Current Financial Turmoil Is Merely A Squall

[Methodius]

The world is in the opening act of a long and epic tragedy. As I predicted some time ago, the government of the United States has begun to buy the nation’s mortgage debt at far above its true value from the charlatans of Wall Street. In Europe too, banks are finally being overwhelmed by their own greed and mendacity; whilst at an earlier stage of the cycle, due not to any excess of prudence over their US rivals but due only to different accounting standards, the great financial institutions of the old world are falling victim to the same blight of usury and poisonous financial alchemy that has infected those of the new. Inevitably, European governments will be force marched down the same path through the vale of tears. For all of us, this will be our own, all too modern, Via Dolorosa.

In the coming months, governments of all of the major world economies will follow the American example and attempt to recapitalise their banking systems in one way or another. The result of this will be the same as it will be for the United States. Their credit worthiness will be destroyed, leaving the last remaining haven for peoples’ savings no safer than a sack full of cash buried in the ground. Think about how much money there is in existence, contemplate how it is believed to be worth so much more than is actually needed for all of the people of the world to live and then consider what will happen when that fragile confidence trick is exposed? Let there be money our rulers said, fiat obscura will be the new response.

But what of the near future? We will shortly be engulfed in the filthy, stinking water thrown up by the death throws of the leveraged fund leviathan as it is slain by its own parents. September has been cruellest month for hedge funds since their invention. The short selling ban has destroyed the very basis of those old fakers statistical and convertible arbitrage – what use is a hedge fund that can’t hedge itself you might ask? The failure of the wholesale lending markets have starved their remaining lenders – the so called prime brokers (would not sub-prime brokers be a more suitable and honest a name?) – of the capital to provide them with leverage and what they do have available is at a far higher price. And last, but not least, their clients are deserting them in fear of what the future will bring. The coming months will witness the burial of the dead from this most monstrous of industries. Even the largest funds, Citadel, Renaissance Technology, D.E. Shaw & Co, HBK, Brevan Howard, GLG and others will find themselves on their knees. Some may survive but, without the elixir of cheap leverage to drive them, their existence will be marginal at best.

And of the longer term? I am steadfast in my belief that the system of money created from debt will implode just as it has exploded. A monetary great crunch to follow the slow motion big bang of the last thousand years. For reasons that may not be immediately obvious, the most important mathematical formula in the world at present is 1/(1-r) – the sum to infinity of a converging geometric series. Calculate the value of this formula for r = 0.98 and r = 0.90 for an approximate view of what will happen to the world’s money supply as a result of the de-leveraging to come over the following months and years, and its relevance will be painfully clear.

[R K]

Too wordy.

Bet you're a scream on a night out.

[PotNoodle]

Too wordy.

Bet you're a scream on a night out.

I bet he listens to Wagner and reads Dostoevsky for fun.

[Methinkshe]

The world is in the opening act of a long and epic tragedy. As I predicted some time ago, the government of the United States has begun to buy the nation’s mortgage debt at far above its true value from the charlatans of Wall Street. In Europe too, banks are finally being overwhelmed by their own greed and mendacity; whilst at an earlier stage of the cycle, due not to any excess of prudence over their US rivals but due only to different accounting standards, the great financial institutions of the old world are falling victim to the same blight of usury and poisonous financial alchemy that has infected those of the new. Inevitably, European governments will be force marched down the same path through the vale of tears. For all of us, this will be our own, all too modern, Via Dolorosa.

In the coming months, governments of all of the major world economies will follow the American example and attempt to recapitalise their banking systems in one way or another. The result of this will be the same as it will be for the United States. Their credit worthiness will be destroyed, leaving the last remaining haven for peoples’ savings no safer than a sack full of cash buried in the ground. Think about how much money there is in existence, contemplate how it is believed to be worth so much more than is actually needed for all of the people of the world to live and then consider what will happen when that fragile confidence trick is exposed? Let there be money our rulers said, fiat obscura will be the new response.

But what of the near future? We will shortly be engulfed in the filthy, stinking water thrown up by the death throws of the leveraged fund leviathan as it is slain by its own parents. September has been cruellest month for hedge funds since their invention. The short selling ban has destroyed the very basis of those old fakers statistical and convertible arbitrage – what use is a hedge fund that can’t hedge itself you might ask? The failure of the wholesale lending markets have starved their remaining lenders – the so called prime brokers (would not sub-prime brokers be a more suitable and honest a name?) – of the capital to provide them with leverage and what they do have available is at a far higher price. And last, but not least, their clients are deserting them in fear of what the future will bring. The coming months will witness the burial of the dead from this most monstrous of industries. Even the largest funds, Citadel, Renaissance Technology, D.E. Shaw & Co, HBK, Brevan Howard, GLG and others will find themselves on their knees. Some may survive but, without the elixir of cheap leverage to drive them, their existence will be marginal at best.

And of the longer term? I am steadfast in my belief that the system of money created from debt will implode just as it has exploded. A monetary great crunch to follow the slow motion big bang of the last thousand years. For reasons that may not be immediately obvious, the most important mathematical formula in the world at present is 1/(1-r) – the sum to infinity of a converging geometric series. Calculate the value of this formula for r = 0.98 and r = 0.90 for an approximate view of what will happen to the world’s money supply as a result of the de-leveraging to come over the following months and years, and its relevance will be painfully clear.

Thank, Methodius, I appreciate your considered posts.

Are there any recommendations you would make so that the average family with little or no savings and probably far too much debt can at least keep themselves and their children alive in the coming months? It is the average Joe whom I fear will suffer, not those with sufficient wealth to protect through purchase of gold or other hedging devices. What about those who have just tried to earn a living, to save a little amount for a deposit on a house in which to raise a family, who have (maybe foolishly) committed themselves to more mortgage debt than they could reasonably be expected to repay for fear of never being able to have a house of their own. Is there any hope you can offer to them?

[A.steve]

I bet he listens to Wagner and reads Dostoevsky for fun.

Oi, I've read Dostoevsky for fun...

(Maybe I shouldn't admit it?)

[Blue Peter]

Oi, I've read Dostoevsky for fun...

(Maybe I shouldn't admit it?)

I like Methodius's style..and I also like Dostoyevski,

Peter.

[Converted Lurker]

Too wordy.

Bet you're a scream on a night out.

behave yerself I liked it. The marching down the vale of tears bit is brilliant.

[dancer7]

Interesting point of view...I am sure there is much truth in what you say. However, I would have preferred a link to support your post particularly with regard to the relevance of the formula. I am a mathematics graduate ( first class honours ) and I cannot tie in the sum to infinity of the geometric series 1,r,rxr,rxrxr,...which is, as you say, 1/(1-r) provided that r<1, to a financial model. Please give more details on this point. Many thanks.

[Tonkers]

Oi, I've read Dostoevsky for fun...

(Maybe I shouldn't admit it?)

Same here, I was trying to impress a boy.

Edit: Thanks Methodius, very well considered.

Edited October 6, 2008 by Tonkers

[PotNoodle]

Oi, I've read Dostoevsky for fun...

(Maybe I shouldn't admit it?)

If I respond to that, this thread will veer hopelessly off topic.

So, here goes :-

I read Dostoevsky at school, when forced to do so, and

found "Crime and Punishment" one of the most turgid and

depressing pieces of gloomy misery I have ever set eyes on.

Which is what came to mind when I read the above.

[Methodius]

Are there any recommendations you would make so that the average family with little or no savings and probably far too much debt can at least keep themselves and their children alive in the coming months?

The best advice I can give is to keep your savings in cash in an instant access account with a different organization than your debt. When deciding where to put your money ask what proportion of the capital base is retail vs wholesale and if they can't tell you, or the number is less than 95%, go elsewhere. I believe that many of your small savings and loans institutions (building societies I think you call them) would be suitable.

[?...!]

That's a a lot of purple prose dressing up a geometric series, isn't it?

To be honest our economy and money supply would be better described using an organic growth or ecological extinction analogy than a geometric one.

How can 1/(1-r) possibly represent global finance? Please try harder.

Why are so many posters of this nature obsessed with the supply of money tending to infinity or zero, or some other arbitrary value? It's a finite system that exists for the population of a single species on a single planet.

Extrapolating trends is what leads to dot.com busts, housing busts, etc.

Nothing ever has or ever will trend to anything it's all just noise based on our collective perceptions.

Currently that perception is bad. I am sure as day follows night that our collective perception will change before we are extinct.

[Solitaire]

Oi, I've read Dostoevsky for fun...

(Maybe I shouldn't admit it?)

Oi, so have I, and Turgenev.

[Injin]

That's a a lot of purple prose dressing up a geometric series, isn't it?

To be honest our economy and money supply would be better described using an organic growth or ecological extinction analogy than a geometric one.

How can 1/(1-r) possibly represent global finance? Please try harder.

Why are so many posters of this nature obsessed with the supply of money tending to infinity or zero, or some other arbitrary value? It's a finite system that exists for the population of a single species on a single planet.

Extrapolating trends is what leads to dot.com busts, housing busts, etc.

Nothing ever has or ever will trend to anything it's all just noise based on our collective perceptions.

Currently that perception is bad. I am sure as day follows night that our collective perception will change before we are extinct.

Scary subjectivist nonsense from the batmonkey at the end but I agree the maths doesn't tend anywhere. It's only a useful lie, after all.

[Methodius]

I bet he listens to Wagner and reads Dostoevsky for fun.

I much prefer Richard Strauss as it happens, Wagner is too, well, Nazi, for my liking. I must also admit a liking for some Russian literature, although I would choose Tolstoy or, from another generation, Solzenitzen over Dostoevsky.

[PontiusPig]

Are there any recommendations you would make so that the average family with little or no savings and probably far too much debt can at least keep themselves and their children alive in the coming months?

How about buy a flat as an invetsment property?

I'm not kidding it's Alsiatir Dalring and the Feds latest plan to get the house market moving again!

[jp1]

On a positive note - 1st time buyers wont have much to worry about - it will soon be cheaper to just buy the bank rather than asking them for a mortgage

[interestrateripoff]

All banks are bankrupt.

The state will have to nationalise them all debts will be removed from the ponzi economic system with the bankers jailed.

[The General]

The world is in the opening act of a long and epic tragedy. As I predicted some time ago, the government of the United States has begun to buy the nation’s mortgage debt at far above its true value from the charlatans of Wall Street. In Europe too, banks are finally being overwhelmed by their own greed and mendacity; whilst at an earlier stage of the cycle, due not to any excess of prudence over their US rivals but due only to different accounting standards, the great financial institutions of the old world are falling victim to the same blight of usury and poisonous financial alchemy that has infected those of the new. Inevitably, European governments will be force marched down the same path through the vale of tears. For all of us, this will be our own, all too modern, Via Dolorosa.

In the coming months, governments of all of the major world economies will follow the American example and attempt to recapitalise their banking systems in one way or another. The result of this will be the same as it will be for the United States. Their credit worthiness will be destroyed, leaving the last remaining haven for peoples’ savings no safer than a sack full of cash buried in the ground. Think about how much money there is in existence, contemplate how it is believed to be worth so much more than is actually needed for all of the people of the world to live and then consider what will happen when that fragile confidence trick is exposed? Let there be money our rulers said, fiat obscura will be the new response.

But what of the near future? We will shortly be engulfed in the filthy, stinking water thrown up by the death throws of the leveraged fund leviathan as it is slain by its own parents. September has been cruellest month for hedge funds since their invention. The short selling ban has destroyed the very basis of those old fakers statistical and convertible arbitrage – what use is a hedge fund that can’t hedge itself you might ask? The failure of the wholesale lending markets have starved their remaining lenders – the so called prime brokers (would not sub-prime brokers be a more suitable and honest a name?) – of the capital to provide them with leverage and what they do have available is at a far higher price. And last, but not least, their clients are deserting them in fear of what the future will bring. The coming months will witness the burial of the dead from this most monstrous of industries. Even the largest funds, Citadel, Renaissance Technology, D.E. Shaw & Co, HBK, Brevan Howard, GLG and others will find themselves on their knees. Some may survive but, without the elixir of cheap leverage to drive them, their existence will be marginal at best.

And of the longer term? I am steadfast in my belief that the system of money created from debt will implode just as it has exploded. A monetary great crunch to follow the slow motion big bang of the last thousand years. For reasons that may not be immediately obvious, the most important mathematical formula in the world at present is 1/(1-r) – the sum to infinity of a converging geometric series. Calculate the value of this formula for r = 0.98 and r = 0.90 for an approximate view of what will happen to the world’s money supply as a result of the de-leveraging to come over the following months and years, and its relevance will be painfully clear.

Good work that. I especially like the bit about the failure of Hedgies! Love it

[Methodius]

batmonkey

I don't recall ever having deliberately insulted anyone on this forum, perhaps you will do me the kindness of explaining why you felt the need to refer to me thus?

[General Melchett]

On a positive note - 1st time buyers wont have much to worry about - it will soon be cheaper to just buy the bank rather than asking them for a mortgage

You see what sort of silliness extrapolation can get you into?

But then, there are far fewer banks than people. Banks are getting fewer all the time right now, so we cant all have one, surely?

I think I'll extrapolate myself out to thkitchen for a cup of tea.

[Blue Peter]

I don't recall ever having deliberately insulted anyone on this forum, perhaps you will do me the kindness of explaining why you felt the need to refer to me thus?

Methodius,

I think Injin was directing that comment at ?...!, whose avatar is a monkey (chimp, actually) with a baseball bat. Given the time which ?...! has spent trying to explain money to Injin, I hope that the term was used affectionately,

Peter.

[Methodius]

Methodius,

I think Injin was directing that comment at ?...!, whose avatar is a monkey (chimp, actually) with a baseball bat. Given the time which ?...! has spent trying to explain money to Injin, I hope that the term was used affectionately,

Peter.

Ah, I see now, my apologies to all in that case.

[Thread Killer]

Ah, I see now, my apologies to all in that case.

Methodius, you don't want to take ANYONE on here seriously - we're all loons.

They're just jealous because you seem to be out-looning the rest of us with your majestic words of gloom and doom.

[zilly]

I much prefer Richard Strauss as it happens, Wagner is too, well, Nazi, for my liking. I must also admit a liking for some Russian literature, although I would choose Tolstoy or, from another generation, Solzenitzen over Dostoevsky.

You've a flakey grip on cyrillic though Gospodin Methodius. Better have a word with Kyril he'll sort you out me ol' droog.