July 30, 2007
Last week's stock market meltdown suggested that a financial sector rigged for the falsification of reality eventually enters a danger zone where reality implacably reasserts itself, expectations dissolve, and all that remains is the sour odor of fraud.
This long episode of market mania, running for seven years, was based on the idea that non-performing loans could be turned into money by removing them from their point of origin and dressing them up in respectable clothes -- like taking all the winos in downtown Los Angeles, putting them in Prada suits, and passing them off as the faculty of the Harvard Business School. It was a transparently ludicrous racket and the wonder is that America proved to be so utterly bereft of regulating authority at every stage.
It's really hard to account for the stunning failure of responsibility. What you had was a whole industry that surrendered the standards and norms that brought it into being and enabled it to function in the first place. Mortgage lenders stopped requiring house-buyers to qualify for loans; bankers stopped caring what stood behind the paper they issued; dubious loans were bundled and resold like barrels of rotten anchovies -- in such numbers that no individual stinking minnow would stand out -- and the barrels were traded up the line, leveraged, hedged, fudged, fobbed, and fiddled until, abracadabra, they were transformed into so many Tribeca lofts, Hampton villas, Piaget wristwatches, million-dollar birthday parties, and Gulfstream jets.
It worked for the Goldman Sachs bonus babies, and the private equity scammers, and for the corporate CEOs and their board members, and for the politicians who parlayed their votes into cushy lobbying jobs, and even for the miserable quants in the federal government's termite mounds of statistical reportage. It even worked for about 18 months for millions of feckless US citizens gulled into contracts for houses they could never hope to pay for, under arrantly false and ruinous terms.
My critical auditors never tire of pointing out how consistently wrong I have been about weakness in the US economy, but I really do think we've reached the vanishing point, and that spot on the horizon is looking more and more like a black hole -- with dire gravitational powers of suckage. It first appeared a few weeks ago when two Bear Stearns hedge funds got into trouble over the barrels of rotten anchovies they had bought for their investors.
The B/S boys tried desperately to sell the barrels, but nobody showed up for the auction. Word began to spread that all the other companies sitting on barrels of rotten anchovies might not be able to sell theirs either. All of a sudden there was a lot less notional "money" in the system. The "positions" held by the hedge funds (bets made on all kinds of other things leveraged by rotten anchovy collateral) have not themselves unwound quite yet. But enough nervousness ran through the system last week that the stock markets came down with irritable bowel syndrome. The blood and fecal matter whirling around the exit pipe is what remains of the "money."
By the way, I believe the stunning failure of responsibility actually can be accounted for, though my theory may not be to everyone's taste (especially the science hard-asses out there). In a word: entropy. The US has enjoyed unprecedented energy inputs and the result is unprecedented entropy outputs. The protean force of entropy then manifests as degradation in just about everything around us from the immersive ugliness of a landscape overbuilt with WalMarts, Pizza Huts, and vinyl houses, to the sexual perversion available on the Internet, to the surrender of standards and norms by executives in the financial sector. It's as simple as that. Entropy rules.
What reinforces my feeling that we are at the vanishing point is the additional simple fact that on Friday, West Texas crude oil closed one-cent short of its previous record high of $77.03 reached on July 14 last year (thanks to John William's Shadowstats.com for the date). Apart from turmoil in the financial markets, there is nothing especially traumatic going on out there for the moment -- no hurricanes, no terror bombings in Europe or America, no guerilla action against Nigerian oil platforms and pipelines. Of course, any of those problems could spring up tomorrow, but right now things are kind of quiet, by current standards. And yet there was oil closing at $77.02 on Friday.
The reason for that high price, I believe, is that we really have entered the zone of the permanent oil export crisis, meaning that the oil exporting nations (Saudi Arabia, Mexico, Russia, Iran, Venezuela, etc) are using ever more of their own depleting product and are able to send less and less along to the places that import their oil (the US, Europe, China, India, and Japan). There is just enough of an export bottleneck now to put upward pressure of a-dollar-here-and-there on the oil in the futures markets . It is certain to get worse. A lot worse.
The launching of this new oil export crisis is coinciding with the crisis in confidence in the financial sector. In fact, the oil export crisis is the un-recognized reality test that is challenging the habitual falsification of reality in finance. This oil export crisis will also have a palpable effect on the reality of everyday life in America. It will bring our system of extreme car dependency closer to failure every day, with each upward one-penny click. Whether the public ever comes to recognize what this means, it will still affect millions of individual decisions.
Among these decisions will be a refusal to consider buying a new house 27 miles outside Minneapolis (or Dallas, or Atlanta....). At the same time this is occurring, and the anchovy barrels stashed around Wall Street start exploding from the gases of putrefaction within, there will be no more mortgages available for new houses anyway. And so the only real activity still driving the US economy -- the building of ever more suburban sprawl -- will come closer to a complete shut-down. I don't think the financial markets will survive that.