“You Can’t Drink Yourself Sober. . . “
By Barry Ritholtz - May 15th, 2009, 3:48PM
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Another fun interview with Aaron Task at Yahoo Tech Ticker:
Its about debt and leverage .
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Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
May 15th, 2009 at 4:02 pm
“….but damnit the Fed will try!”
HCF
May 15th, 2009 at 4:18 pm
By my estimation, the Fed is trying to prop up 30 Trillion dollars in excess debt, not including Social Security and Medicare liabilities. Globally, I bet the figure is 50 Trillion. That’s not going to end well. Forget inflation…forget a dollar crash…forget $1500 gold. It ain’t going to happen. Deleveraging forces asset sales and the money will pour into cash, thus propping the dollar.
May 15th, 2009 at 4:28 pm
Governments HATE deflation because that means their deficits and debts grow with time. Creditors SHOULD love deflation, as their money is getting more valuable with time. Somehow the Fed is trying to convince us that money printing and “mild” inflation are good for us.
HCF
May 15th, 2009 at 4:35 pm
Steve Barry, that’s very astute. What’s your background?
May 15th, 2009 at 4:38 pm
@Ned:
BS in Electrical Engineering, MBA, Masters in Education, plus 20 years investing in stocks and gold.
May 15th, 2009 at 4:45 pm
True. But the Fed will keep on trying The Hair of The Dog for as long as they can get away with it, Barry.
May 15th, 2009 at 4:57 pm
How do you “devalue” something that is created by fiat? Ban paper and ink? They will print. That’s all their currency is good for, and they will do with it the only thing they can. $50 trillion can be printed on a single bill of fiat currency. The only thing stopping them might be integrity, and we know that’s in short supply. The dollar is currently worth 5% of what it was in 1900. Fiat only works in that direction.
May 15th, 2009 at 4:58 pm
@Steve:
If the deleveraging is orderly, perhaps. If it is not orderly, the yellow metal will provide stability.
Inflation is baked in the cake at this point, it is just a matter of time.
While gold is generally thought of, rightfully or not as an inflation hedge, it also does well in times of excess stress in the financial system.
May 15th, 2009 at 4:58 pm
but you can just stay drunk Barry- until you drop into an alcohol induced coma
May 15th, 2009 at 5:05 pm
@Marcus:
If you print a $50 Trillion bill, that is $50 Trillion more debt…a federal reserve note is a circular liability. As Barry said, you can’t drink yourself sober. Federalizing all the bad debts would be a disater of unimaginable proportion. As he also said, every time you try this, you solve a smaller problem now and create a bigger one later. I believe that game is over…this is THE BIG ONE.
May 15th, 2009 at 5:08 pm
What really could mean game over, is that the boomers are going to start retiring and will need to have less equity allocation and more medical care…the demographics are going to turn on us viciously.
May 15th, 2009 at 5:13 pm
interview with 93 yo Dr. Anna Schwartz (w/Milton Friedman) The Monetary History of the United States
She is not happy with Helicopter Ben
http://www.netcastdaily.com/broadcast/fsn2009-0509-3a.mp3
May 15th, 2009 at 5:13 pm
SB:
When the value of something is set by proclamation, 50 trillion of anything can be paid with the stroke of a pen. Circle broken.
May 15th, 2009 at 5:16 pm
wouldn’t an eventual devalutation of the $ be required for this country to get back on its feet- I understand the dynamics in the short term- the impetus will be for the $ to strengthen- but in the long term- a devaluation would seem to be in order- otherwise- what’s our hope for the future- where do we hang our hat-
and please don’t say more education and technology
May 15th, 2009 at 5:17 pm
can you say Zimbabwe
May 15th, 2009 at 5:22 pm
The history of fiat currencies is not a good one. To borrow the Zero Hedge “slogan”
“ON A LONG ENOUGH TIMELINE, THE SURVIVAL RATE FOR every fiat currency DROPS TO ZERO”
May 15th, 2009 at 5:23 pm
and everyone
May 15th, 2009 at 5:27 pm
Sounds like something Keynes would say…
May 15th, 2009 at 5:30 pm
Steve Barry @ 5:08
“What really could mean game over, is that the boomers are going to start retiring and will need to have less equity allocation and more medical care…the demographics are going to turn on us viciously”
I agree; but that’s probably at least two (presidential) election cycles in the future.
May 15th, 2009 at 5:32 pm
Wes-
Keynes did say something quite similar- that is true- who would think that Tyler Durden (although it was his alter ego that said it) and Keynes would have so much in common
May 15th, 2009 at 5:32 pm
It’s 5;30 PM, the markets are closed, and I’m not a predatory shark (or bait) who dabbles in the AH…
So I’ve started the process of attempting to “Drink Myself Sober” (which will end in the infield of Pimlico tomorrow afternoon)…
Go Rachel Alexander!
I’ll let you all know how the experiment went on Monday…
Cheers! ;-)
May 15th, 2009 at 5:33 pm
Steve:
I agree with you, this is going to end very badly for all of us…The magnitude of the debt is the problem…kinda of like exploring Everest in your shorts and flip-flops…the mountain will win…
But it is still rather amazing how fast things turned…maybe not on a dime and sure some saw it coming…but I mean the velocity of the downturn and its global nature have been something to watch.
May 15th, 2009 at 5:33 pm
ahab – good one
May 15th, 2009 at 5:38 pm
Baby Boomers – 1946 – 1964 birth dates. Let’s see. Older retirement age by then due to a number of things, so say retire at 70. Now, good investment practice would be to scale out of equities over the preceding 10 years or so. I think that gives us until 2020-2025 – The Really Big One
May 15th, 2009 at 5:45 pm
Bruce-
people are complacent- I was thinking something was not right at the start of the housing boom- which took off almost immediately after the dot com collapse- but people are lazy and will follow others into the next sure thing- no thought required-
so what amazed me is that it took so long before everyone caught on that something was amiss
May 15th, 2009 at 5:55 pm
You can, however, imbibe the next morning to alleviate the hangover symptoms, and delay the inevitable long slide downward to rock bottom. . .
Once again, sell in may and go away S&P 474 beginning October, GM Bankruptcy final catalyst. That Braveheart Scene? I think they just pulled up the long pointy pikes.
May 15th, 2009 at 5:55 pm
Easy money courtesy of Bubbles Greenspan, stir in some greed, lever up – it was only a matter of time.
Now we are doing it again, to an even greater extent – what will the next bubble be?
May 15th, 2009 at 6:04 pm
Enjoy all, I am going to go drink myself sober…..
May 15th, 2009 at 6:19 pm
Wow…Aaron Task has really let himself go!
May 15th, 2009 at 7:25 pm
I’m gonna take it to the street in a minute (3 beers in now) – NewsHour is on and “car dealership kills”
what is putting more people outta work gonna do? cept make more “to big to fail/fight” dealerships … and bigger “social programs” … or “dreamup your own way or croak you overbuilt waste”
crony capitalism … why is bigger better … oh thats right – that game capitalism
Frank Vincent Zappa – “Titties and Beer”
http://www.youtube.com/watch?v=lwb1s1DYnDU
May 15th, 2009 at 7:43 pm
We all know Barry Ritholtz is the bombdigitty, but Howard Davidowitz is an out-and-out Bada$$.
http://finance.yahoo.com/tech-ticker/article/248398/%22The-Worst-Is-Yet-to-Come%22%3A-If-Youre-Not-Petrified%2C-Youre-Not-Paying-Attention
So, f411 or any other consumer of the green shoots diet, you know my position once you listen to this clip. Also, it has a rather evergreen quality to it, so you probably can listen to this monthly for the next 3 years and it still works.
May 15th, 2009 at 7:52 pm
You can borrow your way out of too much debt… if you can refinance for lower rates (and the rate differential is enough to make the debt serviceable). The government is refinancing the bulk of the entire private sector through the bailouts. The problem is that it is completely unethical, as shifting private debt to the public makes servicing it compulsory for those of us who didn’t go to the debt orgy. (And never mind the moral hazards Obushma/Geitson have created to encourage more of the same temerity in the future, the shifting of the servicing burden to future generations, and the shifting of wealth from the public exchequer to the politically well-connected).
May 15th, 2009 at 7:53 pm
Franklin: “Wow…Aaron Task has really let himself go!”
Is that some kind of humour that I didn’t catch, or did you really just sink that low?
May 15th, 2009 at 8:08 pm
Speaking of “drinking oneself, uh, sober”, well maybe not “sober”, just getting into a mighty fine bottle of red wine and some cheese. TGIF.
May 15th, 2009 at 8:13 pm
Following on Barry’s “Heard” post last night, I nominate “TWEB” (this well end badly). It seems to pop up in so many posts, not that I’m complaining. Watching this train wreck has that effect on realists, me included.
May 15th, 2009 at 8:13 pm
@Cursive…you are right…Howard is Barry without any self-restraint mechanisms…he’s right on all counts too.
May 15th, 2009 at 8:26 pm
On another note, for what it’s worth, Cramer’s recommending to buy tech NOW. Again, for what it’s worth.
I will also note anecdotally that a buddy of mine works for Oracle in sales and neither he nor most of the sales people in his office have sold a damn thing of any consequence for them in almost a year. There is very little capital spending going on right now and with good reason.
May 15th, 2009 at 8:49 pm
You’ll all love this!.
SEC lawyers probed for insider trading
Fri May 15, 2009 6:51pm EDT
WASHINGTON (Reuters) – Two U.S. Securities and Exchange Commission enforcement lawyers are under investigation by federal criminal authorities for allegedly using insider information to trade stocks, a report by the SEC’s internal watchdog said.
The Federal Bureau of Investigation and U.S. Attorney’s Office are conducting an investigation of possible criminal and civil violations, the SEC’s inspector general David Kotz said in a March 3 letter to SEC Chairman Mary Schapiro.
May 15th, 2009 at 9:13 pm
Well, I am sober now and nothing has changed, oh well, pour another whiskey and get this party going’ again.
May 15th, 2009 at 9:39 pm
Green shoots? Starting on the low end in NYC. Will take some time to work way up to the higher parts of the food chain but we’ll get there eventually.
http://www.nytimes.com/2009/05/16/nyregion/16foreclose.html?hp
May 15th, 2009 at 9:53 pm
MannW, did F411 shut this thing down or what? And, do you really ride the bike?
May 15th, 2009 at 11:20 pm
@f411 8:49
Franklin, thanks. That was interesting. My take is this – I would sooner believe in the Easter Bunny than to believe these are the only two SEC employees engaging in insider trading. A corrorlary to that thought is that these two are sacrificial lambs. There is probably a much larger story here, but we’ll never know. Really, the Friedman (NY FR / GS) story was much more on the mark in my thinking.
@Wes 9:53
I think most on here are/have been enjoying adult beverages tonight. I was at the little league ball field and, yes, pleasantly surprised at f411′s research tonight.
May 15th, 2009 at 11:51 pm
“If you print a $50 Trillion bill, that is $50 Trillion more debt…a federal reserve note is a circular liability.”
What if the treasury just mints 50 trillion dollar coins? Those do not come from the fed.
May 16th, 2009 at 12:32 am
We don’t need a dollar devaluation. That’s just some FDR-Keynesian bullshit. The way to go forward from here is for debt to be destroyed — through default and bankruptcy. There’s no reason that American taxpayers, for instance, should forego consumption in order to pay to bail out bad loans made on overpriced real estate (though that’s what we’re doing). Debt represents consumption pulled in from the future to be enjoyed — right now. Debt is fine if it’s going to invest in productivity gains, but much of our debt has been invested in overpriced real estate and consumption. The best way out of this mess is for more defaults and more bankruptcies. This will suck for those on the wrong side of the trade, but it’s better than having it suck for people who weren’t even trading in that market. Keeping zombie debt alive means sucking the life out of the economy until it’s paid off. The evil and pernicious thing right now is that productive people and activities will be taxed to bail out people who made bad bets. If those who made the bad bets and took the risk had to pay for their mistakes, the bailout money would go to productive uses that would benefit all of us. What BR describes in his book is the transfer of wealth from the smart, productive people to the stupid, unproductive — and well-connected — people. It’s a crime and we ought take some serious action to stop it.
BTW, for you Daily Bail fans, dailybail.com was up an running again today.
May 16th, 2009 at 12:39 am
“You can’t drink yourself sober.”
I disagree.
Also, did anyone catch this article in the times about the 700+ cargo ships hanging out at anchor in Singapore….WTF. yeah, green shoots….
http://www.nytimes.com/2009/05/13/business/global/13ship.html?_r=1&emc=eta1
May 16th, 2009 at 1:13 am
Pretty damned ominous, isn’t AT? The more of these kinds of scenes you see, the more this whole thing really sinks in. Scenes of Detroit are also unbelievable and downright gut wrenching. And California’s going to have some pretty scary scenery coming soon as well, I’m sure. We’re in for a really hard time, and no amount of denial or arrogance will change that.
Clawback: I hear ya. If we don’t find the best ways to put our limited remaining real capital to work, and instead keep throwing it into black holes (e.g. bank balance sheet), we’re really screwed. And there’s much social strife coming, that’s for sure.
May 16th, 2009 at 1:40 am
call me ahab Says:
“and please don’t say more education and technology”
And what would you suggest in place?
May 16th, 2009 at 7:37 am
Bleah, hard to know how to phrase this vague theory, so I’ll just spit it out.
Tightly-coupled systems, in the software realm, typically result when one’s design goal is heavily influenced by concern for security and privacy.
Has anyone else noticed how practically everything done to date has made the financial system more tightly coupled, with the single point of failure moving up the chain, to the point where it now rests with the Fed?
The way I see it playing out in the next few months is, we start to see municipal funding crises. They’ll TARP ‘em for a little while, but that’s not nearly enough. FDIC has to step in and insure municipal debt. If they do it for one, they have to do it for all, else there’ll be capital flight, plus about 30 states that can’t make payroll.
How does Treasury justify insuring Goldman Sachs’ debt and not California’s? Giving public money to insurance companies and not to the state of Michigan?
Doesn’t matter from a creditworthiness standpoint whether you’re the crappiest GO bond from the Inland Empire or a Detroit sewer issue. It all has to be guaranteed. To me, that makes you want to do a long munis/short treasuries pair.
May 16th, 2009 at 7:55 am
So that leads me to wonder about the endgame.
This time, the Smoot-Hawley moment will try to play out in the currency markets. Every nation has reasons for wanting its currency lower against all others, the export nations to make their exports more attractive, the import nations to ease their debt burden. Again, we’re trapped in a game-theory experiment.
No reason all boats can’t sink at the same time, until you go to try to buy something fungible. That’s why I think Treasury/Fed winds up having to sit on the commodities markets. But this requires a credible currency. There are limits to how far you can debase the world’s reserve currency.
I wonder if they’re thinking about reviving the old Weimar “blocked marks” concept… You have a separate domestic and trade currency, only convertible in one direction. That prevents capital flight, yet still preserves the convertibility necessary for a worldwide reserve currency.
The Bernanke Buck (really, Bernanke Blip) backed by bonds issued by the Federal Reserve is the domestic currency. $USD, backed by the power to tax, is the trade currency.
You can’t have real inflation without a wage-price spiral, which ain’t happening in the US scenario. Therefore, you convert them at WTF-ever rate is necessary to induce inflation expectations by presenting a credible threat to the purchasing power of the currency.
At the end of it, you convert them back to $USD. All that liquidity, gone, in one swoop. No debasement of the reserve currency.
Could you live through that for a year? Two years? if it meant all these problems just went away?
These are just my dark musings over coffee this morning.
May 16th, 2009 at 9:07 am
ZackAttack-
interesting musings- thanks for sharing
May 16th, 2009 at 9:25 am
Surely I’ll be ostracized for these thoughts on the “…Ships Treading Water Off Singapore” NYT article. (Thanks Andy!) These are the types of articles you want to see during a bottoming process. Secondly, I have been duped by the media in the past into dumping a position,coal for example, after being inundated with reports of oversupply, prices falling, etc. only to have coal reverse and the stock I sold at a loss, soar. Lastly, while the article noted many points of interest (total idle tonnage, % of world’s fleet, warm water vs cold water, port fees…), what really struck me was this:
“Investment trusts have poured billions of dollars over the last five years into buying ships and leasing them for a year at a time to shipping lines. As the leases expire and many of these vessels are returned, losses will be heavy at these trusts and the mainly European banks that lent to them, said Stephen Fletcher, the commercial director for AXS Marine, a consulting firm based in Paris.”
May 16th, 2009 at 9:26 am
@ clawback 12:32
Well said.
May 16th, 2009 at 9:30 am
As far as drinking yourself sober… i still believe the debt is being erased in a “do over.” It’ll disappear in the books as the Fed has back stopped just about everyone now… and the government is back stopping the public at large via “unending” unemployment benefits, mortgage reworks, tax deductions and credits for purchasing homes, vehicles, what next I wonder…
Andy, please tell what you meant by disagreeing with ” You can’t drink yourself sober.” : )
May 16th, 2009 at 9:45 am
Karen Says:
“debt is being erased in a “do over.” . . . [it will] disappear in the books as the Fed has back stopped just about everyone now”
yes- the Fed has insured about everything- and as ZackAttack mentions above- municipal bonds might be next- however-
enlighten me on the “do over” and “disappear” references-
I don’t follow- even if the fed is taking bad assets on its books
May 16th, 2009 at 10:27 am
ahab, our monetary system is not only fiat (check the dictionary definition of that word!) but virtual/digital as well. paper isn’t even needed. imagine that 50 trillion dollars was parked in a warehouse, and the warehouse burnt down. the government just reprints and replaces the money in a new warehouse.
the most serious problem I see going forward is stimulating job growth and a creating a viable, stable, and sustainable economic model. this can be done, i believe, because the important and healthy aspects of our society have been neglected. we must refocus on education, healthcare, science, infrastructure, clean energy, agriculture.. the world really could be a better, safer place .. and i hope this meltdown was a wake up call to the guys running the show..
May 16th, 2009 at 11:02 am
What about the residents double standard?
http://www.butasforme.com/2009/05/15/video-as-gm-closes-1000-dealers-an-obama-double-standard-emerges/
May 16th, 2009 at 11:04 am
Also hmmm are they?
http://tpmmuckraker.talkingpointsmemo.com/2009/05/are_aig_fp_employees_using_bailout_cash_to_get_job.php
May 16th, 2009 at 11:13 am
Karen-
for the erasure of debt- someone takes losses- even if the assets are sold to the Fed- the bank must report the loss- so I don’t see a “do over” or disappearing act coming into play-
“refocus on education, healthcare, science, infrastructure, clean energy, agriculture..”
sorry Karen- empty words in my book- even if everyone in the country has a Phd- doesn’t equate to a sound economy-
the words sound good though
May 16th, 2009 at 11:31 am
Zack Attack,
You’re exactly right about the “single point of failure” residing in the unholy trinity of the Fed, FDIC and Treasury. I think this is what other commentators mean by the “U.S. Govt Bubble”. But your point about this being a single point of failure — a further concentration of risk — is just as important. I don’t know if it will end well.
May 16th, 2009 at 2:08 pm
@karen re: http://www.ritholtz.com/blog/2009/05/%e2%80%9cyou-can%e2%80%99t-drink-yourself-sober/comment-page-1/#comment-172248
We’d never ostracize you! I guess you’re saying that you think we’ve seen a bottom while many here are doubtful. My take on that is that all the things we tend to look at as indications of where we are in this market are based on our experiences post WWII. But we are in a much more destructive downturn than anything we’ve seen since the GD, as you well know. So even though we’re seeing some really bad numbers, sentiment, etc. that might indicate a bottom (i.e. it can’t get worse), I think it may just be a head fake on all us contrarians because I think it can and will get worse.
Just trying to maintain a healthy skepticism. Because it really is different this time, and only kind of rhyming with a mix of ’29-’32 and ’01-’02. I think many are looking for a ’02 type “recovery” but we’re clearly much worse off this time and we’re not going to get off the mat this time for a lot longer. As we’ve all discussed ad nauseum, the wild card is the Fed’s QE and transfer of private debt to the Fed’s balance sheet. Very uncharted waters.
May 16th, 2009 at 3:46 pm
Onlooker, what i think i think is that we are in a bottoming process in some sectors : ) Until there is a nuclear holocaust, i’m very much a proponent of TWINE* and still maintain my reflationary bias based on global QE. I, also, try to maintain a healthy skepticism and cynicism.. and believe me, when I cross the train tracks, I always look both ways.
*credit to that Schadenfreude guy
May 16th, 2009 at 4:02 pm
karen,
w/this: “..refocus on education, healthcare, science, infrastructure, clean energy, agriculture..”
do you mean, per chance, that we need Less Government spending in those sectors, and More Individual attention?
May 16th, 2009 at 5:30 pm
If you send me an e-book copy of “Bailout nation” I would be happy to post a link and a revue of this book on my site http://www.zezorro.blogspot.com The trailer therof is there already. Regards
May 16th, 2009 at 5:32 pm
Things are much better than in early March, if for no other reason than people aren’t crapping their pants anymore. Weekly claims have peaked, although they peaked once before, this is much more pronounced. Commodities and certain stock sectors were signaling a bottom before the overall market. So everything points to a bottom, so soon you should see improving #s all over the place. You can’t wait for the actual improvement or it will already be priced in. Stocks are just deciding what kind of recovery it will be and if they’ve ramped too far. The recovery IS coming, but what will it be like? This is the reason you often see a huge ramp off the bottom, then a sideways consolidation, and then another move in the same direction. One of the best trading rules around.
May 16th, 2009 at 6:00 pm
thetanman, ‘
Peak, relative, GDP has been witnessed.
If this Game continues, be advised, again, to, more, heavily weight the Poli-Sci-side v. the Fi-side. In this Poli-Sci-Fi Pachinko Parlor..
May 16th, 2009 at 6:11 pm
Good point. I think politics was the reason for that final ramp downward. BO was scaring the hell out of investors, imo intentionally. He said to buy stocks within days of the bottom. Coincidence? It maybe why the Utes and transports broke out but have retreated and are now resting right at strong resistance. Especially the Utes, imo cap and trade will be a steamer trunk on the back of the economy.
May 16th, 2009 at 6:38 pm
That a recovery is coming doesn’t guarantee anything. Like you essentially said, since peak earnings will not be reached again for many years, is S&P 900 too far? 900 is still a long way from the S&P 1600 bubble. In addition, even after the recession ended in ’02 we plunged another 30%, although nothing like that had happened before. Even under a strong recovery, even if it eventually failed, it would be difficult to surpass 1200. That’s about the same move we’ve had already and would be in accordance with the ramp continuation trading rule that has worked so well in the past on both the upside and downside. I will caution that from ’03 to ’06 we had 2 1/2 years of consolidation before the ramp to the bubble top.