrugged. “Both.”
Fan himself is a striking case of how off-hours play can serve as a kind of unpaid R. and D. lab for the farming industry. He is that rarest of World of Warcraft obsessives, a Chinese gold farmer who has actually bought farmed gold. (“Sure, I bought 10,000 once,” he said, “I don't have time to farm all that!”) When Fan shows up at the wang ba after work, it is a minor event; the other Donghua workers pull their chairs over to watch him play — his top-level warlock character is an unbelievable powerhouse that no amount of money, real or virtual, can buy.
What makes Fan's dominance so impressive to his peers is that he achieved it in regions of the game that are all but inaccessible to the working gold farmer or power leveler. Therein lies what is known as the end game, the phase of epic challenges that begins only when the player has accumulated the maximum experience points and can level up no more. The rewards for meeting these challenges are phenomenal: rare weapons and armor pieces loaded with massive power boosts and showy graphics. And the greatest cannot be traded or given away; they can only be acquired by venturing into the game's most difficult dungeons. That requires becoming part of a tightly coordinated “raid” group of as many as 40 other players (any fewer than that, and the entire group will almost certainly “wipe” — or die en masse without killing any monsters of note). Each player has a shot at the best items when they drop, and players must negotiate among themselves for the top prizes. These end-game hurdles have some subtle but significant effects. For one thing, they force the growth of “guilds” — teams of dozens, sometimes hundreds, of players who join together to hit high-end dungeons on a regular basis. For another, they shut farmers out from an entire class of virtual goods — the most marketable in the game if only they could be traded.
For a long time the Donghua bosses, Fei and Bao (known even to employees as Little Bai and Brother Bao), could do no more than nurse their envy of the raiding guilds' access to the end game. But Fan's prowess pointed to another way of looking at it: raiding guilds weren't the competition, they realized; they were the solution. Donghua would put together a team of 40 employees. They would train the team in all the hardest dungeons. And then, for a few hundred dollars, the team would escort any customer into the dungeon of his or her choice. And when the customer's longed-for item dropped, the team would stand aside and let the customer take it, no questions asked. Thus would the supposedly unmarketable end-game treasures find their way into the R.M.T. market. And thus would gold farming, of a sort, find its way at last into the end game.
hen Brother Bao and Little Bai put their team together in April of last year, Min Qinghai, a veteran Donghua employee at the time, was among the first to make the roster.
“Before I joined the raiding team, I'd never worked together with so many people,” Min told me. They were 40 young men in three adjoining office spaces, and it was chaotic at first. Two or three supervisors moved among them, calling out orders like generals. A dungeon raid is always a puzzle: figuring out which tactics to use to kill each boss is the main challenge; doing so while coordinating 40 players can be dizzying. But members of the team raided just as diligently as they had power-leveled: 12 hours a day, 7 days a week, making their way through the complexities of a different dungeon every day.
There was a lot of shouting involved, at least in the beginning. Besides the orders called out by the supervisors, there were loud attempts at coordination among the team members themselves. “But then we developed a sense of cooperation, and the shouting grew rarer,” Min said. “By the end, nothing needed to be said.” They moved through the dungeons in silent harmony, 40 intricately interdependent players, each the master of his part. For every fight in every dungeon, the hunters knew without asking exactly when to shoot and at what range; the priests had their healing spells down to a rhythm; wizards knew just how much damage to put in their combat spells.
And Min's role? The translator struggled for a moment to find the word in English, and when I hazarded a guess, Min turned directly to me and repeated it, the only English I ever heard him speak. “Tank,” he said, breaking into a rare, slow smile, and why wouldn't he? The tank — the heavily armored warrior character who holds the attention of the most powerful enemy in the fight, taking all its blows — is the linchpin of any raid. If the tank dies, everybody else will soon die too, as a rule.
“Working together, playing together, it felt nice,” Min said. “Very . . . shuang.” The word means “open, clear, exhilarating.” “You would go in, knowing that you were fighting the bosses that all the guilds in the world dream of fighting; there was a sense of achievement.”
The end arrived without warning. One day word came down from the bosses that the 40-man raids were suspended indefinitely for lack of customers. In the meantime, team members would go back to gold farming, gathering loot in five-man dungeons that once might have thrilled Min but now presented no challenge whatsoever. “We no longer went to fight the big boss monsters,” Min said. “We were ordered to stay in one place doing the same thing again and again. Everyday I was looking at the same thing. I could not stand it.”
Min quit and took the farming job he works at still. The new job, with its rote Timbermaw whacking, could hardly be less exciting. But it is more relaxed than Donghua was, less wearying — “Working 12 hours there was like working 24 here” — and he couldn't have stayed on in any case, surrounded by reminders of the broken promise of tanking for what might have been the greatest guild on Earth.
In the meantime, Min is doing his best to forget that his work has anything at all to do with play or that he ever let himself believe otherwise. But even with a job as monotonous as this one, it isn't easy. On his usual hunt one day, he accidentally backed into combat with a higher-level monster. Losing life fast, he grabbed his mouse and started to flee. He hunched over his keyboard, leaning into his flight, flushed now by the chase. His boss, 26-year-old Liu Haibin, an inveterate gamer himself, wandered by and began to cheer him on: “Yeah, yeah, yeah . . . go!”
Finally the monster quit the chase, and Min got away with no consequence more untoward than having to explain himself. “It's instinctual — you can't help it,” he said. “You want to play.”
Julian Dibbell is the author, most recently, of “Play Money: Or How I Quit My Day Job and Made Millions Trading Virtual Loot.” This is his first article for the magazine.
17 June 2007
Problems in the subprime Bond world
Bears' Chat - Welcome: "'A friend of mine works as a Portfolio Manager for a $2.2b CDO pool of subprime loans. I spoke to him today for an hour. Asked how he is doing, he says 'nothing'. I ask what do u mean nothing, i hear all these stories about CDO's and losses (Bear Stearns for example), he shrugs and says nothing will happen until the Rating agencies do something. Asked about losses, he says they are there but he doesn't have to mark to market his portfolio until someone discovers it or the Rating agencies force his hand. So his plan is to lie low and collect the management fees and pretend as if there are no losses. Asked about management fees, he laughs and says it's a low 50 bips. On $2.2b, that's a cool $10m yearly which he and his four colleagues have to split up at the end of the yr. He says he has the best job in the world and says there is really no work to every day. Just wait and hope that the rating agencies don't downgrade his CDO pool and voila, at the end of the yr, he and his partners can split the $10m spoils (minus the expenses for one Park Avenue office, and a secretary). I am amazed that no body (regulators, investors, the public) hasn't beseeched the Rating agencies to review all the Subprime CDO's by now given the headlines and the incredible losses hidden there."
Severe recession - Commentary - California Housing Forecast by The Berkland Group
Severe recession - Commentary - California Housing Forecast by The Berkland Group: "Just a reminder: we are headed into a severe recession, and you will not get any advance warning from any economists or our government. Our government officials have never warned us of a recession, as their job is to instill confidence. Even if they knew we would have a recession, they will never come out and say so.
Economists are no better at forecasting than the government. In September 2000, a 'Blue Chip' top 50 forecaster projection polled 50 economist, and not even one of them predicted the recession of 2000-2001. Their average outlook was for a 2.4% growth rate.
Instead, look to these reliable historic indicators which are now all flashing red alerts, as explained here
In the past recessions have occurred under the following circumstances:
1) Whenever GDP growth was below 3% annualized for 5 consecutive quarters.
2) When the Fed tightened monetary policy (8 of the last 10 times).
3) When the yield curve was inverted (6 of the last 7 times).
4) When the Conference Board Leading Indicators were 0.5% or more below a year earlier (9 of the last 10 times).
5) When new building permits were 25% or more below a "
Economists are no better at forecasting than the government. In September 2000, a 'Blue Chip' top 50 forecaster projection polled 50 economist, and not even one of them predicted the recession of 2000-2001. Their average outlook was for a 2.4% growth rate.
Instead, look to these reliable historic indicators which are now all flashing red alerts, as explained here
In the past recessions have occurred under the following circumstances:
1) Whenever GDP growth was below 3% annualized for 5 consecutive quarters.
2) When the Fed tightened monetary policy (8 of the last 10 times).
3) When the yield curve was inverted (6 of the last 7 times).
4) When the Conference Board Leading Indicators were 0.5% or more below a year earlier (9 of the last 10 times).
5) When new building permits were 25% or more below a "
16 June 2007
TraderFeed: Trade Like a Scientist - Part One
TraderFeed: Trade Like a Scientist - Part One: "A theme I emphasize with new traders is that it is important to trade like a scientist. The scientific mindset is one that can be rehearsed and cultivated--and eventually internalized.
What do scientists do? First, they observe regularities in nature. They look for patterns: repeated sequences of events and commonalities among structures. Those regularities differentiate what is meaningful from what is random.
After observing regularities, scientists attempt to explain these. Explanation is the role of theory. The theory is the scientist's way of making sense of the world. Theory is not truth; it is a first approximation at truth.
Scientists gain confidence in their explanations by testing them. If a theory is meaningful and accurate, we should be able to use it to generate future observations. These predictions are hypotheses for the scientist. By testing hypotheses, we keep an open mind with respect to our observations and explanations.
Finally, once empirical tests provide fresh observations, scientists revise their explanations of nature and use these to generate further hypotheses, observations, and revisions. Knowledge, for a true scientist, is always provisional: that is what separates science from dogma."
What do scientists do? First, they observe regularities in nature. They look for patterns: repeated sequences of events and commonalities among structures. Those regularities differentiate what is meaningful from what is random.
After observing regularities, scientists attempt to explain these. Explanation is the role of theory. The theory is the scientist's way of making sense of the world. Theory is not truth; it is a first approximation at truth.
Scientists gain confidence in their explanations by testing them. If a theory is meaningful and accurate, we should be able to use it to generate future observations. These predictions are hypotheses for the scientist. By testing hypotheses, we keep an open mind with respect to our observations and explanations.
Finally, once empirical tests provide fresh observations, scientists revise their explanations of nature and use these to generate further hypotheses, observations, and revisions. Knowledge, for a true scientist, is always provisional: that is what separates science from dogma."
15 June 2007
It’s Official: The Crash of the U.S. Economy has begun
It’s Official: The Crash of the U.S. Economy has begun: "Pearlstein’s column was titled, “The Takeover Boom, About to Go Bust” and concerned the extraordinary amount of debt vs. operating profits of companies currently subject to leveraged buyouts.
In language remarkably alarmist for the usually ultra-bland pages of the Post, Pearlstein wrote, “It is impossible to predict when the magic moment will be reached and everyone finally realizes that the prices being paid for these companies, and the debt taken on to support the acquisitions, are unsustainable. When that happens, it won't be pretty. Across the board, stock prices and company valuations will fall. Banks will announce painful write-offs, some hedge funds will close their doors, and private-equity funds will report disappointing returns. Some companies will be forced into bankruptcy or restructuring.”
Further, “Falling stock prices will cause companies to reduce their hiring and capital spending while governments will be forced to raise taxes or reduce services, as revenue from capital gains taxes declines. And the combination of reduced wealth and higher interest rates will finally cause consumers to pull back on their debt-financed consumption. It happened after the junk-bond and savings-and-loan collapses of the late 1980s. It happened after the tech and telecom bust of the late '90s. And it will happ"
In language remarkably alarmist for the usually ultra-bland pages of the Post, Pearlstein wrote, “It is impossible to predict when the magic moment will be reached and everyone finally realizes that the prices being paid for these companies, and the debt taken on to support the acquisitions, are unsustainable. When that happens, it won't be pretty. Across the board, stock prices and company valuations will fall. Banks will announce painful write-offs, some hedge funds will close their doors, and private-equity funds will report disappointing returns. Some companies will be forced into bankruptcy or restructuring.”
Further, “Falling stock prices will cause companies to reduce their hiring and capital spending while governments will be forced to raise taxes or reduce services, as revenue from capital gains taxes declines. And the combination of reduced wealth and higher interest rates will finally cause consumers to pull back on their debt-financed consumption. It happened after the junk-bond and savings-and-loan collapses of the late 1980s. It happened after the tech and telecom bust of the late '90s. And it will happ"
13 June 2007
Shenzhen Confidential
Asia Sentinel - Shenzhen Confidential: "Hello, I'm Amy Jiang. On the surface, I could be a poster woman for the face of modern China. I am a mostly successful 20-something, savvy English-fluent woman with international business experience as a buyer and translator. But the truth is that I'm currently working for shady Russian businessmen posing as legitimate buyers in Shenzhen and Hong Kong. And while much of Shenzhen seems occupied with smuggling counterfeit handbags and shoes to the west, Sacha and Bogdan, as we will call them, are preoccupied with smuggling more serious stuff. Like buses, among other things."
IT'S GREEK TO ME:
Open University: "rue, Shorris also accuses the Bush gang of lacking the Christian virtues of hope and charity. They are possessed, however, of an excess of the third virtue, faith, with which they have given themselves permission to commit evil acts. Faith, unlike hope and charity, being the distinguishing virtue of Christianity, it seems fair to read Shorris' essay as mostly about the loss of classical virtue and the overabundance of faith.
A similar theme infuses Christopher Hitchens' best-selling book, God Is Not Great. At the end of 250 pages of point-by-point explication of the follies and dangers of revelation based moralities, Hitchens finally finds someone he can trust: Socrates. 'From Socrates,' Hitchens says, the very tone of his prose shifting markedly, 'we can learn how to argue two things that are of the highest importance. The first is that conscience is innate. The second is that the dogmatic faithful can easily be outpointed and satirized ... In essence the argument with faith begins and ends with Socrates.'
Looking for moral revival after the Bush years, frightened of people who talk to god, malnourished by the formalistic prescriptions of liberalism, it is not surprising that the rich tradition of classical philosophy calls."
A similar theme infuses Christopher Hitchens' best-selling book, God Is Not Great. At the end of 250 pages of point-by-point explication of the follies and dangers of revelation based moralities, Hitchens finally finds someone he can trust: Socrates. 'From Socrates,' Hitchens says, the very tone of his prose shifting markedly, 'we can learn how to argue two things that are of the highest importance. The first is that conscience is innate. The second is that the dogmatic faithful can easily be outpointed and satirized ... In essence the argument with faith begins and ends with Socrates.'
Looking for moral revival after the Bush years, frightened of people who talk to god, malnourished by the formalistic prescriptions of liberalism, it is not surprising that the rich tradition of classical philosophy calls."
ProgressiveHistorians:: Hadrian's Forum: Roman Dictator Subverted the Constitution and Set an Example
ProgressiveHistorians:: Hadrian's Forum: Roman Dictator Subverted the Constitution and Set an Example: "There are not too many parallels between Sulla and Bush, other than one: both attempted to subvert the constitution, but for one reason or another, neither could. Sulla didn't because he didn't want to subvert the constitution, although he could have. Bush hasn't been able to, because he doesn't have the intellect or the political skill.
However, just a few decades later, Julius Caesar would rise up, following Sulla's example. He would also wage war against fellow Romans, seize absolute power, and become dictator for life. Rome wasn't as lucky with Caesar, because Caesar wouldn't give up his powers so easily. Caesar's habit of granting clemency to his enemies gave him a following with the common people that Sulla's proscriptions didn't. But because of Caesar following Sulla's example, and the fact that Caesar's adopted son and heir, Gaius Octavius, followed Caesar's example, the republic was ruined.
This is what I fear about the example Bush has set, and those who may attempt to follow his example in the future. Only any future president wishing to follow in Bush's example may not be as much of an intellectual lightweight, or as politically reckless. A future such president may subvert the constitution and the republic in ways that Bush will not be able to."
However, just a few decades later, Julius Caesar would rise up, following Sulla's example. He would also wage war against fellow Romans, seize absolute power, and become dictator for life. Rome wasn't as lucky with Caesar, because Caesar wouldn't give up his powers so easily. Caesar's habit of granting clemency to his enemies gave him a following with the common people that Sulla's proscriptions didn't. But because of Caesar following Sulla's example, and the fact that Caesar's adopted son and heir, Gaius Octavius, followed Caesar's example, the republic was ruined.
This is what I fear about the example Bush has set, and those who may attempt to follow his example in the future. Only any future president wishing to follow in Bush's example may not be as much of an intellectual lightweight, or as politically reckless. A future such president may subvert the constitution and the republic in ways that Bush will not be able to."
Subprime-Loan Risk Reaches Record, Derivatives Show
Bloomberg.com: Bonds: "June 12 (Bloomberg) -- The perceived risk of owning low- rated subprime-mortgage bonds created in the second half of 2006 rose to a record as loan delinquencies and mortgage rates climb, according to an index of credit derivatives.
An index of credit-default swaps linked to 20 bonds rated BBB- fell 2.9 percent to 62.12, according to Markit Group Ltd. The ABX-HE-BBB- 07-1 index's previous low of 62.25 came on Feb. 27. An ABX index linked to 20 similar securities from the first half of 2006 remains about 10 percent off a low hit in February.
Improved investor sentiment in May and early June about subprime-mortgage bonds and related collateralized debt obligations may have represented an ``eye of the storm,'' Louis Lucido, group managing director at Los Angeles-based money manager TCW Group Inc., said at a conference in New York last week sponsored by industry group American Securitization Forum.
Yields on 10-year Treasury notes, which mortgage rates generally track, have increased about 0.37 percentage points this month to 5.26 percent, amid bond buyer speculation that concerns about inflation will keep the Federal Reserve from lowering its target rate to boost a slumping housing market.
Higher mortgage rates lessen the chances that subprime borrowers will be able to refinance into new loans when their initial ``teaser'' rates end after two"
An index of credit-default swaps linked to 20 bonds rated BBB- fell 2.9 percent to 62.12, according to Markit Group Ltd. The ABX-HE-BBB- 07-1 index's previous low of 62.25 came on Feb. 27. An ABX index linked to 20 similar securities from the first half of 2006 remains about 10 percent off a low hit in February.
Improved investor sentiment in May and early June about subprime-mortgage bonds and related collateralized debt obligations may have represented an ``eye of the storm,'' Louis Lucido, group managing director at Los Angeles-based money manager TCW Group Inc., said at a conference in New York last week sponsored by industry group American Securitization Forum.
Yields on 10-year Treasury notes, which mortgage rates generally track, have increased about 0.37 percentage points this month to 5.26 percent, amid bond buyer speculation that concerns about inflation will keep the Federal Reserve from lowering its target rate to boost a slumping housing market.
Higher mortgage rates lessen the chances that subprime borrowers will be able to refinance into new loans when their initial ``teaser'' rates end after two"
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