Akkam’s Razor

I was just forwarded the wingnut porno flick blaming brown people for our long, national, economic nightmare.   The central point of the video is that DC liberals forced minorities to buy mortgages they couldn’t afford, and it wrecked our economy.  Is it true?

No.

Low interest rates, plus speculation, plus derivatives, plus a lack of regulation and the manipulation of so called “free markets”, along with a staggering lack of trust caused the problem.  Now that it’s all going to shit, no one wants to get stuck with the check, without a seat when the music stops, or holding the hot potato.  They are counting on you being stupid enough to believe what they’re selling.

I’ve been hearing a lot about hoarding, rationing, or shortages of some food products - mostly rice, but also flour and cooking oil.  Even the Wall Street Journal is talking like its Y2K!

Stocking up on food may not replace your long-term investments, but it may make a sensible home for some of your shorter-term cash. Do the math. If you keep your standby cash in a money-market fund you’ll be lucky to get a 2.5% interest rate. Even the best one-year certificate of deposit you can find is only going to pay you about 4.1%, according to Bankrate.com. And those yields are before tax.

Meanwhile the most recent government data shows food inflation for the average American household is now running at 4.5% a year.

And some prices are rising even more quickly. The latest data show cereal prices rising by more than 8% a year. Both flour and rice are up more than 13%. Milk, cheese, bananas and even peanut butter: They’re all up by more than 10%. Eggs have rocketed up 30% in a year. Ground beef prices are up 4.8% and chicken by 5.4%.

These are trends that have been in place for some time.

And if you are hoping they will pass, here’s the bad news: They may actually accelerate.

The reason? The prices of many underlying raw materials have risen much more quickly still. Wheat prices, for example, have roughly tripled in the past three years.

Sooner or later, the food companies are going to have to pass those costs on.

What if something else is afoot?  What if it’s manipulation and/or speculation? Consider the following:

• Both production and supply are constant (one could argue China, our main source of rice, might keep crop for domestic consumption or switch to a more lucrative cash crop, but there’s no evidence for that).
• There could be anxiety at the wholesale level (as there has been with flour amongst bakers and pizza shops), causing a ‘rice-run’ at retailers.
• Consumers could be tuned-in to news on the subject and stockpiling (how likely could that be?)
• Or, it could be good, old fashioned pump-and-dump manipulation.

I recall that the most common way prices can be driven up (or maintained) is through scarcity - increasing demand or cutting supply.  Since production and demand seem rather constant, what other explanations are there?  Barry Ritholtz at Big Picture casts a suspicious eye towards the Federal Reserve.  Tim F. at Ballon Juice opines as well.  Angry Bear argues too-low interest rates versus demand outstripping supply.

Strangely enough, it appears that the extreme reactions in the overnight trades in Europe and Asia were not due to their fears over our (legitimately) precarious economy, but rather the moves of a single trader at Societe Generale SA was responsible for a $7 billion dollar loss [WSJ via Marc Andreson]:

Early details, including accounts from executives at the French bank, paint a picture of an ordinary trader (Jérôme Kerviel) who used extraordinary means to game the bank’s own system and hide massive unauthorized trades on stock indexes. Even as bank executives were scrambling to deal with the trail of destruction, they were at a loss to describe his motivations. Société Générale executives said that the early investigation indicated the trader didn’t earn a dime on his actions. They also said he appeared to be acting alone.

I’ve seen the rhetoric for the D-word heating up, and I don’t mean downturn. This very well may be the week that the curtain is pulled back on the batshit insanity that is the US economy.

The stock market has lost @ 10% of it’s value since 1/2/08. In 1929, the one day drop was 13% (There were actually several tightly spaced drop; In 1987, the one day drop was 23%, eventually totalling 60%.

As Barry Ritholtz states at the Big Picture:

World markets are plunging in response to fears and expectations that the United States will be (or already is) in a recession that will be both long and deep.

A quote is absolutely driving me nuts is that of Countrywide CEO Angelo Mozilo stating that no one saw the current financial turmoil coming:

But as I do reflect on it, and I do a lot, nobody saw this coming. 

The Big Picture's Barry Ritholtz posts an insider's email, clearly detailing that those in the know CLEARLY knew what was going on.  And any reasonable person knows that it couldn't go on forever.  Industry had to know the good times wouldn't last, but greed gave them tunnel vision and caused them to ignore financial certainties.