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Thursday, November 27, 2008

Pirates Win, Again

[ HT: Mongoose ]

Unbelievable incompetence.

The Indian navy sunk a poor fishing ship with fishermen still onboard. How do you randomly sink a fishing ship and call it a 'pirate mothership'?

Useless tits. The ship was captured a few hours earlier. I'm sure the distress calls were still echoing across the airwaves...

Obviously the pirates don't even give a shit. They'll just capture another ship.

Official: Sunken 'pirate' ship was Thai boat: "The pirate "mother ship" sunk last week by the Indian navy was actually a Thai fishing trawler seized hours earlier by pirates, a maritime agency said Wednesday. The Indian navy defended its actions, saying it fired in self-defense.

Fourteen sailors from the Thai boat have been missing since the Nov. 18 battle, which was hailed as a rare victory in the fight against increasingly brazen pirates who have rattled the international shipping industry and created chaos in vital sea lanes. At the time, the Indian navy boasted of sinking the vessel and showed pictures of it engulfed in a fireball.

But on Wednesday a maritime agency and the boat's owner said it was actually a Thai trawler, the Ekawat Nava5, that had been boarded by pirates just hours before.

"The Indian navy assumed it was a pirate vessel because they may have seen armed pirates on board the boat which has been hijacked earlier," said Noel Choong, who heads the International Maritime Bureau's piracy reporting center in Kuala Lumpur.

One of the crew members was killed and another rescued, said Wicharn Sirichaiekawat, the managing director of Bangkok-based Sirichai Fisheries, which owned the boat. Fourteen are still missing.

Sirichaiekawat said they found out about the fate of the boat after speaking to the survivor who was rescued four days later by passing fishermen.

The Thai Foreign Ministry said Wednesday it was looking into whether the Indian navy acted correctly.

Indian navy spokesman Commander Nirad Sinha defended the navy's actions, saying the INS Tabar — a 400-foot vessel carrying cruise missiles, surface-to-air missiles and six-barreled 30 mm machine guns for close combat was acting in self-defense.

"Insofar as we are concerned, both its description and its intent were that of a pirate ship," he said. "Only after we were fired upon did we fire. We fired in self- defense. There were gun-toting guys with RPGs on it."

Later, Indian navy chief Adm. Sureesh Mehta said the ship's actions were in line with international practices.

"The rules of engagement obviously are that if you are threatened by someone, you take necessary action and that is how it is done by everybody," Mehta told the CNN-IBN news channel.

It was unclear if the Indian warship was in contact with other forces in the area, since at least some had been warned that the Thai trawler had been captured.

Sirichaiekawat said his company had contacted the International Maritime Bureau after getting messages from other boats in the region that the trawler, which was headed from Oman to Yemen to deliver fishing equipment, had come under attack.

Sirichai Fisheries requested that naval ships in the area help their stricken boat. The British navy responded, but later told the company that pirates had already boarded the ship and any attack on them could cause the crew to be harmed.

"The British navy instructed us to wait until the pirates contacted us," he said.

Secretary of State Condoleezza Rice told a State Department briefing in Washington that she was "very actively engaged" on the piracy issue.

"I had extensive discussions with the Russians, the Chinese, the Panamanians, lots of people, about the problem that is there with piracy. We will see what more needs to be done through the U.N.," she said.

Meanwhile, the International Maritime Bureau alerted the coalition forces patrolling the region and other military agencies in the area, sending them photos of the vessel, Choong said.

The Indian navy has no direct communication links to the maritime bureau, he added.

"We hope that individual navy warships that are patrolling the gulf would coordinate with the coalition forces or request information from us" to avoid such incidents, Choong added.

Choong, who had earlier praised the sinking of the vessel a "an action that everybody is waiting for," said he hoped the mistake would not hamper future operations against the pirates.

Somalia, an impoverished nation caught up in an Islamic insurgency, has not had a functioning government since 1991. Somali pirates have become increasingly brazen recently, seizing eight vessels in the past two weeks, including a Saudi supertanker loaded with $100 million worth of crude oil.

Also Wednesday, two foreign journalists were kidnapped in northern Somalia while reporting on the rampant piracy in the region, said regional police spokesman Abshir Abdi Jama.

The journalists' nationalities could not be confirmed. Jama said one was believed to be British. Foreigners, journalists and humanitarian workers are frequently abducted for ransoms in Somalia.

There have been 96 pirate attacks so far this year in Somali waters, with 39 ships hijacked. Fifteen ships with nearly 300 crew are still held by pirates, who have demanded multimillion-dollar ransoms.

At present, warships from Denmark, India, Malaysia, Russia, the U.S. and NATO patrol a vast international maritime corridor, escorting some merchant ships and responding to distress calls in the area.”

Related Posts:
NATO Finds Balls, Declares War on Pirates
Not Just Oil Tankers, Tanks and Anti-Aircraft Guns Too
Pirates: Brains, Muscles and Geeks
Modern Pirates, Somali Port of Eyl
Pirates Seize Massive Oil Tanker, Again

Helicopter Ben Taking His Chopper for a Spin

My favourite line of the day: "As a consequence, the dollar came under pressure against a broad range of currencies as markets concluded that Helicopter Ben is taking his chopper for a spin with a fistful of benjamins."

Source: MacroMan in Ricardian Equivalence

Wednesday, November 26, 2008

Huge Chart

[ WSJ ]

(Click to enlarge this super huge chart.)

Policy Based on Failed Economic Theory: Just Stupid

I can't stress how important it is to understand that economists are relying on hugely flawed theories and models when looking at the economy. Economic policy is being made off the neo-classical theory of economics. This is just a fancy way of describing current mainstream economic theory. This neo-classical theory of economics forms the basis for all the crap your politicians and their advisors keep trying. The greatest failed experiment of this theory is the practical implementation Keynesian and Neo-Keynesian economic policy. Today, right now you are witnessing the implementation of Keynesian theory to its absolute maximum limits with a policy of ZIRP and quantitative easing.

Of course this cannot work and it never has. Neo-classical economic theory is fatally flawed from its very first basic premises. They are:

1) People have rational preferences among outcomes that can be identified and associated with a value.
2) Individuals maximize utility and firms maximize profits.
3) People act independently on the basis of full and relevant information.

This entire theory and all the economic policy that is born of it hinges on these three basic premises. The first one is completely ridiculous and obvious to anybody that isn’t a socially inept, ivory tower, academic, economic nerd. (Clearly these guys have never interacted with the female species in person before. Hahaha.) The assumption is that individuals choose the best action according to stable preference functions and constraints facing them. Simply put, if you prefer beer over liquor you’ll consistently drink beer at parties. No flip flopping allowed. No randomizations allowed. No ‘living in the moment’ allowed. This brings me to premise number two. Individuals maximize utility and firms maximize profits. Basically you drink your beer to the point of being pleasantly buzzed and then you stop. You never get smashed because a massive hangover clearly does not maximize utility. The third premise states that you will act independently and have all the relevant information to make the best choices. This means that you happily drink your beer and won’t get persuaded to do a round of shots with your friends. You clearly know that one round leads to two and you’ve got to work tomorrow. When your drunken friend gives you a stock tip you act independently and only after you’ve figured out everything humanly possible about the company and the industry. You aren’t at all persuaded by the fact that all your friends jumped on the stock and are making a killing. You stay completely level headed all the time.

The fact that we keep going thru economic and financial manias, bubbles and busts does not seem to deter the economic eggheads that continue to employ these theories literally like zealot Bible thumpers.

You’d figure that the Tulip Mania, South Sea Bubble, Dot Com Bubble, and the current Real Estate Bubble (to name a few) would be more than enough evidence to absolutely destroy all three of these premises.

The truly successful traders and investors of course know all this already. They thrive in a chaotic, irrational and uncertain environment.

This Economy Does Not Compute: “A FEW weeks ago, it seemed the financial crisis wouldn’t spin completely out of control. The government knew what it was doing — at least the economic experts were saying so — and the Treasury had taken a stand against saving failing firms, letting Lehman Brothers file for bankruptcy. But since then we’ve had the rescue of the insurance giant A.I.G., the arranged sale of failing banks and we’ll soon see, in one form or another, the biggest taxpayer bailout of Wall Street in history. It seems clear that no one really knows what is coming next. Why?

Well, part of the reason is that economists still try to understand markets by using ideas from traditional economics, especially so-called equilibrium theory. This theory views markets as reflecting a balance of forces, and says that market values change only in response to new information — the sudden revelation of problems about a company, for example, or a real change in the housing supply. Markets are otherwise supposed to have no real internal dynamics of their own. Too bad for the theory, things don’t seem to work that way.

Nearly two decades ago, a classic economic study found that of the 50 largest single-day price movements since World War II, most happened on days when there was no significant news, and that news in general seemed to account for only about a third of the overall variance in stock returns. A recent study by some physicists found much the same thing — financial news lacked any clear link with the larger movements of stock values.

Certainly, markets have internal dynamics. They’re self-propelling systems driven in large part by what investors believe other investors believe; participants trade on rumors and gossip, on fears and expectations, and traders speak for good reason of the market’s optimism or pessimism. It’s these internal dynamics that make it possible for billions to evaporate from portfolios in a few short months just because people suddenly begin remembering that housing values do not always go up.

Really understanding what’s going on means going beyond equilibrium thinking and getting some insight into the underlying ecology of beliefs and expectations, perceptions and misperceptions, that drive market swings.

Surprisingly, very few economists have actually tried to do this, although that’s now changing — if slowly — through the efforts of pioneers who are building computer models able to mimic market dynamics by simulating their workings from the bottom up.

The idea is to populate virtual markets with artificially intelligent agents who trade and interact and compete with one another much like real people. These “agent based” models do not simply proclaim the truth of market equilibrium, as the standard theory complacently does, but let market behavior emerge naturally from the actions of the interacting participants, which may include individuals, banks, hedge funds and other players, even regulators. What comes out may be a quiet equilibrium, or it may be something else.

For example, an agent model being developed by the Yale economist John Geanakoplos, along with two physicists, Doyne Farmer and Stephan Thurner, looks at how the level of credit in a market can influence its overall stability.

Obviously, credit can be a good thing as it aids all kinds of creative economic activity, from building houses to starting businesses. But too much easy credit can be dangerous.

In the model, market participants, especially hedge funds, do what they do in real life — seeking profits by aiming for ever higher leverage, borrowing money to amplify the potential gains from their investments. More leverage tends to tie market actors into tight chains of financial interdependence, and the simulations show how this effect can push the market toward instability by making it more likely that trouble in one place — the failure of one investor to cover a position — will spread more easily elsewhere.

That’s not really surprising, of course. But the model also shows something that is not at all obvious. The instability doesn’t grow in the market gradually, but arrives suddenly. Beyond a certain threshold the virtual market abruptly loses its stability in a “phase transition” akin to the way ice abruptly melts into liquid water. Beyond this point, collective financial meltdown becomes effectively certain. This is the kind of possibility that equilibrium thinking cannot even entertain.

It’s important to stress that this work remains speculative. Yet it is not meant to be realistic in full detail, only to illustrate in a simple setting the kinds of things that may indeed affect real markets. It suggests that the narrative stories we tell in the aftermath of every crisis, about how it started and spread, and about who’s to blame, may lead us to miss the deeper cause entirely.

Financial crises may emerge naturally from the very makeup of markets, as competition between investment enterprises sets up a race for higher leverage, driving markets toward a precipice that we cannot recognize even as we approach it. The model offers a potential explanation of why we have another crisis narrative every few years, with only the names and details changed. And why we’re not likely to avoid future crises with a little fiddling of the regulations, but only by exerting broader control over the leverage that we allow to develop.

Another example is a model explored by the German economist Frank Westerhoff. A contentious idea in economics is that levying very small taxes on transactions in foreign exchange markets, might help to reduce market volatility. (Such volatility has proved disastrous to countries dependent on foreign investment, as huge volumes of outside investment can flow out almost overnight.) A tax of 0.1 percent of the transaction volume, for example, would deter rapid-fire speculation, while preserving currency exchange linked more directly to productive economic purposes.

Economists have argued over this idea for decades, the debate usually driven by ideology. In contrast, Professor Westerhoff and colleagues have used agent models to build realistic markets on which they impose taxes of various kinds to see what happens.

So far they’ve found tentative evidence that a transaction tax may stabilize currency markets, but also that the outcome has a surprising sensitivity to seemingly small details of market mechanics — on precisely how, for example, the market matches buyers and sellers. The model is helping to bring some solid evidence to a debate of extreme importance.

A third example is a model developed by Charles Macal and colleagues at Argonne National Laboratory in Illinois and aimed at providing a realistic simulation of the interacting entities in that state’s electricity market, as well as the electrical power grid. They were hired by Illinois several years ago to use the model in helping the state plan electricity deregulation, and the model simulations were instrumental in exposing several loopholes in early market designs that companies could have exploited to manipulate prices.

Similar models of deregulated electricity markets are being developed by a handful of researchers around the world, who see them as the only way of reckoning intelligently with the design of extremely complex deregulated electricity markets, where faith in the reliability of equilibrium reasoning has already led to several disasters, in California, notoriously, and more recently in Texas.

Sadly, the academic economics profession remains reluctant to embrace this new computational approach (and stubbornly wedded to the traditional equilibrium picture). This seems decidedly peculiar given that every other branch of science from physics to molecular biology has embraced computational modeling as an invaluable tool for gaining insight into complex systems of many interacting parts, where the links between causes and effect can be tortuously convoluted.

Something of the attitude of economic traditionalists spilled out a number of years ago at a conference where economists and physicists met to discuss new approaches to economics. As one physicist who was there tells me, a prominent economist objected that the use of computational models amounted to “cheating” or “peeping behind the curtain,” and that respectable economics, by contrast, had to be pursued through the proof of infallible mathematical theorems.

If we’re really going to avoid crises, we’re going to need something more imaginative, starting with a more open-minded attitude to how science can help us understand how markets really work. Done properly, computer simulation represents a kind of “telescope for the mind,” multiplying human powers of analysis and insight just as a telescope does our powers of vision. With simulations, we can discover relationships that the unaided human mind, or even the human mind aided with the best mathematical analysis, would never grasp.

Better market models alone will not prevent crises, but they may give regulators better ways for assessing market dynamics, and more important, techniques for detecting early signs of trouble. Economic tradition, of all things, shouldn’t be allowed to inhibit economic progress.”

Canadian, US Dollar, Vix

Tuesday, November 25, 2008

Fed Admits Quantitative Easing

Fed Commits $800 Billion More to Unfreeze Lending (Update1): “The Federal Reserve took two new steps to unfreeze credit for homebuyers, consumers and small businesses, committing up to $800 billion.

The central bank will purchase as much as $600 billion in debt issued or backed by government-chartered housing-finance companies. It will also set up a $200 billion program to support consumer and small-business loans, the Fed said in statements today in Washington.

With today’s announcement, the central bank is starting to use some of the unorthodox policy tools that Chairman Ben S. Bernanke outlined as a Fed governor six years ago. Policy makers are aiming to prevent a financial collapse and stamp out the threat of deflation.

“They’re trying to put funds into the system, trying to unfreeze these markets,” said William Poole, the former St. Louis Fed president, in an interview with Bloomberg Television. “Clearly, the Fed and the Treasury are beginning to take a large amount of credit risk.”

The Fed will purchase up to $100 billion in direct debt of Fannie Mae, Freddie Mac and the Federal Home Loan Banks and up to $500 billion of mortgage-backed securities backed by Fannie, Freddie and Ginnie Mae, the statement said.”

Estimated U.S. GDP for 2008 is about $14.3 trillion (IMF). I mention that because today Federal Reserve announced a new facility and thereby all but admitting to a policy of quantitative easing. This puts the total amount of money pledged to various facilities and bailouts at about $8 trillion dollars… or 56% of GDP. (Total Breakdown of the U.S. Governments Bailout Efforts)

(You're children are going to hate you. They've been sold into debt slavery so you don't have to face the consequences of living beyond your means.)

Econompic Data goes into greater detail in Bailout Pledges More than $8 Trillion. This clearly means my Scary Fed Charts are going to get worse and the Federal Reserve Balance Sheet will continue to explode. Federal Receipts and Outlays have got to head in seriously opposite directions now. I’m talking the wrong way too, with outlays doing a moonshot while receipts go cliff diving.

The terrible tearing sound you’re barely hearing in the distance is the U.S. constitution and the U.S. social fabric simultaneously getting shredded.

None of this is surprising. The signs were there for all to see…

Related Posts:
Zero Rate World, The Age of Free Money: We’re Doomed
ZIRP, Zero, Nada, Free Money and a Big Mess
Money Supply, Hoarding, Gold, Deflation: Tin Foil Hats
Japan Stuck, Quantitative Easing in the US
Closer to ZIRP, Liquidity Trap, Lost Decade
Japan v2.0: GLOBAL Liquidity Trap
Japan v2.0
The Lost Decade
Stimulus Package: Does it Even Work

The Really Scary Fed Charts Series:
1) Really Scary Fed Charts, Why Bernanke Will Furiously Cut
2) Fed CHANGES Really Scary Fed Charts
3) Really Scary Fed Charts: MARCH
4) Really Scary Fed Charts: APRIL
5) Really Scary Fed Charts: MAY, False Alarm?
6) Really Scary Fed Charts: JUNE, ‘Just’ 1% of GDP Now
7) Really Scary Fed Charts: JULY, More of the Same
8) Really Scary Fed Charts About to Get Crazy Scary
9) Really Scary Fed Charts: OCT, Now Crazy Scary
10) Really Scary Fed Charts: NOV, US Bankrupt?

US Dollar, Gold Signal Bounce Time for Equities

In Going to Test the Lows I argued that failure to hold the 850 support level on the S&P 500 would result in a rapid fall to support at 835 and 817. The actual low was somewhere around 738.

Fun times.

This rally seems to have some legs for several reasons. Equities have burst off their lows and from deeply oversold territory with a major accumulation day on decent volume. More importantly, the USD fell hard and fast at resistance around 88.50 (on the US Dollar Index), failing to create and hold a new high. Gold perked up late last week an early warning that the USD ‘safe haven bid’ was about to run out of steam.

This is Bullish for risky assets. For now.

Monday, November 24, 2008

Bush: Where's The Love?

Not a single handshake. They really hate him.

This is especially interesting considering the summit consisted of the G20 and was an attempt to find a solution to the current finanacial crisis. Furthermore, the summit was in Washington and Bush was the host.

He got the cold shoulder anyways.

You can see 'The Great Decider' shuffle past each head of state, staring at his shiny shoes. Not a single hand is extended to him. Not a single smile. A proud leader of the most powerful nation in the world? Or the final failure of a nation in steep decline?

There is abosulutely no way in hell this could happen to Obama.