Friends, Romans, Countrymen, Lend Me Your Ears

First, let me just thank London Banker for giving me the opportunity to make an “official” contribution to this website. In addition, I’d like to start of with an acknowledgement and thanks to Nouriel Roubini, The RGE’s Lead Analysts, and the RGE’s Bloggers for helping educate myself and many others on the economic crisis, and the worldwide implications and effects it has had and will continue to have in the various interrelated arenas of our global community. In my past 2 years on this website, I have shared more interest and insight on worldly events then I have with most members of my family, my friends and/or my inner circles. You all deserve a pat on the back for being part of that as well as congratulations on finding this website. For those of you here, your subscription date to the RGE marks the timeline on where you opened up your eyes and mind to the crisis that we now face.

With this crisis, it’s important to know where we’ve been and what was done. We can learn from our mistakes, make corrections, and hold people, companies and governments accountable for their actions and inactions. …but at the end of the day, it doesn’t change the past or bring anything back. The only real solution to our crisis is to keep moving forward. Those who adjust and adapt the most efficiently will be best equipped for what tomorrow brings.So without further ado…

The “Powers” That Be… (Past, Present & Future)

THE PAST:

For many of the bloggers on Nouriel’s page that know of me and my past contributions, feel free to skip this section. (just read the “present” & “future”) I am just rehashing some old forecasts that I made, to validate why newcomers or readers might want to take a listen.

For the past 15 years, I have worked on a managed the bank operations side of Wall St. I have learned quite a bit about the many facets of the market and how they affect one another. I have taken that knowledge and pooled it together with data from the past and present, and created simulated market economies to help me reasonably forecast potential economic outcomes. In addition, I use a sensitive cognition of trends to help me forecast things that data can not show you. (Following chatter, confidence, flows of cash, manipulation, intervention, etc…) In addition, I am not, and have never invested with the only exception being a 401k. (I have only given advice to friends and family) I believe this impartial view helps me create a better unbiased opinion. (In other words… I’m not selling my book a la Goldman Sachs)

Here are the blogging highlights:

The Financial War: Over a year ago, and well documented on this website, I stated that a Financial War was taking place. Not bombs and bullets… but instead through bits and bytes. I said this was accomplished through access to credit and well timed coordination between The Powers That Be. (TPTB) At the time, this “theory” was considered more “conspiracty theorist”, as it shook the foundation of “free markets”, but now we know it to be “fact” as the coordination have become well documented and deemed a “necessity to save the economy”. I stated that the market gyrations could be “reasonably calculated” since the problems that were occurring were in the Fixed Income Markets. These “fixed losses” would lead to mandatory losses in other areas of the economy based on the loss of the overall supply of credit. I went so far as to spell out distinct friction lines where the market would turn. This was dubbed by some bloggers on this website as: “The RH Shakedown”.

The Market: Due to these forced losses, I laid out where the markets would go. Specifically in January I stated:“I see DOW somewhere between 10,800 and 10,100. (S&P 1,180 and 1,100) If control is lost, I see a bottom at DOW 8,500 and S&P 900.” – Written by Rich H on 2008-01-24 11:00:49

As you can clearly look back, the markets dropped precisely to the 10,100 10,700 range in late September. Shortly thereafter, the US Gov’t lost control of the markets which required the bailout plan construction. At this time we saw the markets drop to my 8,500/900 low. (These market closing lows have still held.) These calls were made IN JANUARY! I did not see a single parallel forecast anywhere in mainstream media or from the so called “experts” at that time that has come anywhere close to my call.

The Surprise Rate Cut: In addition to the equity market call I also called for the FED to make a surprise rate cut to the Fed Fund Rate. This was days before the cut was made, and had rarely been done in recent years. Since then, predictions like this have become more mainstream, but at the time, this kind of call was seldom heard:

“On the big swing down, GS will give the signal, and cash will fly in. (i.e. I wouldn’t be surprised if there is a surprise rate cut, prior to or after the next Fed meeting) – Written by Rich H on 2008-01-15 21:41:30

Gold: I made a call in the fall of 2007 on where the value of gold would go stating: “we’d see a peak between $1,000 – $1,100”. In early March when we topped $1,000, I said we peaked and that: “we’re approaching what I deem to be peak values, and I decided to throw out the concept that “gold” might no longer be the right play. (based on it’s turning point potentially being right around the corner”. (this prediction was not popular on this website, and drew ire from the many goldbugs. In addition, it was contrary to “expert” calls that saw gold shooting through the roof. Schiff was calling for gold to go much higher at the time.)

This theory flew in the face of both inflation and economic crisis as gold has typically been a safe haven against those forces. My theory still holds that gold is just a good hedge and that the public needs to rid their dogmatic views on its eternal importance in the new world economy.

I said: “Gold is a useless commodity! (At best, it’s a less then average “conductor” for electricity) Its recent run is as a hedge against bad financial news. It has soared. …but the second that those “fears” become “reality” the value will crash harder and faster then the market since there would be no cash to pay for it. (sorta like handing a hot dog vendor a $1,000 bill. He’ll say sorry, I can’t change that for you.) So you don’t get your tasty hot dog. The dollar is playing a similar game right now. All foreign currencies are soaring against the dollar, but once that “fear” turns into “reality”, the market seems to return back to the good old greenback.”

This can all be read in Nouriel’s archive from March 4th 2008 under the title:

Will Default Rates on Muni Bonds Sharply Rise During the Recession? Most Likely: Yes. (From March 4 – Nouriel Roubini)

(If you read the whole blog from that date, you will see all of the Gold posts as well as the foundation for my “principal reduction on housing platform”. It was a great re-read of a past blog.)

Oil: As far a as peak oil price goes… I nailed it. It’s high close was $145.29. In addition, its rapid decent also found my flux point of $96-$110. But I admittedly am surprised by its greater drop to below $70, and now am not sure what’s to stop it from dropping further. On a moments notice, it could fly back up too! I’d hate to speculate on where it’s going because at this point it will strictly be a GUESS.

Below is the posting from June 2008: – Miss America on 2008-06-10 11:01:40

“Now at the beginning of hurricane season, at the beginning of USA/EU SUMMERTIME, when consumption of oil peaks, when Morgan Stanley is calling for $150 oil, and GS ups the odds for $200 oil… I’m putting my RGE reputation on the line again! I truly believe oil will make a rapid decent to the $90-110 range (a 20-30% drop from peak) …and in the event of a flare up, I don’t picture oil breaking $145..”

***this post was also the birthplace of my “Evaporflation Theory”***

In addition to calling the peak on oil, in mid July I explained my theory on the Psyche Effect of oil and it’s lagging affect. The title of that blog was:

“The Broken See-Saw” – Miss America on 2008-07-24 12:51:07

In it I stated that: “I invert the oil chart, and move it 3 months ahead of the S&P. (I also cut Oil down % wise to a comparative level) The 3 month lag allows me to see beyond the cash flow (and market euphoria), and instead take a look on the price pressure that is caused. Once again, the lines do not diverge too much over the course of 2007 through March of 2008. Then, in late-March/early-April, the lines diverge again. By June, the divergence is violent!”

This oil lag pinpointed the first 2 weeks of October as the peak pressure point on our market.

In addition to those posts and calls some additional early forecasts that have played out include:

  • I fleshed out the Broker vs Broker vs Hedge Fund battle in my “Survivor Wall St” contribution.
  • I put together the platform for: The Debt Servicing Company (back in February) which mirrors what the gov’t is now trying to do.
  • The collapse of China’s Market in my “Ch-Enron” contribution as well as a call to question The EU’s ability to coordinate a bailout package that would eventually be necessary but possibly inequitable? (and what the possible results would be.)
  • In January I stated that multination stocks that sell cheap products will do well as they can easily pass inflation cost on to their customers (Quoting: MCD, BUD, KO. In general, they have beaten the broader market.)
  • The Bailout plan: I have offered countless contributions for “concepts and theories on what needs to be done. (Many of these theories pre-date presidential calls for similar actions and ironically mirror some concepts.)

THE PRESENT:

The current day situation leaves everyone at a loss. Do we panic? Do we hunker down? Is this a bottom? What do the experts say? What qualifies anyone to be an expert? There is plenty of money out there… Where should it go? Where is it going? There is too much debt out there… Where will it hit? To try and answer any of these questions with any degree of confidence is impossible. Anyone, (including me) who thinks they have “the answer” is flat out speculating or lying. Educated guesses are today’s best forecasts. ..and that is all I can offer anyone: An EDUCATED GUESS. Being “well informed” is no longer a qualification for success.

Over the past week or so, I read a lot of chatter on the build up to Lehman’s CDS payday. There was an air of panic for some… To situations like that I say: Don’t you think the market movers have already prepared for events like this? Big players position themselves well when they know what is coming. In today’s market, A premium on “Risk Analysis” is not only important for your company’s well being… but it’s important for your survival through the end of that trading day!

The real weight of the moment remains in 2 simple words:

Transparency & Confidence.

Without transparency, confidence and value can NOT return to the market. …but transparency needs to be found without destroying the economy. Based on the current debt to credit ratios, full transparency can not be attained as it is impossible to meet the net obligations for future earnings at any current moment. This obligation forces the Perma-growth concept as a necessity. (Or at worst, Perma-maintain) Right now, the real economy is not growing on par with inflation or demands of our current obligations so there is less money available then what is needed. This phenomenon causes a constant shift in where that loss is.

To further add pressure to this death spiral, you now have redemptions outweighing subscriptions in the market, along with negative savings, increasing defaults, increased jobless claims, halting of 401k matching by companies and of course depreciating home values. Small to large, the trickle down of all these factors adds up to a large net loss. The money that exits leaves a void that must be filled, or the next round of “hot potato” losses spins around the death spiral.

So where to start?

Equal liquidity/credit needs to be pumped in on par with debt destruction and redemption. The worldwide bailout plans have started to meet that immediate need. …but they can NOT continue this path indefinitely. They must maintain a certain level of confidence until the markets can support their own failures and breed their own success. (Failures are NECESSARY to establish Risk vs Reward, and thus provide the free market its price discovery.) In the soon to come “calm” from liquidity injections, our markets will need to create/regulate a system that restores transparency to the markets. If our market/government/regulators fail to provide expeditiously, the current liquidity that has been added, will need another injection or the death spiral will continue. Confidence will erode unless the shell game ends.

So with our friction line being set between 8,000 – 10,000 (although I see 8,500 being the typical dip)if we take a look at the equity markets in comparison to anything else that we can possibly own, we have to ask: · Do you believe that the markets have fallen enough by %?

· Do you believe that they should fall further? Were these markets so overpriced to begin with that we still have room to go? (remember… there is a large amount of legal tender that is floating around the world. Those slips of paper represent something. A job done, a need met, food, shelter, etc… That tender needs to have a home.)

· Or did the markets grow proportionate to the needs of our current society? (one could even ask… Have they grown enough? There are still people starving/homeless/etc… out there, so maybe we haven’t even reached our potential yet?)

My educated guess is that we are at a bottom that we will see repeatedly until the fixes that needed are met. A few weeks ago I posted my plan which parallels many of the current actions that are pending. It also has some things that haven’t been addressed. I still believe in this and have copied it below: (If you already read this, feel free to skip it)

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Rich Hartmann’s / Miss America’s Plan

The world is now looking for someone to blame for the crisis that now exists. We must investigate the causes so we do not repeat our past actions, and so we can hold irresponsible fraudsters accountable for their actions. But in the meantime we must also act immediately on what we do know to address our urgent needs. To prevent a catastrophic financial collapse, we must provide liquidity to banks to keep markets from freezing. Likewise, homeowners must come to a realization that they are holding overpriced illiquid assets too. (Their homes) New regulations as well as regulatory bodies need to be created.

To flesh out what I believe would be a fix for the current problem can be detailed in a multi-level approach. The key points are as follows:

1. Up to $1 trillion credit LEASE.

2. Home Principal Reduction – I have argued this for quite some time and have worked through economic models (that I created) which show recapitalization taking a few short years.

3. Create Central Regulatory/Depository for MBS market, CDS market, and Hedge Fund / Private Equity groups.

4. Pair off of CDS market. – To reduce counterparty exposure, and lessen the need for the allowance of failure.

5. Backstop FDIC on new deposits up to $200,000.00

6. New Regulations on shorts and Derivatives

I have worked through quite a bit of these scenarios and can provide a more detailed approach (if I was employed to do so)

1. – $1,000,000,000,000.00 lease:

To keep credit markets moving, the US Government lease liquidity to ailing institutions versus illiquid securities at par value, with pledged collateral from the institution to cover over 102% of the amortized difference. (Mutual Funds, Pension Funds, etc… can exchange at more favorable rates to meet net redemption outflow) An initial cap of up to $1 trillion can be placed upon this. (I have calculated the need for a net of $1.2 – $2.1 trillion in liquidity that will be needed on a short term basis. $1.2 is likely. $2.1 is doomsday.)

2. – Home Principal Reduction: (10%, but we can do up to 20%!!!)

In a capitalist market, you CAN NOT show blind allegiance to any particular group. If you bailout every bankrupt person, then responsible people will choose not to pay. You can NOT create fail/reward system. A balanced approach with an option of anyone to receive a 10% principal reduction of home loans is needed. (many of the underlying secondary market securities have already been written down this much or more already)

For participating banks that are willing to perform a principal reduction, they will receive a parallel lease line to liquidity to cover the immediate loss.

At the same time, an “open receivable” will be created for the amount written down. (You can chose not to have a reduction which will be discussed below, as well as how the “open receivable works)

A) – At 10%, it will take banks approximately 19 months to recapitalize the losses from the write down through P&I alone.

B) – By reducing the monthly bills of every person, you are putting IMMEDIATE capital in the US citizens hands. While at the same time you are putting equity in the home owner hands, which gives them incentive to stay in their home.

C) – The extra cash that is “saved” by the homeowners will flow (most likely) to 1 of 3 places.

1. Pay off debt

2. Savings

3. Under the mattress.

In the first 2 scenarios, you have cash flowing back into the system. Debt repayment will help aid putting a floor under default or the confidence/fear of default by investors. “Savings” will immediately recapitalize the banks, thus helping start an upward cycle (that may speed up a recovery that would be faster then the aforementioned 19 months) Under the mattress… will have to be addressed. (this can be done through increased bank rates and raising of FDIC caps.)

2a) – Home Principal Reduction (caveats):

* For those whom have paid off their MTG debt, or choose not to write down their principal, a tax break will be created to reward them annually (similar to a STAR reduction)

* For all those that choose to reduce principal, an open receivable is kept on the books for the length of ownership of the home. If the housing market were to recover and you were to see a windfall, the open receivable would have to be paid prior to seeing a profit.

For example, You have a $200,000 mortgage. The bank writes down 10%.

* The bank creates an open receivable for $20,000.

* The Gov’t leases the bank $20,000 liquidity in exchange for that receivable. (Based on lease rules and pricing of risk on that receivable the Bank also offers collateral to cover the amortized difference)

* The homeowner now has a $1,140 monthly payment as opposed to a $1,266 payment, saving them $126 per month which gets infused back into the financial system (It’s a “rolling stimulus plan”. – For a $417,000 conforming loan, the savings would be $264 per month.)

* 5 years from now, the housing market recovers. You sell your $200,000 home (which you were only paying on $180,000) for $230,000. Instead of walking away with a $50,000 profit (230k – 180k = 50k) you would be force to pay off your open receivable first. So you’d walk away with $30k (or maybe less if interest is added???)

3. Create Central Regulatory/Depository for MBS market, CDS market, and Hedge Fund / Private Equity groups.

A Debt Servicing Corp – which I have posted here before is a start point for the MBS market. Parallel market coordinators will also need immediate creation for the CDS market, as well as a central regulatory for the HF/PE business. Without TRANSPARANCY CREATION, there will be no CONFIDENCE restored! It goes in that order.

4 – Pair off of the CDS market.

Through a central regulatory (not the multiple smaller clearing houses), more sophisticated universal systems can pair up unnecessary derivates, and write them against one another. This will reduce counterparty risk/exposure, as well as reduce, net overall debt. For those familiar with TBA’s, it would work in parallel form, by “round robin” payments and straight pairoff wires. An eventual overhaul of this market needs to take place as net CDS moves should not outweigh what they insure.

5 – FDIC insurance raise.

For confidence, and inflation adjustments, the $100,000 will need to be increased. (I won’t bother explaining any more as I believe this has finally been addressed in the current package.)

6 – New regulatory rules

This list can go on and on… but for starters, some simple provisions should be made. “Shorts” should not be banned! Up tick rules should apply. In addition, shorting must find direct lenders to short from. (No more borrowing from Mutual/Pension Fd’s etc…) I believe a direct “conflict of interests” exist here! In the current environment, MF/Pen funds lend securities for 2 typical purposes. Collateral & Shorting. These funds are paid well for the loaning of their securities. …but so are the custodians and so are their advisors. If a “short” is successful, the broker makes money, as well as the custodian, as well as the advisor. …but the underlying investor is now holding a depreciated asset. If MF/Pen fund holders knew their assets were being used against them to bring down the value of their own assets, the never would participate in them (regardless of the fee generation) Most prospectuses of MF/Pen Funds do not state that their assets are being loaned for this purpose. (so investors should be protected from this self destructive process that they aren’t even aware of.)

In addition to these “rules”, accountability for destructive actions must be more aggressively prosecuted. Bear gets taken out by Goldman: By GS cutting off relations, the risk on Bear bonds rise 600bps, and investors immediately pull their cash and $28billion leaves the door in 3 days. The move was well coordinated and done with destructive aim. JPMChase (with GS backing) cuts off liquidity to Lehman through the Tri-party window (by cutting/devaluing their collateral to pennies on the dollar) Lehman is left without cash to cover standard obligations as they cannot raise enough collateral. $200 billion leaves in a no time. In these cases, cannibalism can be euphemized as self preservation. …but in fact, they are aggressive acts of financial war.

Without liquidity added to the credit crisis, consumer stimulus/bailout, new rules, new regulatory’s, we are without a sound direction to go. Confidence will return after transparency has been returned to the investor. Credibility will be returned after fraudsters are held accountable.

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In addition to what I originally wrote, I need to specify the importance of principal reduction of existing debt to point out that the rolling stimulus that the general public will immediately feel, as it will put a floor on net redemptions of the broader economy. It will also create a sink or swim line where failure in the housing market would be allowed to return. (for example, if there was a net 20% principal reduction and you still can’t work through it with your bank, then maybe you were meant to be a renter.) Likewise, it will likely provide us with a floor on house prices that should eventually trend upwards from there at a reasonable and monitored pace.

Another course of action the government can take would be a potential “nationalization” of certain utilities. Or a rolling credit for xx% of the average household utilities. This would also be an immediate rolling stimulus package that can springboard the economy. The ultimate goal of a plan like this would be to give our government incentive (rather then just political gesturing and lip service) to work on an immediate transformation of making individual homes more self sustaining for their energy needs.

Evaporflation:

As a worst case scenario, we will see what I call evaporflation occur in broad daylight. As it is now, I see this being the best description for the hyperinflationary credit injections, coupled with debt destruction, and debt forgiveness that do not give way to inflation. (I have not been able to complete my economic sim-model for this as it grew way too complex.) A coordinated worldwide move will be called for at some time that will flesh out the actions that will mirror this eventual move.

Let’s just call “evaporflation” a hunch and a cute name for now, and let the coming future provide the official hindsight definition.

Insolvency:

For all of Nouriel’s great predictions/forecasts, I believe this is the one area where my opinion greatly differs from things he has stated. He has said that there is a risk of the US gov’t/economy becoming insolvent. To this, I believe the great professor flawed. I state that it can not BECOME insolvent, because it HAS ALWAYS BEEN insolvent. That slight technicality makes all the difference in the world. It is the reason I believe this one aspect is flawed, and the reason why insolvency can never happen. It’s illogically, not logical.

THE FUTURE:

My wife recently quipped; “people should sell their “rainy day” funds off and just buy umbrellas with what’s left over.” I thought the line was cute, so I shared it. Unfortunately, though, I do not see this as the time to sell. Instead, it’s the time to start doing homework. When price discovery is eventually found, certain stocks will likely post modest gains as they were unnecessarily brought lower then where they should’ve been just because the overall market dragged them down. Likewise, the opposite will exist where it will be a race to zero. At the same time, it is not a time to buy.

I believe that money that is “stuck” in the market (401k) is what really needs to be assessed. Depending on your age and financial situation, and if you are open to risk, I believe we are at a “buying opportunity” on the equity side of the 401k market. I believe bond and money markets have only a “slightly” better risk factor then equities at the moment, but their reward factor is too low to justify keeping it there in that “safe haven”. The current market volatility will test anyone’s fortitude, but if you don’t mind the stress, then I say jump on the 8,000-8,500 DOW marks and re-shift on the 9,500-10,000 side. Rinse lather and repeat as we bounce in this range for some time. (but first find out how many moves per xxx days you are allowed to make in your particular 401k fund as well as fees/restrictions for holding a fund for a defined length of time.)

As far as where to put your money longer term… I have preached this for the past 2 years: Alternative Energy!!! It will be new “Powers That Be”.

Every other economist has said this… but the official “boom” has NOT taken place. It’s not even close! For a moment stop and ask yourself: What have I really done to learn more about Alt-Energy? Seriously! To look for an equivalent, we are at/where the computer industry was in 1980. Information is sketchy and scattered. There are no official good sources of worldwide universal information in this field. Likewise, there have been few noteworthy industry leaders that have become mainstream.

Now, with elections only 2 weeks away, we are faced with the knowledge that 1 of 2 men will be taking office come 2009. Obama is committed to Solar/Wind/Hydro, while McCain favors Nuclear. Either way, both platforms are so committed to the alternative energy arena that they are looking top spend upwards of $150,000,000,000.00. That figure is before PRIVATE INVESTMENT!!! (which stands to be so much larger) With that knowledge, how can you not be looking for immediate “buy and hold” opportunities in this market. Likewise, entire career paths will open up from button pushers and accountants to science and development. Any learned experiences may translate to an opening that will come about in this market.

It is your job now to find that! ! No waiting. Start researching. I’ve said in the past that from the commercial players, to the manufacturers of Alt-en sources, there are select few players/opportunities. …but on the research and production side, I believe there is a wide range of “next big thing” opportunities. (glass/glaze panel producers, nano tech for energy conversion and battery cell storage, wind farms, etc…) I believe GE’s good company/bad company will result in the “good company” becoming one of the brand name industry leaders as their wind/hydro turbines will be templates for that source. (Their success in splitting away from the financial arm and retail to focus on energy will be paramount to their survival.)

In the solar sector, I postulated a few months ago that we should track the success of a few companies like FSLR, STP, WFR, ESLR, SPWR, AKNS, SPIR, to see what is good & what is “Junk”. I believe trends will soon begin to appear.

Whatever you find, I invite you to share it here. I’ll do my best to review what you find and offer you my take. In addition, for those of you already familiar with this Alternative Energy market I gladly welcome your knowledge and theories. (provide information websites, books, forums, etc…)

My goals here and in life are generally not self serving. I really want to reach out and help as many people as I can. If Nouriel was kind enough (and enough people called for it) maybe the RGE could provide me with a contribution slot where I can continue to build on this. (tracking the future of Alternative energy, as well providing random updates on what I perceive to be market opportunities and anomalies.) But this is not my call. A strong response from the RGE blog community might be what it takes?

Feel free to comment, and I will do my best to reply. Hopefully my history of successful forecasting and timing can continue to benefit those who have taken advice from a complete stranger. And finally… thank you all for giving me the opportunity to speak. (sorry it was so long) Now it’s your turn.

All the best, Rich Hartmann (aka Rich H, Miss America, MA)

63 Responses to "Friends, Romans, Countrymen, Lend Me Your Ears"

  1. Grateful Guest   October 24, 2008 at 10:49 am

    I just want to thank you for being generous in your knowledge. I have so much to learn but have been saved financially by Dr. Roubini and contributers to this site such as yourself. It is an education from the ground up for me as many terms (and concepts) used, I do not understand fully but am learning. Thank you once again Rich.

    • Grateful Guest   October 24, 2008 at 11:09 am

      PSYes, yes, please Dr. Roubini, let Rich have his slot for Alt.energy and we will all benefit, all. It is a win/win/win slot (you/me/humanity.

    • Beebee   October 24, 2008 at 2:56 pm

      Thanks for sharing your knowledge with us. Rich.what is your thinking on YGE

    • MA   October 27, 2008 at 1:40 pm

      Let me first apologize for taking so long to reply to you all. Over the past 2 years, researching this coming crisis had become a point of obsession. So much so, that I sometimes lost view of what was most important. Which is: Good times, bad times, family comes first! With that said, I tend to take the weekends off now. Sometimes, I’ll log in late at night… but not nearly as often. (Hlowe, thank you for sharing a personal story some time ago. My heart goes out to you, and I thank you for helping me with a smack of reality that helped me rearrange my priority list.)Thank you all so much for such a great collective response.I will be posting here regularly, and will hope to keep my promise of voicing sound economic advice. (I will try to focus on the future, as I think the world has plenty of “journalists” currently focused on the past and present. If there is something that’s being overlooked in the past and present, I will chime in… but it won’t be my focus.)Miss America

  2. Expat in Canada   October 24, 2008 at 10:56 am

    Thanks so much Rich for all of your insight! You are missing your calling, you should be a strategist.

  3. hazleton   October 24, 2008 at 11:11 am

    RichVery helpful, and I will print this to refer to throughout the months.

  4. Leon K   October 24, 2008 at 11:24 am

    Hello Rich,A agree with you about the alternative energy”s future. But I have some doubts. 1) if is true that we are face a severe recession, will oil price return to a high level? 2) If you answer no, how much profitable will be the alternative energy? 3) If you have positive answers for both questions, could we expect a new future bubble of all those projects of ethanol, electric car, nuclear, solar, eolic, biofuel etc (what do you think about “green buble”?)?BYLK

    • MA   October 27, 2008 at 1:40 pm

      @ Leon KI don’t think oil can return to a high price in the event of a severe recession. (with the exception of an “event”) With that said, I don’t see the matriculation away from oil as being profit driven… but rather industry/growth driven. Similar to the Space program of the 1960’s, the only net/yield of hard assets was a bunch of rocks that were picked up off of the moon. …but the net benefit to society was the “tech revolution”.…and if that “green bubble” has not been claimed, I’d suggest getting a patent on it. I liked that.Miss America

  5. BK   October 24, 2008 at 11:49 am

    Rich,I have read your comments on Nouriel’s blog with great interest over the last year and a half or so. I too believe that alternative energy is the future and have been doing research for some time on the subject. I have gained experience with two local companies, Green Fuel Technologies, and FSLR. I hope their progress continues! As I hope you can get a slot on this wonderful website.Thank you for all your contributions! I always enjoy reading what you have to say.

    • MA   October 27, 2008 at 1:45 pm

      @ BK,Thanks, I appreciate the GFT and FSLR tips. I’m doing research as we speak and will let you know my take as learn more about them and can speak intelligently on what I think will be their directionMiss America

  6. crgordon   October 24, 2008 at 12:12 pm

    Thanks for the post – have enjoyed your insight over the past year that I have been reading first the BSetser and then the NR blogs. You have a gift to both understand and communicate your ideas. Your accuracy is legend amongst long-term readers.A question as to alt-energy. Why would alt-energy not fall in the category of being the next bubble? Replace “tech” and “housing” with “alt-energy” when used in a sentence with “bubble”. And why would we not expect the same results – leveraged money chasing illusory windmills – not for the purpose of actually generating energy but only for the purpose of generating profit with debt? I am not suggesting alt-energy isn’t the correct thing to do – but why should we expect any different results than another bubble? And should we care? A bit befuddled.

    • Dan the First   October 24, 2008 at 12:25 pm

      The results should be different provided transparency and regulations have been put in place and proper fundamental evaluations are conducted. Remember, … we should be aiming for the good old days when the investment horizon was longer that from the 9:30AM to 4:00 PM of the same day.

    • MA   October 27, 2008 at 1:59 pm

      @ CRGordonI don’t deny the potential of Alt-E becoming the next bubble, and I don’t sing the praises of bubbles to begin with… but I’m not sure all bubbles are that bad too. There has to be a balance.With bubbles, the excess can easily lead to fraud. …but excess can also lead to innovation. (Which can be expensive) It’s all about policing that excess.The “good side” of an Alt-Energy bubble is that from a supply and demand standpoint, I don’t see supply decreasing. Every individual’s energy needs have a tendency to increase. Couple that with the natural growth of technology. Now add population growth. Then add the industrialization of emerging markets. (Where population and its growth are enormous.)To me, this turns into a “multiplier effect” where “the sky’s the limit”.If you believe in technology being a true wave of the future… then powering that technology will always be the challenge. And dogmatic fixed supplies will have to be replaced by inexhaustible sources of energy. (IMO) …regardless of price.Hope that answered your questions?Miss America

  7. bcdogs   October 24, 2008 at 12:25 pm

    Excellent read. Being fairly new, is there a way that I can bring up the prior posts? I tried doing a search using the search box, I didn’t get results that I wanted.A question I have that might have been answered in the original post, the geopolitical implications when you refer to the financial war that was taking place, were they ignored or part and parcel of said war?I will retreat to my kitchen to wrap my head in no name brand foil after having asked the question.You do an excellent job and I always specifically look for your posts.I would love to see you do something regularly on the energy front. You make some very good points about this (not that I know much, but the logic in this is convincing to me).

    • MA   October 27, 2008 at 2:11 pm

      @ BCDogsGoogle & “quote marks” around phrases to find specics… When navigating through NR’s blogs, on the right hand side of the page, there are archives of NR’s old posts.I like to find relevant times to look up postings. For example, sometimes I look up a year ago today, just to se what was talked about. Another thing I like to do is find similar activity dates. If there was a “crash date” from the past 2 years, or a fed rate reduction date, I go back to posts from those past dates to see what people were saying, just so I can see if the concerns of similar events are the same.It’s funny… A year ago, “monoliners” were all the rage on big dip dates… but the gov’t stpped in and changed that. It leaves me scrathing my head over that industry’s purpose at this point???hmmmmm…….Miss America

      • bcdogs   October 29, 2008 at 9:51 pm

        Google, wiki and investopedia have been my friends lately, along with Khanacademy videos…I sure have learned a lot. I googled monoline and came up with NRs article from 2007…I always thought that economics, etc. was boring, but it’s not, it’s fascinating. Political junkie and turning into economic (?) junkie…I can honestly say that I have never used a ” with google! I will start using that also. Not enough time in the day to read as much as I’d like. I probably got a lot more housework done before the advent of google…I look forward to reading your musings tomorrow!

  8. Casper the Friendly Guest   October 24, 2008 at 12:37 pm

    Great post, Rich! Let me add my voice to the chorus asking for regular updates from you.

  9. Guest   October 24, 2008 at 12:44 pm

    Hi Rich,Thanks for all your work and unselfish contributions. Much of my 401k has been saved by my readings on this website, combined with a bit of knowledge and some luck.I’m a researcher who works in the alternative energy (AE) space, although I’m not a scientific expert. I’m a quantitative modeler. I fully agree with your comments and perspectives on AE and would like to refer your readers to a very informative publication from a highly credible source: “Imagining the future of gasoline, proposals for the US energy economy” by Vinod Khosla, in Industrial Biotechnology, Fall 2006, Vol 2. No 3. for the curious reader. If this article doesn’t convince people of what you are saying, nothing will.All the best!PKB

    • Bruno Fischer   October 25, 2008 at 5:08 am

      The publisher has kindly made the article avaialble online as pdf.http://www.liebertonline.com/doi/pdfplus/10.1089/ind.2006.2.177Rich,I learned a lot today, thanks!

    • MA   October 27, 2008 at 2:45 pm

      @ PKB.Thank you. I have some reading to do (Vinod). Those are the kind of “shares” i’m looking for from starting this Alt-Energy dialog.Hopefully, I’ll be able to share some relevant information back in the not too distant future.Miss America

  10. JS   October 24, 2008 at 12:46 pm

    Excellent post Rich. Chalk me up as a supporter of the Miss America RGE Contribution Slot.

  11. Sean   October 24, 2008 at 12:49 pm

    Rich, very nice article. Your vast investment knowledge is really the guiding light in the dark ages now.For Alt energy recommendation, I strongly encourage you to also consider investment in energy Conservation. This should pair with Energy Creation (Solar) to really make a long lasting energy independence.For example, LED lights are becoming the Real Lighting revolution, way better than the Compact Fluorescent.

    • MA   October 27, 2008 at 2:47 pm

      I agree. Conservation/efficientcy will be at the heart of this next wave.Thank youMiss America

  12. Guest   October 24, 2008 at 12:53 pm

    Professor Roubini, Please provide a platform dedicated to Miss America for the benefit of RGE and all of us that look for his posts.Thank you,hlowe

  13. Mike   October 24, 2008 at 1:00 pm

    MAI always liked to read your posts. Once…long time ago I had a little confrontation with you. It wasn’t your fault, I got too sensitive.Economics is not my strong side. I am in the nuclear engineering design and have been there for almost thirty years. Your idea of Alternate Energy is great. Nuclear is too complex and expensive.I will be following your contributions on the subject of Alternate Energy with great interest. I will also change my blog name form Dan to …say Mike. Recently another Dan has appeared on the site and his stock market contributions are much more useful than mine. So I will re-name myself.

    • MA   October 27, 2008 at 2:55 pm

      @ Mike (the artist formerly known as Dan)No harm at all on past bickering. I need to be kept in check. Not every prediction/forecast that I have made has come true. (I’ve only posted the good stuff) Allesandro could probably point out a couple of mistake.My only hope is that I don’t say something that eventually causes you to follow me and lose money. (I don’t deal well with knowing my mistakes cost someone something, which is why I could never be a broker/trader. I just don’t have the fortitude for it.)Thanks for the post, and don’t hesitate to disagree. (Regardless of how I react) My wife will be the first to say: “I’m not right all the time like I think I am.”Miss America

      • OuterBeltway   October 31, 2008 at 6:20 am

        Mike:I salute you for your amazing ability to look at the energy situation from outside the confines of your career track. I have a visceral fear of nukes-not-managed, and that informs my objections to them. The economics are a function of the management issue.However, it is a complex technical topic, not often thoroughly discussed on its technical merits, and I see you making a valiant effort to do this – to look at it from outside your own biases. This is very tough to do.Congratulations. I’ll do my best to follow your example.

  14. Mark   October 24, 2008 at 1:04 pm

    I think that we’re facing the law of diminishing returns, and that alt-energy cannot hold any significant sway as bubble material. Consider:1) Who will be the beneficiaries of the bubble output? “Consumers,” esp the US (and much of the western world), are maxed out, in debt. Even IF we could muster the manufacturing capacity there wouldn’t be enough of a market to sell in to (govt subsidies are going to start drying up as govts are massively over-leveraged);2) It takes existing energy to build alt-energy systems/infrastructure. This has to take place at the same time that an existing “cheap” system is running at max capacity (more slack will be realized with the downturn, but any gains here will be offset by reduced production and increased taxes [or severely decreased services, which will place a further burden on production]);3) Jevons Paradox still holds. Efficiency will NEVER overcome shortages from population (and economic) growth, only shooting for equilibrium in energy use (daily solar output/input): as long as growth is promoted we will ultimately fail;4) Nuclear ISN’T alternative energy- it’s still based on limited resources.if you look back at every bubble you will find this same promotion taking place, the “sale” (convincing) that the new bubble is to solve some pressing need.

    • MA   October 27, 2008 at 2:42 pm

      @ MarkI have numerous problems with your post, but welcome your views regardless. (Counterpunches take more effort then lying down, so I appreciate your being a devil’s advocate.)My general problem is this; your reluctance to my views (or the potential energy revolution) seems to be based on cost vs return.1. The subsidized savings puts more money in the pockets of the consumer. That return of credit helps fuel, savings, spending, and investments. Savings recapitalized. Spending and investing fuel growth.2. True energy efficiency through competition will bring about the cheapest price for consumers. (especially on the corporate/private investment side) where investment will not bring as much in return… but have a greater return in reduced costs.3. I just disagree with.4. I don’t know enough about… but you’re not the only one to say that. Hopefully, my time researching this will net me some answers.Lastly… There all widgets in the end and have always been. At least this widget will meet a need/demand.Miss America

  15. amena   October 24, 2008 at 1:35 pm

    Thanks Mr. Hartmann, especially for your proposal for home principal reduction. I’ve been promoting the idea, but your plan is the best, most well thought out plan that I’ve read to date.As to Alt-Energy, I would steer folks to the man who’s already starting the revolution at: http://www.pickensplan.com/theplan/

    • Mark   October 24, 2008 at 7:40 pm

      Most of Pickens’ plan revolves around natural gas. He, as so do many energy folks, just perpetuate our existing, failing transportation-based paradigm! (in the thousands of years that mankind has existed he/she has only hurled himself/herself many miles per day for a mere 60 years or so; the law of averages will once again set in; just look at the rest of nature as to why this will be)Yes, I’ve stated that this plan makes the best sense of the lot of them, but that’s still not saying that I think that it has any hope of getting us off the track of heading over the cliff.Alternative energy contributes perhaps 3% (if you don’t count hydro [dams have a life expectancy of perhaps up to 150 years]). With the price of fossil fuels coming down, and all the force of the nuclear industry bearing down on us, I don’t hold out much hope that alternative energy will gain the traction that’ll make much of a difference. See my posting above (pay attention to Jevons Paradox).And more on nuclear:http://counterpunch.org/bell10242008.htmlRich should stick with economics (yes, energy plays a part), which I feel he does a pretty good job with.

    • MA   October 27, 2008 at 3:08 pm

      @ AmenaThank for the kudos on Prin Redux.As for Pickens, I will read up.As for Mark. I agree and disagree.I agree with the fact that I don’t know enough. …but not for long.I disagree with his spirit and imagination. This world is not nearly as logical as parts of his arguments.I have to read the “Jevons Paradox” to see why he is so inclined/influenced to believe in the possiblities/potential that exists in what I see as a “limitless” arena.Thank youMiss America

      • MA   October 28, 2008 at 2:35 pm

        To add a bit to this… After reading through the Pickens Plan, I agree with his goal… but I have problems with his vested interest being at the heart.I will continue to follow up on this, but I like impartial views/plans.Miss America

  16. bytheway   October 24, 2008 at 1:38 pm

    Alt-energy is gonna be very important but FIRST you have to change Americans attitude to the value and use of energy in general.The concept of using alt-energys begins with saving or using less energy.Saving in general seems to be unamerican.To change this is the task of the gov.Maybe one point to CHANGE, if you can Obama.

  17. Guest   October 24, 2008 at 1:51 pm

    yep…time to be responsible and clean up our own garbage and stop shipping it to china under the disguise of charity. I can’t believe how the Canadian environment minister can close his eyes and allow this to happen.I too appreciate all points of view from this website. Interesting article but may I add the word responsible to the alternative. As a guiding grandmother it is my responsibility to educate my children about “blind” faith and humans that think they are oracles.merciSmall BusinessRecyclingTurning computers into black goldBut it’s the company’s treatment of plastics that turns heads: They’re fed into a unique machine that processes them back into their base hydrocarbons.In plain language, the machine turns plastic into diesel fuel.”It’s a one-of-a-kind machine from Germany which we installed a year or so ago, and we’ve been working with it since,” says Hambsch, adding that he is still tweaking it. “It uses a patented process with a catalyst and turbines to heat up the plastic, and we extract about 300 litres an hour of diesel fuel. We want to get 500 litres an hour.”It takes about 10 per cent of the diesel produced to drive the turbines that distill the plastic. Hambsch plans to use the balance of the diesel fuel to fire two one-megawatt generators at the site, creating electricity and making the operations self-sufficient. He adds that once the process is perfected, it can be duplicated and installed at other locations.http://www.cbc.ca/news/background/small-business/recycling.html

    • Mark   October 24, 2008 at 8:16 pm

      Sounds like everyone’s excitement over using “waste” vegetable oil- we can solve our liquid fuel problems by building more McDonalds!Back-end waste WILL be reduced because front-end manufacturing WILL go into decline.

    • MA   October 28, 2008 at 2:48 pm

      I am DEFINATELY NOT an oracle, nor do I claim to be one.I have limitations and faults and acknowledge many of my views to have been incorrect. Those errors humble me….but I am impartial, and I feel I’ve got a good eye for trends. (it doesn’t hurt that i’ve got a ringside seat and related experience.)I’ll look into new black gold.Thanks for your contribution,Miss America

  18. Gloomy   October 24, 2008 at 4:02 pm

    Think Dow 3000. Really!

  19. jones   October 24, 2008 at 4:24 pm

    Hi Rich,many thanks for your contributions. Hope to see you fill that slot at RGE often which you’ll surely get.Kind regards, jones

  20. Free Tibet   October 24, 2008 at 6:08 pm

    I love ya, baby. I don’t care about you nailing the oil thing. Or any of that other chartist stuff. You nailed it right here.

    “….full transparency can not be attained as it is impossible to meet the net obligations for future earnings at any current moment. This obligation forces the Perma-growth concept as a necessity. (Or at worst, Perma-maintain) Right now, the real economy is not growing on par with inflation or demands of our current obligations so there is less money available then what is needed. This phenomenon causes a constant shift in where that loss is.”

    (my emphasis)We have outsourced our productive sectors. Financial intermediation (banking) makes up nearly half of corporate profits. We are not in a good position to meet the demands you refer to.I would have liked you to have said, “confidence will erode until the shell game ends.” If we’re at or near a market bottom now it’s only because we’ve bailed out everybody and his brother-in-law. Not because we have any more transparency. If I’m a banker I’ve got to feel pretty good. But as a taxpayer I might be feeling a little queezy. This liquidity intervention only works if the fx markets hold up. We’ll see. It’s high risk. They put the currency at risk. And a risky currency limits access to the capital that will be necessary to make the productive investments – alt. energy, etc. – necessary to meet our obligations. And we’ve just taken on huge new obligations. Huge. Very risky.

  21. Drsteph   October 24, 2008 at 8:01 pm

    Rich,Thanks for your posts which I have followed inconsistently over the last two years. You were one of the first posters to develop the idea of ‘financial warfare’ which has proven too accurate for all of our liking. Since that time I’ve read a bit more on 4GW (4th gen warfare) over on the fabius maximus board – I’d like to see your opinions further developed along those lines if it helps to tie things together, particularly if you hadn’t thought quite that way. Perhaps the game is larger than you thought?It seemed to me that in the fin-war scenario that something went terribly, terribly wrong after the Olympics; perhaps coinciding with the Russian action over in South Ossetia. The reversal in the oil markets (and therefore the commodity markets) was rapid & then everything began to feed off of its own volatility. The sudden reversal of the inflationary influence of the oil boom then became massively deflationary as sell-off precipitated market participant implosions and ultimately Lehman’s collapse. It’s pretty obvious that Lehman wasn’t in ‘the club’ like the rest, so there was no love lost over its demise among street players. And I think it was intended to stop there. However, unaccounted for were vehicles which would have caused AIG’s insolvency and therefore hit or seriously wounded Golden Snacks (misspelling intentional) as a collateral player hard From that point on, things seemed to get worse and worse and started spiraling out of control, resulting in Merrill’s merger, and conversion of the other two into bank holding companies. The resulting lack of confidence triggered smart money sales, etc… and here we are now.My questions which I would love to see you address in future posts are the following:1. How out of control are things, really?2. Any thoughts on my hypothesis of geopolitical forces precipitating the instability?3. Do you see the financial warfare concept spilling out of the US financial markets and now becoming a global phenomenon? Consider specifically that central banks are, to some extent, the market right now.4. How much more pain and how much longer until we reach a new equilibrium point?

    • MA   October 28, 2008 at 2:58 pm

      The amount of money we spend on destabilization is “apparently” large. I’ve talked with people that know more about this… but it’s just talk. No facts.I lived in a high end neighborhood in Brooklyn for about 10 years. There were some people in that neighborhood that lived in mansions, but yet worked garbage type jobs.We talked with people about how they afforded those mansion… but it was just talk. No facts.With that said, there is no proof of actual warfare… but when enough people start to starve……as for a timeline, TRANSPARANCY will dictate that.Miss America

  22. 2cents   October 24, 2008 at 8:05 pm

    MA,Overall you had great and thoughtful post. Are you sure you want to put that much time into a post each week? You outdid yourself man!As posters above have indicated, the transparency issue is the key to re-floating the ship. However, I do disagree with your bottom calls. Yes, I understand you are mathematically enveloping the situation based on your historical observations and modeling, but just as the models used to forecast growth infinitum helped get us into this mess, your models have built in assumptions too. Assumptions that you may not even realize are in there.Don’t get me wrong, I think you’ve done a heck of a job on a shoestring budget to boot. The problem is there is a sea change happening. The system constraints are being altered before our very eyes. The correct model is a transform function not a probability function. Why is this so? The answer lies in the fact that the new constraints are going to be heavily influenced by interests outside the US, Europe and Japan. Quite frankly they don’t’ care diddly about the S&P, DOW or what have you. You see right now they are looking at the US run financial system as a benchmark in how NOT to do it! I agree with Nouriel that forward looking P/E’s are going to go into the 8-10 range. Nobody knows what the new order will bring so they are going to want a margin for error built in before they swim in the waters again.As for alternate energy (AE), it will only be the grand success financially that you portray if it develops into a bubble. That’s not to say good money can’t be made if it does not become a bubble, but it’s not a sure bet.As a MEE with experience working in nuclear/energy I can assure you that solar, wind, hydro and geothermal, etc. can never become more than a token percentage of our overall energy requirements. They are niche technologies best used in niches that suit them. Have you ever been near a wind farm? They are utterly annoying audibly/visually. We would need hundreds of thousands of these suckers. Incidentally, these AE sources are abysmal at meeting fluctuating demand.Nuclear energy (non-AE) however can and should become a significant part of our plan. Despite the Nuclear Engineer’s above comments nuclear energy is not complex but it is perceived as expensive. However, over the lifetime of the facility it can be competitive. The real increases will come from coal technology while the long term increases will be nuclear/biomass based.The real problem with all these technologies is that they will take 1-2 decades to significantly impact the balance of power (pun literally intended). So if there is money to be made in the near term in AE it most assuredly will be speculative and bubbilicious.

    • Mark   October 24, 2008 at 8:27 pm

      The real increases will come from coal technology while the long term increases will be nuclear/biomass based.Based on what information?Biomass-based energy is a big bust! The logistics of managing all that mass, which, btw, isn’t “waste” when one considers that it’ll be necessary to replace fossil-fuel based fertilizers, is a non-starter.I don’t have any kids, so I guess that I don’t have to worry about them being exposed to the inevitable nuclear meltdown (or waste accident- leakage into water tables etc.). NOTE: ALL SYSTEMS FAIL EVENTUALLY!In addition to Jevons Paradox I’ll toss in Pandora’s Box- mess with Mother Nature and you’re going to get burned scarecrow!

      • Mark   October 26, 2008 at 12:15 am

        More facts about biomass…Whatever happened to cellulosic ethanol?AP: cellulosic ‘not even close’ to being ready to satisfy government mandateshttp://gristmill.grist.org/story/2008/10/17/94536/558And this video of David Fridley (not the best, but it presents all the basic issues):http://video.google.com/videoplay?docid=287398391460321023

      • 2cents   October 26, 2008 at 9:13 pm

        @ MarkI probably should have said biofuels instead of biomass. I’m not talking about hemp & sugar cane … rather, I’m tlaking about biolagical agent “factories” where you utilize the natural instincts of these agents to do work. There are many initiatives ongoing. You may want to google microbial fuel cells as an example. This is a million miles from fetilizer based tactics.

        • Mark   October 27, 2008 at 1:00 am

          I don’t doubt that many people are working on many such things (such as algae derived fuels), but they are only sucking up hard work (money) and wasting it.Converting fuels takes time and energy. Shorting one means more of the other. Trying to short both is, well, not gonna happen…The cellulosic ethanol approach is looking to create a termite(?) that can manage to break down lignin. The termite has been around for how many hundreds of thousands of years (if not millions)? If it hasn’t evolved to do this in this amount of time what makes us think that we can come up with a solution? AND, by doing so what makes us think that we can control a creation like this such that it doesn’t get out and ravage our existing trees?In our quest for the holy grail we will find that we will skip some important aspect and place ourselves in peril far greater than that which we started. Much like dismissing the concerns over nuclear energy early on (now we’ve got to live with this mistake).Our energy needs to be conserved for managing our real priorities: FOOD, SHELTER, WATER!

    • MA   October 28, 2008 at 3:33 pm

      @ $.02My models had “failure points”. Points where I deemed, if it goes beyond that point, it will become self perpetuating. …so, it’s not as if my models didn’t have room for more downside… they do. …but if there’s gonna be a recovery, then a line will need to be drawn somewhere on the high side of the cliff.If we go over that cliff… I think everything and everyone goes with it.So, why would anyone allow that to happen?As far as wind power goes. In theory I’m not a huge fan. Wind is consistently inconsistent. Weather patterns change. What if wind starts to meet demands and becomes relied upon… but we encounter very calm weather??? That’s a recipe for inconsistent return.I like that same tech under water, as well as the solar angle a little better. Likewise, I believe there will be some really out of the box discoveries using gravity, tide and magnetism. (Where is that next DeVinci / Newton / Einstein!!! These discoveries are waiting to be unlocked.)OK… I’m done with my crazy talk.Always a pleasure 2c.Miss America

      • 2cents   October 28, 2008 at 4:19 pm

        @MAI hope you’re right about the energy situation. However you look at it though it is a slow long term process to move the needle.As for your models, I’m glad to see you included a “trap door”. As to why anyone would want to go off the cliff … just watch out for those who don’t know/care diddly!

  23. Reader   October 25, 2008 at 9:25 am

    Professor Roubini,I join the others in asking you to provide a platform dedicated to Miss America for the benefit of RGE and of all of us who look for his posts.Thank you

  24. Guest   October 25, 2008 at 10:22 am

    I am quite new to this site and find the content to be of excellent quality. I have noted some of your posts and see that you have earned quite a reputation amongst the regulars. I am from Canada and live in a community that has aggressive recycling programs, provides an opportunity to pay a premium for “green energy” (both business and home) and allows the opportunity to sell back to the grid if you already have alt energy. In the immediate future a program will be implemented that applies a variable price to residential electrical energy usage to encourage conservation. Hybrid vehicles are increasing in popularity, primarily among the affluent and a partially integrated public transportation system includes the use of hybrid and electric vehicles. Legislation has been enacted that will eliminate the use of incandescent lighting and many commercial and government enterprises have adopted an energy saving posture e.g. reduced lighting, air conditioning and heat.I think it is safe to say that the motivating factors behind the above were urban planning initiatives and more recently environmental concerns. Implementation was enabled by government policy with broad public support. An additional motivating factor related to constraints in the supply of electricity due to shortcomings in infrastructure (poor planning and aversion to nuclear) combined with robust demand.I recognize that the examples provided are anecdotal, but what is interesting is that the driving force to date behind these alt energy initiatives has in large part been environmental concerns and not economics nor sustainability of supply. Concerns about the cost/sustainability of the oil supply were at best in the background during the implementation of all of these alt energy initiatives. In fact only recently have those cost/sustainability concerns been brought to the forefront, where they have been quickly adopted (hijacked) by a powerful environmental lobby and a government that failed to properly plan.One more anecdote: a well known Canadian company, McCain Foods has seized on the opportunity of using wind power to investment in biogas, again with an economic angle thanks to subsidies rooted in environmental politics.I think your argument regarding the future of alt energy has merit and may prove to be the investment of a lifetime if one is able to find the next Microsoft or Apple but in order for it to blossom either conventional energy must be at high enough levels to support the economic story and / or the environmental movement must continue to gain to influence in the formation of government policies that subsidize alt energy. It must be remembered that the promises of the current political campaign in the US were made by politicians, certainly a risky proposition on which to make an investment. Ironically, it may turn out that the current financial crisis and need for stimulus may be the catalyst that makes those promises a reality.

    • Guest   October 25, 2008 at 10:28 am

      for some reason part of the second last paragraph was truncated here it is againOne more anecdote: a well known Canadian company, McCain Foods has seized on the opportunity of using wind power to supply energy for some of its operations. For McCain Foods this is wonderful PR opportunity in terms of environmental stewardship with a significant economic upside e.g. a payback of as little as two years. However, in the fine print you discover that the economic upside was driven by government subsidies, subsidies that are rooted in environmental concerns about carbon emissions and sustainability. A cynic might argue that such a project would never have been undertaken without those subsidies. That same company has also made an investment in biogas, again with an economic angle thanks to subsidies rooted in environmental politics.

      • MA   October 28, 2008 at 3:46 pm

        @ Guest.I wish you had a name so I could remember you or address you in the future.“Canadian guest”Something… anything. Especially when you come to the table with well rounded thoughts. I can better thank you directly.As for the: “It must be remembered that the promises of the current political campaign in the US were made by politicians, certainly a risky proposition on which to make an investment. Ironically, it may turn out that the current financial crisis and need for stimulus may be the catalyst that makes those promises a reality.”I believe it will be the latter half of that statement that becomes a necessity. (and subsidies will be the Gov’ts “skin in the game”)Miss America

    • Mark   October 26, 2008 at 12:41 am

      Aversion to nuclear? Damn straight! You make it sound like something petty, something that was just a poor decision. Sorry, but nuclear, just as everything else that’s premised on mining, would meet with a final collapse. And in the case of nuclear we’d end up being collapsed societies living in radioactive dumps!Nuclear power plants are energy losers. They’re money suckers to boot! If not for huge subsidies they wouldn’t exist. They are relics of failed politics of the past, of con jobs from the Cold War.As for biomass… another sure fire way to impoverish us all! See my above posting.I think mankind’s time to move past this investment mentality has come. No longer can we afford to sacrifice future generations to the get-rich-quick schemes of modern economics.Lastly, when everyone is broke who is going to pay for all of these new “solves everything” solutions?This all reminds me of the 1970 made-for-TV movie Sole Survivor. Look it up…

      • Guest   October 26, 2008 at 11:32 am

        “Nuclear power plants are energy losers.”I don’t believe this is true. Why do you say it?

        • Mark   October 26, 2008 at 11:44 am

          Because its true.Most of the nuclear industry externalizes costs. These costs represent work done, or work to be done (as in the case of waste remediation). When factoring in construction (lots of cement!), mining of uranium ores, handling of waste (not counting long-term storage, which no one seems able to, after nearly 50 years, figure out) nuclear is a dud. Then there’s always the terrorist factor…Believe what you want, just don’t force me to spend my earned income supporting your fantasies and I won’t force you to support mine.

          • BK   October 27, 2008 at 6:22 pm

            Are you saying conservation is our only real solution then?I really fail to believe any of these technologies, that are currently in their infancy (solar and wind power, as well as bio fuels) are lost causes. Without investment and exploration we will never know for sure, you can’t acknowledge failure here…there isn’t nearly enough currently known.What about fusion power? Infinitely more potential than any of the other suggestions but also, infinitely more complex. How do we decide which theory gets investment and which is destined to fail? Private companies generating private financing and making break throughs is the only way. A government subsidized industry will not create the most efficient method, but it will do a lot to create a bubble and unnecessary investment. I think future power could be more of a conglomeration of technologies that are each suited to the application in which they are used.

  25. Guest   October 26, 2008 at 11:15 am

    Bloomberg Wind Index

  26. Payday Loan Advocate   October 27, 2008 at 5:01 am

    Inflation is the main economic problem of the United States the unstable economic stability of the financial crisis that today we are face off. There is a lot of issues regarding to this major problem.Americans are struggling with the current economic crisis that has been brought on by careless mortgage lending. However, America is not the only country that is negatively affected by this economic calamity. The International Herald Tribune tells its readers that the credit crunch is being felt in Europe, too. Small businesses like Dominique Boudier’s printing company, outside of Paris, rely on credit with their suppliers to operate. Boudier’s creditors are reducing their offerings by half. The suppliers’ credit insurance companies have mandated this cut. Considering the 60-day lag time in which clients pay, Boudier’s business needs additional cash flow to compensate for this major shortfall. Because Boudier’s bank has its hands tied as well, Boudier fears the worst. Boudier’s bank, like many others throughout Europe, started to put its money to sleep with the European Central Bank instead of investing it in other banks and the economy as a whole. When banks began to fail and liquidity was disrupted, credit began to dry up. Similar to America’s Federal Reserve Bank, the European Central Bank uses a mechanism based on the ability to produce as much fiat money as necessary. Fiat-money currency, which is essentially credit money, loses worth as soon as the government declines to further guarantee its value. Inflation is on the rise. Many people believe that stronger private banking systems that make responsible decisions will eventually solve this problem. In the meantime, payday advance loans will be easier to get for those that need short-term assistance and can’t afford to wait for the faltering central banking system.Post Courtesy of Personal Money StoreProfessional Blogging TeamFeed Back: 1-866-641-3406Home: http://personalmoneystore.com/NoFaxPaydayLoans.htmlBlog: http://personalmoneystore.com/moneyblog/

  27. Riding out the Storm   October 28, 2008 at 5:17 pm

    Miss America or anyone else, do you know of an ETF dealing strictly in Alt Energy? Do you see that coming about in the future? There are just so many bad companies out there I wonder how thorough a fund would be in picking the good ones. Just food for thought.I love the blog and look forward to reading many more. As for your concern of leading any of us down a bad direction, I think we are all grown ups here and can make our own choices, I would say the vast majority of us are happy to hear your advice, learn something and make our decisions from there. Just glad you aren’t trying to sell us a seminar and are trying to educate some of us. Thank you.

  28. OuterBeltway   October 31, 2008 at 6:53 am

    MA:Glad to see you’ve got your own space here. You’ve started with a bang. Interesting that the bulk of the postings address the Alt-E part of your post.I’d like to suggest some reading for you, MA, that might give you some useful insights to add to the mix.cellulosic ethanol.pyrolysis. More energy-efficient means to convert bio matter into ethanol. Doesn’t use bio-engineered microbes capable of breaking down cellulose; just does very efficient chemical decomposition (burn). Lot of potential, esp. where the heat can be used for industrial process.soil health. soil needs sugar to feed the complex bio-network that resides in it. If you remove the sugar (plant debris) from the field, you take the food supply for the soil eco-system. That ecosystem is what provides the conduit for nutrients from the air and soil into the plant. As that eco-system is starved off, it takes more and more artificial food (chem fertilizer) to get the same yields. This is worth a close look.Local .vs. centralized electrical gen. Transmission of power causes significant losses. The further the power is transmitted, the more is lost – unless transmission can be done via super-conducting lines (negligible losses).The south-western sections of the U.S. get vastly more sunlight than the other parts of the country. One 50-square-mile segment gets enough sunlight to power (all uses, incl transportation, if expressed as BTUs) the entire nation. Not a lot of cloud cover down there, either. Fairly stable energy source.Wealth is created by finding a use for resources that are currently ignored/wasted/underutilized. Sunlight, roof space, braking your car (loss of kinetic energy) are examples of wasted resources. As every energy source is evaluated, ask yourself: what heretofore underutilized resource is being captured? Is energy-in < energy-out?What Mark doesn’t like about cellulosic ethanol is twofold: one, it is robbing Peter (the soil eco-network) to pay Paul (a not-very-bright energy consumer), and it implies the introduction of a biological entity which can decompose cellulose. This is very dangerous; if it gets loose, it could (could, I say) turn all wood products, live or dead, to mush. Think of the implications. The natural order doesn’t have a fast, ready means to break down cellulose (slow and complicated, yes, but fast and easy, no).

  29. Guest   December 3, 2008 at 4:26 pm

    Reckless Endangerment! By Rich Hartmann – Miss AmericaOver the next few days, I will have a couple of articles to share.401k’s unleveled playing fieldThe Financial Industry’s overgrowth /Principal Reduction Now! Credit Expansion (Quantitative Easing) or Debt Destruction?Today’s piece focuses in on the reckless endangerment that the Financial Elite and Policy Makers have partaken in and what sort of accountability / punishment is or should be taking place. As you all know, Sarbanes Oxley was created a few years ago to help prevent corporate crime. What you may not realize is that since its inception, over 1,000 cases have been brought up under the “Whistle Blowers Act”. Of those cases, can someone please answer this simple question…?How many convictions have there been?With that said, it’s time for the American legal system to wake up. Hell, it’s time for American citizens to wake up. I have to do my part with the article below, but now it’s your turn to spread the word and demand action. I ask that readers who feel this article has merit, please grass root it throughout the internet. Maybe we can reach critical mass of popular support?Criminal Negligence Finance???:In the criminal law, criminal negligence is defined as:The failure to use reasonable care to avoid consequences that threaten or harm the safety of the public and that are the foreseeable outcome of acting in a particular manner. (Unlike the TORT of Negligence, a person who is convicted of criminal negligence is subject to a fine, imprisonment, or both, because of the status of the conduct as a crime.)Where do you draw the line when it comes to industry leaders and policy makers?In May 2006, a jury sent an unmistakable message to CFOs and CEOs around the world: “You can’t lie to shareholders. No matter how rich and powerful, you must play by the rules.” Enron’s Ken Lay and Jeff Skilling were accused and found guilty of: knowingly overstating the health of the former energy giant shortly before it plunged into bankruptcy in December 2001. Skilling and Lay countered that the company was in pretty good financial shape, and blamed bad press, short sellers and a run on the bank for the company’s failure. (4 years of investigations provided details of more sinister affairs!)How does this differ from the current CEOs/CFOs who make the same pledge of financial stability, while at the same time, not disclose overall debt and risk? To loosely use a pun, we are looking a “Murderers Row” of corporate elite and policy makers that are obfuscating the economic truths from the people.Just as sure as I saw the downstream affects of this crisis coming, I believe it is reasonable to believe that the next steps down will likely lead to more grave consequences. The reality of financial hardship is; it brings about a downward spiral of macro economic affects. Employment will be cut. Crime will rise. People will go hungry. Eventually, social damages will result in loss of life due to the direct and indirect consequences that have been allowed to take place, with the financial elite using loopholes and financial/mathematic engineering to rob a financial system that wasn’t designed to outpace the innumerous variables of economic innovation.The concept of “Corporate Manslaughter” has been criticised, with respect to law and economics. It argues that civil damages are a more appropriate means of compensation and recognized losses apply the appropriate level of deterrence. Clearly, through privatization of profits and socialization of losses, the government has now becom complicint in eliminating that deterrence!Reasonable Person StandardIn order to hold the Financial Elite and Policy Makers criminally negligent, a level of culpability for their recklessness has to be established. Whether they were malfeasant (where the defendant knowingly exposed the public and was still willing to run the risk.), nonfeasant (where the fault lies in the failure to foresee and so allow otherwise avoidable dangers to manifest.) or willfully blind (where the individual intentionally avoids adverting to the reality of a situation), the culpability is determined by applying a “reasonable person standard”.A “reasonable person” is appropriately informed, capable, aware of the law, and fair-minded. This standard can never go down, but it can go up to match the training and abilities of the particular accused. This objective yardstick against which to measure the culpability, has directly relevant knowledge to the activities being undertaken by the accused. (where a doctor is accused mistreatment, you would use similar doctor as your “reasonable person standards”.In July of 2005, The Counterparty Risk Management Policy Group II sent a report to all industry heads that were involved in its creation, warning that operational risks from the use of credit derivatives and other financial innovations could, under the wrong circumstances, spiral out of control. THESE PEOPLE MEET THE “REASONABLE PERSON STANDARD!Here’s the letter to Hank Paulson – CEO of Goldman Sachshttp://www.crmpolicygroup.org/crmpg2/docs/CRMPG-II-Transmittal-Letter.pdfHere’s the Who’s Who of the Policy Group (so you can figure out the recipients)http://www.crmpolicygroup.org/crmpg2/docs/CRMPG-II-Ex-I-II.pdfRegulatory Warnings and InactionIn direct relationship to the Counterparty Risk Management Policy Group II Report, in May of 2006, Tim Geithner, the President of the Federal Reserve Bank of New York (while at the Third Credit Risk conference at the NYU Stern School of Business) stated that: The operational infrastructure and that backlog of unconfirmed trades is an ongoing source of concern. In addition, he encouraged banks to take “greater caution and conservativism” on their lending practices. He cited “very favorable credit conditions for hedge funds,” due to “erosion in loan covenants” and “higher levels of transaction leverage” He went on to say that “regulators had some concern and unease” based in part on uncertainty.In January on 2007 U.S. and European regulators conducting a joint probe into whether banks and securities firms set strict enough limits on loans to hedge funds. The NY Fed, SEC and FSA met some of the biggest lenders to the hedge-fund industry, “to discuss margin practices,’’ In examining this incestuous relationship, it revealed that this lending was the most profitable source of income. (for example, it was reported that Bear Stearns generated 30% profit catering to hedge funds.) The regulators were concerned that there had been a decline in lending standards because hedge funds were such lucrative customers . It was common for prime brokers to relax margin requirements because the bigger the loans, the more the banks make charging interest and holding securities as collateral.Prior to leaving, the SEC’s Annette Nazareth said “it’s not clear what steps, if any, the regulators may take.” In an earlier meeting regarding the same topic, Tim Geithner said: “It’s maybe as hard or harder to try to figure out whether you can bring about change that may be in the broader interests of all market participants.”What and why were these people employed? If Tim Geithner’s intuition was correct, I found his strengths of conviction to be lacking. Without action, they were just words. In addition, as a “regulator”, shouldn’t the concerns of the overall economy and the public come before the “interests of market participants” and their profits!Conflicts of InterestMuch like banned substances in amateur athletics, financial innovation should have receive approval PRIOR TO injecting itself into the financial system. If it exists within unregulated pools, then there has to be a separation between regulated and unregulated markets where they can NOT affect one another. Banks willingly increased margin to hedge funds (while knowing the downside risk) in order to chase profits and bring home larger bonuses, had become criminal and conspiratorial.To me, this is no different then the tobacco industry (who knew they were selling cancer) selling financial cancer. Following the tobacco industry’s class action settlement, Big Tobacco securitized there debt with so called “tobacco bonds”, and as a result, we now have a perverse incentive to support the tobacco industry, to whom we are now dependent for future payments against this debt.Is this just morally grey or is it CORPOATE BLACKMAIL!?!?!?People… It’s time to ACT NOW! Corporate Elite were made aware of the Risks that existed by their own industry policy groups. They chose to recklessly endanger the public for the purpose of private gain. The only real “deterrance” that existed for this Gross-Reckless-Negligence has been removed if these people are not prosicuted. The conflict of interests that existed, where profits multiplied by expanding that risk through loose lending practices. …which was discussed by regulators and Corporate Elite is obvious and well documented.At what point will something be done about this? Without culpability, we are officially in a financial lawless state. THIS IS NOT AN EXAGGERATION! What are people supposed to do if the people making decisions on their behalf are no longer doing what’s in the best interest of the people? This is the same question our forefathers asked and subsequently answered. As an American, it is the same question you must ask yourself and find an answer to.Now it’s your turn to speak.Thank you reading, and may justice truly prevail!Miss America, Rich Hartmannp.s. Not all corporate elite are criminals. I happen to be lucky enough to work for a CEO who number 1 priority is the health and well being of his employees. On a weekly basis he emphasizes this.p.p.s. If you are as bothered angered by our current system as I am… Tak a minute more to read the following, and see if it once again should apply?“When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature’s God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.”…you should know the authors.