Recently in Economy Category

Earlier this morning I watched a short film that I TiVo'd the other day. It's a profile of a the South China Mall in Dongguan, China which is twice the size of the Mall of America. The problem is that the geniuses who developed the mall built it in the middle of nowhere. There are no freeways nearby, nor is there an airport. I guess they thought "build it and they will come" but it didn't work out that way. For the first minute or so that i was watching it I thought the mall was still under construction. But it had actually been open for a while. (I'm late to this story. The mall was opened in 2005 and I think this film was shot in 2008.) What's more, a government funded group bought the property from the previous owners in order to save it from bankruptcy. Hmm, a government funded bailout. Why does that sound familiar?

Here's a link to the video -- Utopia, Part 3: The World's Largest Shopping Mall. There's also an interview with the filmmaker.

P.S. This also reminds me of a photo essay on Dubai that I recently saw in Fast Company magazine. Ah, such folly.

If, like me, you missed I.O.U.S.A. during its theatrical run you can now watch the condensed, 30 minute version online:

By now, you may have heard about our acclaimed documentary I.O.U.S.A., a film that boldly examines the rapidly growing national debt and its consequences for the United States and its citizens. The film has been a huge hit, getting rave reviews from Roger Ebert and others.

Now, we proudly release a 30-minute condensed version of I.O.U.S.A. designed specifically for watching and sharing on the web - for free.

So if you haven't had a chance to see the movie yet, watch the condensed I.O.U.S.A. today. If you've already seen it in a theater, check out the abbreviated version for a refresher. Then, tell your friends, your family, your Facebook friends and your Twitter followers about the staggering amount of money - $53 trillion - in financial obligations owed by the federal government to foreign investors and to every single American in the form of pensions, health benefits, Social Security and Medicare.

Then, visit http://www.IOUSAtheMovie.com and join us in our Fiscal Wake-Up Movement. Together, we can make American fiscal responsibility a reality.

A comment by Andrew on Barry's post about the SEC wanting to ban all short selling sent me to my copy of Michael Panzner's book Financial Armageddon. Andrew stated that "tonight's event draws me to the last paragraph of ch.7 in Michael Panzer's Financial Armageddon". When I read that paragraph I was reminded of how I felt while reading the book back in March 2007. The scenarios that Panzner laid out were nothing short of chilling. I kept wondering if he really believed all those dire things would actually happen or if they were just a worst case scenario. In flipping through a few chapters tonight it's scary to see just how much of what Panzner wrote has come to pass. Here are the last two paragraph from chapter 7 ("Depression") which Andrew was talking about (hopefully Michael won't mind me posting so much of his text):

Eventually, with a decades-long orgy of credit expansion unraveling fast; the meltdown of stock, bond, commodity, and other markets; a cratering economy; and more of the nation's largest financial institutions precariously on the edge, the Federal Reserve and Washington as a whole will have reached a critical juncture. There will be widespread pressure, bordering perhaps on hysteria, for somebody, somewhere to take action and stem the rapidly rising tide of disaster.

Only then, after being unwilling to react quickly and forcefully enough early on, the Federal Reserve will abruptly shift gears, no longer fearing the consequences of an aggressive monetary response. In a sense, they will have nothing to lose. With immediate effect, they will give up their self-imposed yoke of restraint and move wholeheartedly into money-creation mode. That will mark the beginning of the second phase of the great unraveling.

Sound familiar? Here's some more from Chapter 6 ("Systemic Crisis")

No doubt a systemic meltdown will provoke a similar response. For the financial system and the markets, however, the fallout will likely be worse than any downturn in many decades, owing to a unique combination of modern developments and incendiary circumstances. The explosive growth of derivatives trading and leveraged hedge fund investing, hidden behind a shroud of lightly regulated secrecy, means that few people will have a handle on where dangerous risk is concentrated or overall levels of exposure -- not until it's too late...

-SNIP-

Simply put, people will find it difficult to react in timely, logical or focused fashion to the unfolding calamity...

-SNIP-

Despite increased levels of sophistication and the broad use of modern risk management systems, no one can be sure how new or exotic instruments and markets will behave when conditions take an ominous turn. The sheer scale of the unfolding financial crisis—in terms of the number of participants, firms, regulators, products, countries, and markets—will make it difficult to penetrate the problems...

-SNIP-

This time, however, a vast and efficient global communications network will ensure that destructive energies are rapidly transmitted to billions of people. So, too, will trading technology that facilitates and encourages traders and investors to act on their impulses. Many will find it too easy to shoot first -- or point and click -- and ask questions later in a 21st-century rush for the exits.. Not only will the fastest or sharpest operators look to get out. Firms that have come to depend on leverage, including hedge funds, brokers, and even banks, will also face immediate and rapidly growing pressure to scale back positions because of demands for additional cash collateral or reduced access to financing. Meanwhile, those who still have the wherewithal to initiate fresh positions or act independently will look to dive in and take advantage of the stampede.

-SNIP-

A constant global ripple effect will occur as positions are adjusted to take account of risk management strategies or cash-raising demands. The widespread use of flawed models will further aggravate the situation.

-SNIP-

By the time the systemic crisis is full-blown, there will almost certainly have been a domino-like collapse of more than a few large intermediaries and allegedly sophisticated global financial firms, including hedge funds, insurers, and brokers. As the number of failures grows, concerns over counterparty risk will take center stage. Lenders, investors, and risk managers will fret and gossip about which institution is next. Worries about fraud and chicanery will boost anxiety to a fever pitch. Even firms not in dire straits may suddenly find themselves at risk. In times of upheaval, a lack of information and concern about the ability of others to manage their exposure often spurs a self-fulfilling prophecy, where idle chatter alone leads to institutions being squeezed or cut off—just when they need access to financing most.

-SNIP-

Few areas of the financial system will be unaffected when the meltdown rages. In the insurance sector, for example, debt downgrades and defaults will occur at a quickening pace... At least some of the $2 trillion held in money market funds will anxiously flee to safer pastures as the prices of one or more pools fall below par -- "breaks the buck" -- because of shaky markets and holdings that turn out to be much riskier than expected.

Pretty much all of this has taken place over the last few weeks. Kudos to Michael Panzner for nailing all of this. And somehow I still have hope that much of the other stuff in the book is worst case scenario and won't come to pass. But I'm losing hope by the day.

I've long wondered how long current supplies of all kinds of commodities (natural resources) will last given how rapacious humans (especially Westerners) can be. After watching 'Human Footprint' on National Geographic Channel last week I was more convinced than ever that I needed to be long every conceivable hard commodity and probably most of the soft ones too! :-) Today I got wind of another article about food shortages, except this one isn't about some "developing" country, it's about shortages & rationing right here in the U.S.A. Some snippets:

MOUNTAIN VIEW, Calif. — Many parts of America, long considered the breadbasket of the world, are now confronting a once unthinkable phenomenon: food rationing. Major retailers in New York, in areas of New England, and on the West Coast are limiting purchases of flour, rice, and cooking oil as demand outstrips supply. There are also anecdotal reports that some consumers are hoarding grain stocks.

At a Costco Warehouse in Mountain View, Calif., yesterday, shoppers grew frustrated and occasionally uttered expletives as they searched in vain for the large sacks of rice they usually buy.

"Where's the rice?" an engineer from Palo Alto, Calif., Yajun Liu, said. "You should be able to buy something like rice. This is ridiculous."

[SNIP]

"You can't eat this every day. It's too heavy," a health care executive from Palo Alto, Sharad Patel, grumbled as his son loaded two sacks of the Basmati into a shopping cart. "We only need one bag but I'm getting two in case a neighbor or a friend needs it," the elder man said.

The Patels seemed headed for disappointment, as most Costco members were being allowed to buy only one bag. Moments earlier, a clerk dropped two sacks back on the stack after taking them from another customer who tried to exceed the one-bag cap.

"Due to the limited availability of rice, we are limiting rice purchases based on your prior purchasing history," a sign above the dwindling supply said.

[SNIP]

An employee at the Costco store in Queens said there were no restrictions on rice buying, but limits were being imposed on purchases of oil and flour. Internet postings attributed some of the shortage at the retail level to bakery owners who flocked to warehouse stores when the price of flour from commercial suppliers doubled.

[SNIP]

The curbs and shortages are being tracked with concern by survivalists who view the phenomenon as a harbinger of more serious trouble to come.

"It's sporadic. It's not every store, but it's becoming more commonplace," the editor of SurvivalBlog.com, James Rawles, said. "The number of reports I've been getting from readers who have seen signs posted with limits has increased almost exponentially, I'd say in the last three to five weeks."

But here's the part that really gets me. We've got the same dynamic working as with gasoline. This reminds me so much of our little fake gas scare & mania here in Atlanta that I documented back in 2005, post-Katrina -- when gas rose from sub $3 to over $5 in a matter of hours:

"There have been so many stories about worldwide shortages that it encourages people to stock up. What most people don't realize is that supply chains have changed, so inventories are very short," Mr. Rawles, a former Army intelligence officer, said. "Even if people increased their purchasing by 20%, all the store shelves would be wiped out."

[SNIP]

An anonymous high-tech professional writing on an investment Web site, Seeking Alpha, said he recently bought 10 50-pound bags of rice at Costco. "I am concerned that when the news of rice shortage spreads, there will be panic buying and the shelves will be empty in no time. I do not intend to cause a panic, and I am not speculating on rice to make profit. I am just hoarding some for my own consumption," he wrote.

Ah, the old I'll just panic before everybody else panics solution! As Duru & I say to each other almost daily, "we live in interesting times". Now where are those food ETFs trading...

Here's a good interview with Barry Ritholtz from Friday's WallStrip Chat:

The Chairman posted a link to an article about a "bank run" on Countrywide Financial Corp. (CFC) . I just had to shake my head and laugh after reading that article. I've been watching that company, which happens to hold my mortgage, closely this year. Back in March when the subprime/credit concerns first got serious and just after New Century blew up, I posted this in my links section:

Mortgage Lenders Whistling Past the Sub-Prime Graveyard? -- I just noticed this Countrywide (CFC) ad on my site. I wonder how much longer we'll be seeing these.

Here's the ad I was linking to:

It just seemed incredible to me that Countrywide, the biggest mortgage lender was apparently doing business as usual right after New Century went belly up. Then some weeks later I saw their CEO, Angelo Mozilo, co-hosting Squawk Box. He was all tanned (just off a nice vacation?) and kept talking about how everything was all good for the company despite what was going on in subprime land. I'm pretty sure he even talked about buying back stock (the stock is now about 05 lower). Well the real deal was revealed on July 24th when they released earnings. Here's what Mr. Mozilo had to say:

"This is a huge battleship, and we're headed in the wrong direction," Chief Executive Angelo Mozilo said on an analyst conference call, referring to the housing environment.

He said it may be 2009 before the market recovers from oversupply, stagnant home prices, and increasingly lax lending standards that left many borrowers overstretched.

"Nobody saw this coming," Mozilo, a 54-year mortgage industry veteran, said on the nearly three-hour call.

Nobody saw it coming? Really? I call bullsh*t. A lot of people called it in March if not earlier than that. Anyway, the death spiral in this stock has been simply amazing to watch. I just hope we don't start seeing these bank runs spread to other financial institutions.

P.S. It's interesting to go back and see/hear what was being said about Countywide earlier this year. This CBS News report from May 29th is an example: "Why is Countrywide Financial, one of the country's largest subprime mortgage lenders, doing so well despite the recent lending crisis? Geoff Colvin reports."

PIMCO's Bill Gross covers the Bear Stearns/subprime crisis in his July 2007 investment outlook, which is entitled "Looking for Contagion in All the Wrong Places". Here are some snippets:

Many of these good looking girls are not high-class assets worth 100 cents on the dollar. And sorry Ben, but derivatives are a two-edged sword. Yes, they diversify risk and direct it away from the banking system into the eventual hands of unknown buyers, but they multiply leverage like the Andromeda strain. When interest rates go up, the Petri dish turns from a benign experiment in financial engineering to a destructive virus because the cost of that leverage ultimately reduces the price of assets. Houses anyone?

[SNIP]

Those that point to a crisis averted and a return to normalcy are really looking for contagion in all the wrong places. Because the problem lies not in a Bear Stearns hedge fund that can be papered over with 100 cents on the dollar marks. The flaw resides in the Summerlin suburbs of Las Vegas, Nevada, in the extended city limits of Chicago headed west towards Rockford, and yes, the naked (and empty) rows of multistoried condos in Miami, Florida. The flaw, dear readers, lies in the homes that were financed with cheap and in some cases gratuitous money in 2004, 2005, and 2006. Because while the Bear hedge funds are now primarily history, those millions and millions of homes are not. They’re not going anywhere…except for their mortgages that is. Mortgage payments are going up, up, and up…and so are delinquencies and defaults.

[SNIP]

The right places to look for contagion are therefore not in the white-washed Bear Stearns hedge funds, but in the subprime resets to come and the ultimate effect they will have on the prices of homes – the collateral that’s so critical in this asset-backed, and therefore interest-sensitive financed-based economy of 2007 and beyond. If delinquencies lead to defaults and then to lower home prices, then we have problems and the potential for an extended – not a 27-day Paris Hilton sentence.

[SNIP]

If subprime total losses hit 10% then even some single-A tranches face the grim reaper. AAA’s? Folks the point is that there are hundreds of billions of dollars of this toxic waste and whether or not they’re in CDOs or Bear Stearns hedge funds matters only to the extent of the timing of the unwind. To death and taxes you can add this to your list of inevitabilities: the subprime crisis is not an isolated event and it won’t be contained by a few days of headlines in The New York Times. And it will not remain confined to a neat little Petri dish in some mad financial derivative scientist’s laboratory. Ultimately through capital market arbitrage it will affect risk spreads in markets completely divorced from U.S. housing.

[SNIP]

Importantly, as well, and this point is neglected by most pundits, the willingness to extend credit in other areas – high yield, bank loans, and even certain segments of the AAA asset-backed commercial paper market should feel the cooling Arctic winds of a liquidity constriction.

If not taken too far – and there is no hint yet of a true “crisis” – these developments may be just what the Fed has been looking for: easy credit becoming less easy; excessive liquidity returning to more rational levels. Still, PIMCO looks for the Fed to issue an insurance policy in the form of lower Fed Funds at some point over the next 6 months...

I'm not sure what just caused this air pocket in the market but these note from the Mortgage Bankers Association (MBA) that hit right at noon must have contributed to the slide:

12:02 MBA says U.S. MORTGAGE DELINQUENCY RATE 4.95 PCT IN Q4, UP FROM 4.67 PCT IN Q3 AND FROM 4.70 PCT IN Q4 2005

12:02 MBA says subprime borrowers more vulnerable to higher interest rates, slower home price gains or price drops

12:01 MBA pushes back forecast for housing market to regain footing to end of 2007 vs middle of year

12:01 MBA says delinquency rates rose in 49 states in Q4; foreclosure inventory rates grew in 44 states

12:01 Late payments rise for all loan types but driven mainly by subprime and FHA loans

12:00 According to MBA, Mississippi, Louisiana, Michigan had highest overall late payment rates across all loan types in Q4

12:00 U.S. Mortgage delinquencies, foreclosures rise in Q4 2006 vs prior quarter and year ago, according to MBA

Here's an intraday shot of QQQQ with 15 minute bars. Note the volume on the big drop:

It's carnival time! No, not that carnaval but the much more exciting 9th edition of the Carnival of Investing. For the uninitiated, this carnival consists of recent articles about investing from the blogosphere. Without further ado, here are this week's submissions:

Welcome to week 57 of the Carnival of the Capitalists. This is an exciting weekend for me, yesterday this blog was highlighted in Barron's and today I get to host the carnival. I encourage all of my new visitors to visit the blogs listed below. You may be surprised at the high quality of writing being done in the blogosphere.

As usual there are a lot of good articles submitted by bloggers on a variety of topics. I didn't even attempt to categorize the articles, as many of them cross multiple topics. I did do a quick sorting of them, so the list below generally flows in this order: entrepreneurship, business, technology, blogging, marketing, internet, financial markets, economy and taxes. Enjoy...

Earlier this morning I watched a short film that I TiVo'd the other day. It's a profile of a the South China Mall in Dongguan, China which is twice the size of the Mall of America. The problem is that the geniuses who developed the mall built it in the middle of nowhere. There are no freeways nearby, nor is there an airport. I guess they thought "build it and they will come" but it didn't work out that way. For the first minute or so that i was watching it I thought the mall was still under construction. But it had actually been open for a while. (I'm late to this story. The mall was opened in 2005 and I think this film was shot in 2008.) What's more, a government funded group bought the property from the previous owners in order to save it from bankruptcy. Hmm, a government funded bailout. Why does that sound familiar?

Here's a link to the video -- Utopia, Part 3: The World's Largest Shopping Mall. There's also an interview with the filmmaker.

P.S. This also reminds me of a photo essay on Dubai that I recently saw in Fast Company magazine. Ah, such folly.

If, like me, you missed I.O.U.S.A. during its theatrical run you can now watch the condensed, 30 minute version online:

By now, you may have heard about our acclaimed documentary I.O.U.S.A., a film that boldly examines the rapidly growing national debt and its consequences for the United States and its citizens. The film has been a huge hit, getting rave reviews from Roger Ebert and others.

Now, we proudly release a 30-minute condensed version of I.O.U.S.A. designed specifically for watching and sharing on the web - for free.

So if you haven't had a chance to see the movie yet, watch the condensed I.O.U.S.A. today. If you've already seen it in a theater, check out the abbreviated version for a refresher. Then, tell your friends, your family, your Facebook friends and your Twitter followers about the staggering amount of money - $53 trillion - in financial obligations owed by the federal government to foreign investors and to every single American in the form of pensions, health benefits, Social Security and Medicare.

Then, visit http://www.IOUSAtheMovie.com and join us in our Fiscal Wake-Up Movement. Together, we can make American fiscal responsibility a reality.

A comment by Andrew on Barry's post about the SEC wanting to ban all short selling sent me to my copy of Michael Panzner's book Financial Armageddon. Andrew stated that "tonight's event draws me to the last paragraph of ch.7 in Michael Panzer's Financial Armageddon". When I read that paragraph I was reminded of how I felt while reading the book back in March 2007. The scenarios that Panzner laid out were nothing short of chilling. I kept wondering if he really believed all those dire things would actually happen or if they were just a worst case scenario. In flipping through a few chapters tonight it's scary to see just how much of what Panzner wrote has come to pass. Here are the last two paragraph from chapter 7 ("Depression") which Andrew was talking about (hopefully Michael won't mind me posting so much of his text):

Eventually, with a decades-long orgy of credit expansion unraveling fast; the meltdown of stock, bond, commodity, and other markets; a cratering economy; and more of the nation's largest financial institutions precariously on the edge, the Federal Reserve and Washington as a whole will have reached a critical juncture. There will be widespread pressure, bordering perhaps on hysteria, for somebody, somewhere to take action and stem the rapidly rising tide of disaster.

Only then, after being unwilling to react quickly and forcefully enough early on, the Federal Reserve will abruptly shift gears, no longer fearing the consequences of an aggressive monetary response. In a sense, they will have nothing to lose. With immediate effect, they will give up their self-imposed yoke of restraint and move wholeheartedly into money-creation mode. That will mark the beginning of the second phase of the great unraveling.

Sound familiar? Here's some more from Chapter 6 ("Systemic Crisis")

No doubt a systemic meltdown will provoke a similar response. For the financial system and the markets, however, the fallout will likely be worse than any downturn in many decades, owing to a unique combination of modern developments and incendiary circumstances. The explosive growth of derivatives trading and leveraged hedge fund investing, hidden behind a shroud of lightly regulated secrecy, means that few people will have a handle on where dangerous risk is concentrated or overall levels of exposure -- not until it's too late...

-SNIP-

Simply put, people will find it difficult to react in timely, logical or focused fashion to the unfolding calamity...

-SNIP-

Despite increased levels of sophistication and the broad use of modern risk management systems, no one can be sure how new or exotic instruments and markets will behave when conditions take an ominous turn. The sheer scale of the unfolding financial crisis—in terms of the number of participants, firms, regulators, products, countries, and markets—will make it difficult to penetrate the problems...

-SNIP-

This time, however, a vast and efficient global communications network will ensure that destructive energies are rapidly transmitted to billions of people. So, too, will trading technology that facilitates and encourages traders and investors to act on their impulses. Many will find it too easy to shoot first -- or point and click -- and ask questions later in a 21st-century rush for the exits.. Not only will the fastest or sharpest operators look to get out. Firms that have come to depend on leverage, including hedge funds, brokers, and even banks, will also face immediate and rapidly growing pressure to scale back positions because of demands for additional cash collateral or reduced access to financing. Meanwhile, those who still have the wherewithal to initiate fresh positions or act independently will look to dive in and take advantage of the stampede.

-SNIP-

A constant global ripple effect will occur as positions are adjusted to take account of risk management strategies or cash-raising demands. The widespread use of flawed models will further aggravate the situation.

-SNIP-

By the time the systemic crisis is full-blown, there will almost certainly have been a domino-like collapse of more than a few large intermediaries and allegedly sophisticated global financial firms, including hedge funds, insurers, and brokers. As the number of failures grows, concerns over counterparty risk will take center stage. Lenders, investors, and risk managers will fret and gossip about which institution is next. Worries about fraud and chicanery will boost anxiety to a fever pitch. Even firms not in dire straits may suddenly find themselves at risk. In times of upheaval, a lack of information and concern about the ability of others to manage their exposure often spurs a self-fulfilling prophecy, where idle chatter alone leads to institutions being squeezed or cut off—just when they need access to financing most.

-SNIP-

Few areas of the financial system will be unaffected when the meltdown rages. In the insurance sector, for example, debt downgrades and defaults will occur at a quickening pace... At least some of the $2 trillion held in money market funds will anxiously flee to safer pastures as the prices of one or more pools fall below par -- "breaks the buck" -- because of shaky markets and holdings that turn out to be much riskier than expected.

Pretty much all of this has taken place over the last few weeks. Kudos to Michael Panzner for nailing all of this. And somehow I still have hope that much of the other stuff in the book is worst case scenario and won't come to pass. But I'm losing hope by the day.

I've long wondered how long current supplies of all kinds of commodities (natural resources) will last given how rapacious humans (especially Westerners) can be. After watching 'Human Footprint' on National Geographic Channel last week I was more convinced than ever that I needed to be long every conceivable hard commodity and probably most of the soft ones too! :-) Today I got wind of another article about food shortages, except this one isn't about some "developing" country, it's about shortages & rationing right here in the U.S.A. Some snippets:

MOUNTAIN VIEW, Calif. — Many parts of America, long considered the breadbasket of the world, are now confronting a once unthinkable phenomenon: food rationing. Major retailers in New York, in areas of New England, and on the West Coast are limiting purchases of flour, rice, and cooking oil as demand outstrips supply. There are also anecdotal reports that some consumers are hoarding grain stocks.

At a Costco Warehouse in Mountain View, Calif., yesterday, shoppers grew frustrated and occasionally uttered expletives as they searched in vain for the large sacks of rice they usually buy.

"Where's the rice?" an engineer from Palo Alto, Calif., Yajun Liu, said. "You should be able to buy something like rice. This is ridiculous."

[SNIP]

"You can't eat this every day. It's too heavy," a health care executive from Palo Alto, Sharad Patel, grumbled as his son loaded two sacks of the Basmati into a shopping cart. "We only need one bag but I'm getting two in case a neighbor or a friend needs it," the elder man said.

The Patels seemed headed for disappointment, as most Costco members were being allowed to buy only one bag. Moments earlier, a clerk dropped two sacks back on the stack after taking them from another customer who tried to exceed the one-bag cap.

"Due to the limited availability of rice, we are limiting rice purchases based on your prior purchasing history," a sign above the dwindling supply said.

[SNIP]

An employee at the Costco store in Queens said there were no restrictions on rice buying, but limits were being imposed on purchases of oil and flour. Internet postings attributed some of the shortage at the retail level to bakery owners who flocked to warehouse stores when the price of flour from commercial suppliers doubled.

[SNIP]

The curbs and shortages are being tracked with concern by survivalists who view the phenomenon as a harbinger of more serious trouble to come.

"It's sporadic. It's not every store, but it's becoming more commonplace," the editor of SurvivalBlog.com, James Rawles, said. "The number of reports I've been getting from readers who have seen signs posted with limits has increased almost exponentially, I'd say in the last three to five weeks."

But here's the part that really gets me. We've got the same dynamic working as with gasoline. This reminds me so much of our little fake gas scare & mania here in Atlanta that I documented back in 2005, post-Katrina -- when gas rose from sub $3 to over $5 in a matter of hours:

"There have been so many stories about worldwide shortages that it encourages people to stock up. What most people don't realize is that supply chains have changed, so inventories are very short," Mr. Rawles, a former Army intelligence officer, said. "Even if people increased their purchasing by 20%, all the store shelves would be wiped out."

[SNIP]

An anonymous high-tech professional writing on an investment Web site, Seeking Alpha, said he recently bought 10 50-pound bags of rice at Costco. "I am concerned that when the news of rice shortage spreads, there will be panic buying and the shelves will be empty in no time. I do not intend to cause a panic, and I am not speculating on rice to make profit. I am just hoarding some for my own consumption," he wrote.

Ah, the old I'll just panic before everybody else panics solution! As Duru & I say to each other almost daily, "we live in interesting times". Now where are those food ETFs trading...

Here's a good interview with Barry Ritholtz from Friday's WallStrip Chat:

The Chairman posted a link to an article about a "bank run" on Countrywide Financial Corp. (CFC) . I just had to shake my head and laugh after reading that article. I've been watching that company, which happens to hold my mortgage, closely this year. Back in March when the subprime/credit concerns first got serious and just after New Century blew up, I posted this in my links section:

Mortgage Lenders Whistling Past the Sub-Prime Graveyard? -- I just noticed this Countrywide (CFC) ad on my site. I wonder how much longer we'll be seeing these.

Here's the ad I was linking to:

It just seemed incredible to me that Countrywide, the biggest mortgage lender was apparently doing business as usual right after New Century went belly up. Then some weeks later I saw their CEO, Angelo Mozilo, co-hosting Squawk Box. He was all tanned (just off a nice vacation?) and kept talking about how everything was all good for the company despite what was going on in subprime land. I'm pretty sure he even talked about buying back stock (the stock is now about 05 lower). Well the real deal was revealed on July 24th when they released earnings. Here's what Mr. Mozilo had to say:

"This is a huge battleship, and we're headed in the wrong direction," Chief Executive Angelo Mozilo said on an analyst conference call, referring to the housing environment.

He said it may be 2009 before the market recovers from oversupply, stagnant home prices, and increasingly lax lending standards that left many borrowers overstretched.

"Nobody saw this coming," Mozilo, a 54-year mortgage industry veteran, said on the nearly three-hour call.

Nobody saw it coming? Really? I call bullsh*t. A lot of people called it in March if not earlier than that. Anyway, the death spiral in this stock has been simply amazing to watch. I just hope we don't start seeing these bank runs spread to other financial institutions.

P.S. It's interesting to go back and see/hear what was being said about Countywide earlier this year. This CBS News report from May 29th is an example: "Why is Countrywide Financial, one of the country's largest subprime mortgage lenders, doing so well despite the recent lending crisis? Geoff Colvin reports."

PIMCO's Bill Gross covers the Bear Stearns/subprime crisis in his July 2007 investment outlook, which is entitled "Looking for Contagion in All the Wrong Places". Here are some snippets:

Many of these good looking girls are not high-class assets worth 100 cents on the dollar. And sorry Ben, but derivatives are a two-edged sword. Yes, they diversify risk and direct it away from the banking system into the eventual hands of unknown buyers, but they multiply leverage like the Andromeda strain. When interest rates go up, the Petri dish turns from a benign experiment in financial engineering to a destructive virus because the cost of that leverage ultimately reduces the price of assets. Houses anyone?

[SNIP]

Those that point to a crisis averted and a return to normalcy are really looking for contagion in all the wrong places. Because the problem lies not in a Bear Stearns hedge fund that can be papered over with 100 cents on the dollar marks. The flaw resides in the Summerlin suburbs of Las Vegas, Nevada, in the extended city limits of Chicago headed west towards Rockford, and yes, the naked (and empty) rows of multistoried condos in Miami, Florida. The flaw, dear readers, lies in the homes that were financed with cheap and in some cases gratuitous money in 2004, 2005, and 2006. Because while the Bear hedge funds are now primarily history, those millions and millions of homes are not. They’re not going anywhere…except for their mortgages that is. Mortgage payments are going up, up, and up…and so are delinquencies and defaults.

[SNIP]

The right places to look for contagion are therefore not in the white-washed Bear Stearns hedge funds, but in the subprime resets to come and the ultimate effect they will have on the prices of homes – the collateral that’s so critical in this asset-backed, and therefore interest-sensitive financed-based economy of 2007 and beyond. If delinquencies lead to defaults and then to lower home prices, then we have problems and the potential for an extended – not a 27-day Paris Hilton sentence.

[SNIP]

If subprime total losses hit 10% then even some single-A tranches face the grim reaper. AAA’s? Folks the point is that there are hundreds of billions of dollars of this toxic waste and whether or not they’re in CDOs or Bear Stearns hedge funds matters only to the extent of the timing of the unwind. To death and taxes you can add this to your list of inevitabilities: the subprime crisis is not an isolated event and it won’t be contained by a few days of headlines in The New York Times. And it will not remain confined to a neat little Petri dish in some mad financial derivative scientist’s laboratory. Ultimately through capital market arbitrage it will affect risk spreads in markets completely divorced from U.S. housing.

[SNIP]

Importantly, as well, and this point is neglected by most pundits, the willingness to extend credit in other areas – high yield, bank loans, and even certain segments of the AAA asset-backed commercial paper market should feel the cooling Arctic winds of a liquidity constriction.

If not taken too far – and there is no hint yet of a true “crisis” – these developments may be just what the Fed has been looking for: easy credit becoming less easy; excessive liquidity returning to more rational levels. Still, PIMCO looks for the Fed to issue an insurance policy in the form of lower Fed Funds at some point over the next 6 months...

I'm not sure what just caused this air pocket in the market but these note from the Mortgage Bankers Association (MBA) that hit right at noon must have contributed to the slide:

12:02 MBA says U.S. MORTGAGE DELINQUENCY RATE 4.95 PCT IN Q4, UP FROM 4.67 PCT IN Q3 AND FROM 4.70 PCT IN Q4 2005

12:02 MBA says subprime borrowers more vulnerable to higher interest rates, slower home price gains or price drops

12:01 MBA pushes back forecast for housing market to regain footing to end of 2007 vs middle of year

12:01 MBA says delinquency rates rose in 49 states in Q4; foreclosure inventory rates grew in 44 states

12:01 Late payments rise for all loan types but driven mainly by subprime and FHA loans

12:00 According to MBA, Mississippi, Louisiana, Michigan had highest overall late payment rates across all loan types in Q4

12:00 U.S. Mortgage delinquencies, foreclosures rise in Q4 2006 vs prior quarter and year ago, according to MBA

Here's an intraday shot of QQQQ with 15 minute bars. Note the volume on the big drop:

It's carnival time! No, not that carnaval but the much more exciting 9th edition of the Carnival of Investing. For the uninitiated, this carnival consists of recent articles about investing from the blogosphere. Without further ado, here are this week's submissions:

Welcome to week 57 of the Carnival of the Capitalists. This is an exciting weekend for me, yesterday this blog was highlighted in Barron's and today I get to host the carnival. I encourage all of my new visitors to visit the blogs listed below. You may be surprised at the high quality of writing being done in the blogosphere.

As usual there are a lot of good articles submitted by bloggers on a variety of topics. I didn't even attempt to categorize the articles, as many of them cross multiple topics. I did do a quick sorting of them, so the list below generally flows in this order: entrepreneurship, business, technology, blogging, marketing, internet, financial markets, economy and taxes. Enjoy...

Earlier this morning I watched a short film that I TiVo'd the other day. It's a profile of a the South China Mall in Dongguan, China which is twice the size of the Mall of America. The problem is that the geniuses who developed the mall built it in the middle of nowhere. There are no freeways nearby, nor is there an airport. I guess they thought "build it and they will come" but it didn't work out that way. For the first minute or so that i was watching it I thought the mall was still under construction. But it had actually been open for a while. (I'm late to this story. The mall was opened in 2005 and I think this film was shot in 2008.) What's more, a government funded group bought the property from the previous owners in order to save it from bankruptcy. Hmm, a government funded bailout. Why does that sound familiar?

Here's a link to the video -- Utopia, Part 3: The World's Largest Shopping Mall. There's also an interview with the filmmaker.

P.S. This also reminds me of a photo essay on Dubai that I recently saw in Fast Company magazine. Ah, such folly.

If, like me, you missed I.O.U.S.A. during its theatrical run you can now watch the condensed, 30 minute version online:

By now, you may have heard about our acclaimed documentary I.O.U.S.A., a film that boldly examines the rapidly growing national debt and its consequences for the United States and its citizens. The film has been a huge hit, getting rave reviews from Roger Ebert and others.

Now, we proudly release a 30-minute condensed version of I.O.U.S.A. designed specifically for watching and sharing on the web - for free.

So if you haven't had a chance to see the movie yet, watch the condensed I.O.U.S.A. today. If you've already seen it in a theater, check out the abbreviated version for a refresher. Then, tell your friends, your family, your Facebook friends and your Twitter followers about the staggering amount of money - $53 trillion - in financial obligations owed by the federal government to foreign investors and to every single American in the form of pensions, health benefits, Social Security and Medicare.

Then, visit http://www.IOUSAtheMovie.com and join us in our Fiscal Wake-Up Movement. Together, we can make American fiscal responsibility a reality.

A comment by Andrew on Barry's post about the SEC wanting to ban all short selling sent me to my copy of Michael Panzner's book Financial Armageddon. Andrew stated that "tonight's event draws me to the last paragraph of ch.7 in Michael Panzer's Financial Armageddon". When I read that paragraph I was reminded of how I felt while reading the book back in March 2007. The scenarios that Panzner laid out were nothing short of chilling. I kept wondering if he really believed all those dire things would actually happen or if they were just a worst case scenario. In flipping through a few chapters tonight it's scary to see just how much of what Panzner wrote has come to pass. Here are the last two paragraph from chapter 7 ("Depression") which Andrew was talking about (hopefully Michael won't mind me posting so much of his text):

Eventually, with a decades-long orgy of credit expansion unraveling fast; the meltdown of stock, bond, commodity, and other markets; a cratering economy; and more of the nation's largest financial institutions precariously on the edge, the Federal Reserve and Washington as a whole will have reached a critical juncture. There will be widespread pressure, bordering perhaps on hysteria, for somebody, somewhere to take action and stem the rapidly rising tide of disaster.

Only then, after being unwilling to react quickly and forcefully enough early on, the Federal Reserve will abruptly shift gears, no longer fearing the consequences of an aggressive monetary response. In a sense, they will have nothing to lose. With immediate effect, they will give up their self-imposed yoke of restraint and move wholeheartedly into money-creation mode. That will mark the beginning of the second phase of the great unraveling.

Sound familiar? Here's some more from Chapter 6 ("Systemic Crisis")

No doubt a systemic meltdown will provoke a similar response. For the financial system and the markets, however, the fallout will likely be worse than any downturn in many decades, owing to a unique combination of modern developments and incendiary circumstances. The explosive growth of derivatives trading and leveraged hedge fund investing, hidden behind a shroud of lightly regulated secrecy, means that few people will have a handle on where dangerous risk is concentrated or overall levels of exposure -- not until it's too late...

-SNIP-

Simply put, people will find it difficult to react in timely, logical or focused fashion to the unfolding calamity...

-SNIP-

Despite increased levels of sophistication and the broad use of modern risk management systems, no one can be sure how new or exotic instruments and markets will behave when conditions take an ominous turn. The sheer scale of the unfolding financial crisis—in terms of the number of participants, firms, regulators, products, countries, and markets—will make it difficult to penetrate the problems...

-SNIP-

This time, however, a vast and efficient global communications network will ensure that destructive energies are rapidly transmitted to billions of people. So, too, will trading technology that facilitates and encourages traders and investors to act on their impulses. Many will find it too easy to shoot first -- or point and click -- and ask questions later in a 21st-century rush for the exits.. Not only will the fastest or sharpest operators look to get out. Firms that have come to depend on leverage, including hedge funds, brokers, and even banks, will also face immediate and rapidly growing pressure to scale back positions because of demands for additional cash collateral or reduced access to financing. Meanwhile, those who still have the wherewithal to initiate fresh positions or act independently will look to dive in and take advantage of the stampede.

-SNIP-

A constant global ripple effect will occur as positions are adjusted to take account of risk management strategies or cash-raising demands. The widespread use of flawed models will further aggravate the situation.

-SNIP-

By the time the systemic crisis is full-blown, there will almost certainly have been a domino-like collapse of more than a few large intermediaries and allegedly sophisticated global financial firms, including hedge funds, insurers, and brokers. As the number of failures grows, concerns over counterparty risk will take center stage. Lenders, investors, and risk managers will fret and gossip about which institution is next. Worries about fraud and chicanery will boost anxiety to a fever pitch. Even firms not in dire straits may suddenly find themselves at risk. In times of upheaval, a lack of information and concern about the ability of others to manage their exposure often spurs a self-fulfilling prophecy, where idle chatter alone leads to institutions being squeezed or cut off—just when they need access to financing most.

-SNIP-

Few areas of the financial system will be unaffected when the meltdown rages. In the insurance sector, for example, debt downgrades and defaults will occur at a quickening pace... At least some of the $2 trillion held in money market funds will anxiously flee to safer pastures as the prices of one or more pools fall below par -- "breaks the buck" -- because of shaky markets and holdings that turn out to be much riskier than expected.

Pretty much all of this has taken place over the last few weeks. Kudos to Michael Panzner for nailing all of this. And somehow I still have hope that much of the other stuff in the book is worst case scenario and won't come to pass. But I'm losing hope by the day.

I've long wondered how long current supplies of all kinds of commodities (natural resources) will last given how rapacious humans (especially Westerners) can be. After watching 'Human Footprint' on National Geographic Channel last week I was more convinced than ever that I needed to be long every conceivable hard commodity and probably most of the soft ones too! :-) Today I got wind of another article about food shortages, except this one isn't about some "developing" country, it's about shortages & rationing right here in the U.S.A. Some snippets:

MOUNTAIN VIEW, Calif. — Many parts of America, long considered the breadbasket of the world, are now confronting a once unthinkable phenomenon: food rationing. Major retailers in New York, in areas of New England, and on the West Coast are limiting purchases of flour, rice, and cooking oil as demand outstrips supply. There are also anecdotal reports that some consumers are hoarding grain stocks.

At a Costco Warehouse in Mountain View, Calif., yesterday, shoppers grew frustrated and occasionally uttered expletives as they searched in vain for the large sacks of rice they usually buy.

"Where's the rice?" an engineer from Palo Alto, Calif., Yajun Liu, said. "You should be able to buy something like rice. This is ridiculous."

[SNIP]

"You can't eat this every day. It's too heavy," a health care executive from Palo Alto, Sharad Patel, grumbled as his son loaded two sacks of the Basmati into a shopping cart. "We only need one bag but I'm getting two in case a neighbor or a friend needs it," the elder man said.

The Patels seemed headed for disappointment, as most Costco members were being allowed to buy only one bag. Moments earlier, a clerk dropped two sacks back on the stack after taking them from another customer who tried to exceed the one-bag cap.

"Due to the limited availability of rice, we are limiting rice purchases based on your prior purchasing history," a sign above the dwindling supply said.

[SNIP]

An employee at the Costco store in Queens said there were no restrictions on rice buying, but limits were being imposed on purchases of oil and flour. Internet postings attributed some of the shortage at the retail level to bakery owners who flocked to warehouse stores when the price of flour from commercial suppliers doubled.

[SNIP]

The curbs and shortages are being tracked with concern by survivalists who view the phenomenon as a harbinger of more serious trouble to come.

"It's sporadic. It's not every store, but it's becoming more commonplace," the editor of SurvivalBlog.com, James Rawles, said. "The number of reports I've been getting from readers who have seen signs posted with limits has increased almost exponentially, I'd say in the last three to five weeks."

But here's the part that really gets me. We've got the same dynamic working as with gasoline. This reminds me so much of our little fake gas scare & mania here in Atlanta that I documented back in 2005, post-Katrina -- when gas rose from sub $3 to over $5 in a matter of hours:

"There have been so many stories about worldwide shortages that it encourages people to stock up. What most people don't realize is that supply chains have changed, so inventories are very short," Mr. Rawles, a former Army intelligence officer, said. "Even if people increased their purchasing by 20%, all the store shelves would be wiped out."

[SNIP]

An anonymous high-tech professional writing on an investment Web site, Seeking Alpha, said he recently bought 10 50-pound bags of rice at Costco. "I am concerned that when the news of rice shortage spreads, there will be panic buying and the shelves will be empty in no time. I do not intend to cause a panic, and I am not speculating on rice to make profit. I am just hoarding some for my own consumption," he wrote.

Ah, the old I'll just panic before everybody else panics solution! As Duru & I say to each other almost daily, "we live in interesting times". Now where are those food ETFs trading...

Here's a good interview with Barry Ritholtz from Friday's WallStrip Chat:

The Chairman posted a link to an article about a "bank run" on Countrywide Financial Corp. (CFC) . I just had to shake my head and laugh after reading that article. I've been watching that company, which happens to hold my mortgage, closely this year. Back in March when the subprime/credit concerns first got serious and just after New Century blew up, I posted this in my links section:

Mortgage Lenders Whistling Past the Sub-Prime Graveyard? -- I just noticed this Countrywide (CFC) ad on my site. I wonder how much longer we'll be seeing these.

Here's the ad I was linking to:

It just seemed incredible to me that Countrywide, the biggest mortgage lender was apparently doing business as usual right after New Century went belly up. Then some weeks later I saw their CEO, Angelo Mozilo, co-hosting Squawk Box. He was all tanned (just off a nice vacation?) and kept talking about how everything was all good for the company despite what was going on in subprime land. I'm pretty sure he even talked about buying back stock (the stock is now about 05 lower). Well the real deal was revealed on July 24th when they released earnings. Here's what Mr. Mozilo had to say:

"This is a huge battleship, and we're headed in the wrong direction," Chief Executive Angelo Mozilo said on an analyst conference call, referring to the housing environment.

He said it may be 2009 before the market recovers from oversupply, stagnant home prices, and increasingly lax lending standards that left many borrowers overstretched.

"Nobody saw this coming," Mozilo, a 54-year mortgage industry veteran, said on the nearly three-hour call.

Nobody saw it coming? Really? I call bullsh*t. A lot of people called it in March if not earlier than that. Anyway, the death spiral in this stock has been simply amazing to watch. I just hope we don't start seeing these bank runs spread to other financial institutions.

P.S. It's interesting to go back and see/hear what was being said about Countywide earlier this year. This CBS News report from May 29th is an example: "Why is Countrywide Financial, one of the country's largest subprime mortgage lenders, doing so well despite the recent lending crisis? Geoff Colvin reports."

PIMCO's Bill Gross covers the Bear Stearns/subprime crisis in his July 2007 investment outlook, which is entitled "Looking for Contagion in All the Wrong Places". Here are some snippets:

Many of these good looking girls are not high-class assets worth 100 cents on the dollar. And sorry Ben, but derivatives are a two-edged sword. Yes, they diversify risk and direct it away from the banking system into the eventual hands of unknown buyers, but they multiply leverage like the Andromeda strain. When interest rates go up, the Petri dish turns from a benign experiment in financial engineering to a destructive virus because the cost of that leverage ultimately reduces the price of assets. Houses anyone?

[SNIP]

Those that point to a crisis averted and a return to normalcy are really looking for contagion in all the wrong places. Because the problem lies not in a Bear Stearns hedge fund that can be papered over with 100 cents on the dollar marks. The flaw resides in the Summerlin suburbs of Las Vegas, Nevada, in the extended city limits of Chicago headed west towards Rockford, and yes, the naked (and empty) rows of multistoried condos in Miami, Florida. The flaw, dear readers, lies in the homes that were financed with cheap and in some cases gratuitous money in 2004, 2005, and 2006. Because while the Bear hedge funds are now primarily history, those millions and millions of homes are not. They’re not going anywhere…except for their mortgages that is. Mortgage payments are going up, up, and up…and so are delinquencies and defaults.

[SNIP]

The right places to look for contagion are therefore not in the white-washed Bear Stearns hedge funds, but in the subprime resets to come and the ultimate effect they will have on the prices of homes – the collateral that’s so critical in this asset-backed, and therefore interest-sensitive financed-based economy of 2007 and beyond. If delinquencies lead to defaults and then to lower home prices, then we have problems and the potential for an extended – not a 27-day Paris Hilton sentence.

[SNIP]

If subprime total losses hit 10% then even some single-A tranches face the grim reaper. AAA’s? Folks the point is that there are hundreds of billions of dollars of this toxic waste and whether or not they’re in CDOs or Bear Stearns hedge funds matters only to the extent of the timing of the unwind. To death and taxes you can add this to your list of inevitabilities: the subprime crisis is not an isolated event and it won’t be contained by a few days of headlines in The New York Times. And it will not remain confined to a neat little Petri dish in some mad financial derivative scientist’s laboratory. Ultimately through capital market arbitrage it will affect risk spreads in markets completely divorced from U.S. housing.

[SNIP]

Importantly, as well, and this point is neglected by most pundits, the willingness to extend credit in other areas – high yield, bank loans, and even certain segments of the AAA asset-backed commercial paper market should feel the cooling Arctic winds of a liquidity constriction.

If not taken too far – and there is no hint yet of a true “crisis” – these developments may be just what the Fed has been looking for: easy credit becoming less easy; excessive liquidity returning to more rational levels. Still, PIMCO looks for the Fed to issue an insurance policy in the form of lower Fed Funds at some point over the next 6 months...

I'm not sure what just caused this air pocket in the market but these note from the Mortgage Bankers Association (MBA) that hit right at noon must have contributed to the slide:

12:02 MBA says U.S. MORTGAGE DELINQUENCY RATE 4.95 PCT IN Q4, UP FROM 4.67 PCT IN Q3 AND FROM 4.70 PCT IN Q4 2005

12:02 MBA says subprime borrowers more vulnerable to higher interest rates, slower home price gains or price drops

12:01 MBA pushes back forecast for housing market to regain footing to end of 2007 vs middle of year

12:01 MBA says delinquency rates rose in 49 states in Q4; foreclosure inventory rates grew in 44 states

12:01 Late payments rise for all loan types but driven mainly by subprime and FHA loans

12:00 According to MBA, Mississippi, Louisiana, Michigan had highest overall late payment rates across all loan types in Q4

12:00 U.S. Mortgage delinquencies, foreclosures rise in Q4 2006 vs prior quarter and year ago, according to MBA

Here's an intraday shot of QQQQ with 15 minute bars. Note the volume on the big drop:

It's carnival time! No, not that carnaval but the much more exciting 9th edition of the Carnival of Investing. For the uninitiated, this carnival consists of recent articles about investing from the blogosphere. Without further ado, here are this week's submissions:

Welcome to week 57 of the Carnival of the Capitalists. This is an exciting weekend for me, yesterday this blog was highlighted in Barron's and today I get to host the carnival. I encourage all of my new visitors to visit the blogs listed below. You may be surprised at the high quality of writing being done in the blogosphere.

As usual there are a lot of good articles submitted by bloggers on a variety of topics. I didn't even attempt to categorize the articles, as many of them cross multiple topics. I did do a quick sorting of them, so the list below generally flows in this order: entrepreneurship, business, technology, blogging, marketing, internet, financial markets, economy and taxes. Enjoy...

Earlier this morning I watched a short film that I TiVo'd the other day. It's a profile of a the South China Mall in Dongguan, China which is twice the size of the Mall of America. The problem is that the geniuses who developed the mall built it in the middle of nowhere. There are no freeways nearby, nor is there an airport. I guess they thought "build it and they will come" but it didn't work out that way. For the first minute or so that i was watching it I thought the mall was still under construction. But it had actually been open for a while. (I'm late to this story. The mall was opened in 2005 and I think this film was shot in 2008.) What's more, a government funded group bought the property from the previous owners in order to save it from bankruptcy. Hmm, a government funded bailout. Why does that sound familiar?

Here's a link to the video -- Utopia, Part 3: The World's Largest Shopping Mall. There's also an interview with the filmmaker.

P.S. This also reminds me of a photo essay on Dubai that I recently saw in Fast Company magazine. Ah, such folly.

If, like me, you missed I.O.U.S.A. during its theatrical run you can now watch the condensed, 30 minute version online:

By now, you may have heard about our acclaimed documentary I.O.U.S.A., a film that boldly examines the rapidly growing national debt and its consequences for the United States and its citizens. The film has been a huge hit, getting rave reviews from Roger Ebert and others.

Now, we proudly release a 30-minute condensed version of I.O.U.S.A. designed specifically for watching and sharing on the web - for free.

So if you haven't had a chance to see the movie yet, watch the condensed I.O.U.S.A. today. If you've already seen it in a theater, check out the abbreviated version for a refresher. Then, tell your friends, your family, your Facebook friends and your Twitter followers about the staggering amount of money - $53 trillion - in financial obligations owed by the federal government to foreign investors and to every single American in the form of pensions, health benefits, Social Security and Medicare.

Then, visit http://www.IOUSAtheMovie.com and join us in our Fiscal Wake-Up Movement. Together, we can make American fiscal responsibility a reality.

A comment by Andrew on Barry's post about the SEC wanting to ban all short selling sent me to my copy of Michael Panzner's book Financial Armageddon. Andrew stated that "tonight's event draws me to the last paragraph of ch.7 in Michael Panzer's Financial Armageddon". When I read that paragraph I was reminded of how I felt while reading the book back in March 2007. The scenarios that Panzner laid out were nothing short of chilling. I kept wondering if he really believed all those dire things would actually happen or if they were just a worst case scenario. In flipping through a few chapters tonight it's scary to see just how much of what Panzner wrote has come to pass. Here are the last two paragraph from chapter 7 ("Depression") which Andrew was talking about (hopefully Michael won't mind me posting so much of his text):

Eventually, with a decades-long orgy of credit expansion unraveling fast; the meltdown of stock, bond, commodity, and other markets; a cratering economy; and more of the nation's largest financial institutions precariously on the edge, the Federal Reserve and Washington as a whole will have reached a critical juncture. There will be widespread pressure, bordering perhaps on hysteria, for somebody, somewhere to take action and stem the rapidly rising tide of disaster.

Only then, after being unwilling to react quickly and forcefully enough early on, the Federal Reserve will abruptly shift gears, no longer fearing the consequences of an aggressive monetary response. In a sense, they will have nothing to lose. With immediate effect, they will give up their self-imposed yoke of restraint and move wholeheartedly into money-creation mode. That will mark the beginning of the second phase of the great unraveling.

Sound familiar? Here's some more from Chapter 6 ("Systemic Crisis")

No doubt a systemic meltdown will provoke a similar response. For the financial system and the markets, however, the fallout will likely be worse than any downturn in many decades, owing to a unique combination of modern developments and incendiary circumstances. The explosive growth of derivatives trading and leveraged hedge fund investing, hidden behind a shroud of lightly regulated secrecy, means that few people will have a handle on where dangerous risk is concentrated or overall levels of exposure -- not until it's too late...

-SNIP-

Simply put, people will find it difficult to react in timely, logical or focused fashion to the unfolding calamity...

-SNIP-

Despite increased levels of sophistication and the broad use of modern risk management systems, no one can be sure how new or exotic instruments and markets will behave when conditions take an ominous turn. The sheer scale of the unfolding financial crisis—in terms of the number of participants, firms, regulators, products, countries, and markets—will make it difficult to penetrate the problems...

-SNIP-

This time, however, a vast and efficient global communications network will ensure that destructive energies are rapidly transmitted to billions of people. So, too, will trading technology that facilitates and encourages traders and investors to act on their impulses. Many will find it too easy to shoot first -- or point and click -- and ask questions later in a 21st-century rush for the exits.. Not only will the fastest or sharpest operators look to get out. Firms that have come to depend on leverage, including hedge funds, brokers, and even banks, will also face immediate and rapidly growing pressure to scale back positions because of demands for additional cash collateral or reduced access to financing. Meanwhile, those who still have the wherewithal to initiate fresh positions or act independently will look to dive in and take advantage of the stampede.

-SNIP-

A constant global ripple effect will occur as positions are adjusted to take account of risk management strategies or cash-raising demands. The widespread use of flawed models will further aggravate the situation.

-SNIP-

By the time the systemic crisis is full-blown, there will almost certainly have been a domino-like collapse of more than a few large intermediaries and allegedly sophisticated global financial firms, including hedge funds, insurers, and brokers. As the number of failures grows, concerns over counterparty risk will take center stage. Lenders, investors, and risk managers will fret and gossip about which institution is next. Worries about fraud and chicanery will boost anxiety to a fever pitch. Even firms not in dire straits may suddenly find themselves at risk. In times of upheaval, a lack of information and concern about the ability of others to manage their exposure often spurs a self-fulfilling prophecy, where idle chatter alone leads to institutions being squeezed or cut off—just when they need access to financing most.

-SNIP-

Few areas of the financial system will be unaffected when the meltdown rages. In the insurance sector, for example, debt downgrades and defaults will occur at a quickening pace... At least some of the $2 trillion held in money market funds will anxiously flee to safer pastures as the prices of one or more pools fall below par -- "breaks the buck" -- because of shaky markets and holdings that turn out to be much riskier than expected.

Pretty much all of this has taken place over the last few weeks. Kudos to Michael Panzner for nailing all of this. And somehow I still have hope that much of the other stuff in the book is worst case scenario and won't come to pass. But I'm losing hope by the day.

I've long wondered how long current supplies of all kinds of commodities (natural resources) will last given how rapacious humans (especially Westerners) can be. After watching 'Human Footprint' on National Geographic Channel last week I was more convinced than ever that I needed to be long every conceivable hard commodity and probably most of the soft ones too! :-) Today I got wind of another article about food shortages, except this one isn't about some "developing" country, it's about shortages & rationing right here in the U.S.A. Some snippets:

MOUNTAIN VIEW, Calif. — Many parts of America, long considered the breadbasket of the world, are now confronting a once unthinkable phenomenon: food rationing. Major retailers in New York, in areas of New England, and on the West Coast are limiting purchases of flour, rice, and cooking oil as demand outstrips supply. There are also anecdotal reports that some consumers are hoarding grain stocks.

At a Costco Warehouse in Mountain View, Calif., yesterday, shoppers grew frustrated and occasionally uttered expletives as they searched in vain for the large sacks of rice they usually buy.

"Where's the rice?" an engineer from Palo Alto, Calif., Yajun Liu, said. "You should be able to buy something like rice. This is ridiculous."

[SNIP]

"You can't eat this every day. It's too heavy," a health care executive from Palo Alto, Sharad Patel, grumbled as his son loaded two sacks of the Basmati into a shopping cart. "We only need one bag but I'm getting two in case a neighbor or a friend needs it," the elder man said.

The Patels seemed headed for disappointment, as most Costco members were being allowed to buy only one bag. Moments earlier, a clerk dropped two sacks back on the stack after taking them from another customer who tried to exceed the one-bag cap.

"Due to the limited availability of rice, we are limiting rice purchases based on your prior purchasing history," a sign above the dwindling supply said.

[SNIP]

An employee at the Costco store in Queens said there were no restrictions on rice buying, but limits were being imposed on purchases of oil and flour. Internet postings attributed some of the shortage at the retail level to bakery owners who flocked to warehouse stores when the price of flour from commercial suppliers doubled.

[SNIP]

The curbs and shortages are being tracked with concern by survivalists who view the phenomenon as a harbinger of more serious trouble to come.

"It's sporadic. It's not every store, but it's becoming more commonplace," the editor of SurvivalBlog.com, James Rawles, said. "The number of reports I've been getting from readers who have seen signs posted with limits has increased almost exponentially, I'd say in the last three to five weeks."

But here's the part that really gets me. We've got the same dynamic working as with gasoline. This reminds me so much of our little fake gas scare & mania here in Atlanta that I documented back in 2005, post-Katrina -- when gas rose from sub $3 to over $5 in a matter of hours:

"There have been so many stories about worldwide shortages that it encourages people to stock up. What most people don't realize is that supply chains have changed, so inventories are very short," Mr. Rawles, a former Army intelligence officer, said. "Even if people increased their purchasing by 20%, all the store shelves would be wiped out."

[SNIP]

An anonymous high-tech professional writing on an investment Web site, Seeking Alpha, said he recently bought 10 50-pound bags of rice at Costco. "I am concerned that when the news of rice shortage spreads, there will be panic buying and the shelves will be empty in no time. I do not intend to cause a panic, and I am not speculating on rice to make profit. I am just hoarding some for my own consumption," he wrote.

Ah, the old I'll just panic before everybody else panics solution! As Duru & I say to each other almost daily, "we live in interesting times". Now where are those food ETFs trading...

Here's a good interview with Barry Ritholtz from Friday's WallStrip Chat:

The Chairman posted a link to an article about a "bank run" on Countrywide Financial Corp. (CFC) . I just had to shake my head and laugh after reading that article. I've been watching that company, which happens to hold my mortgage, closely this year. Back in March when the subprime/credit concerns first got serious and just after New Century blew up, I posted this in my links section:

Mortgage Lenders Whistling Past the Sub-Prime Graveyard? -- I just noticed this Countrywide (CFC) ad on my site. I wonder how much longer we'll be seeing these.

Here's the ad I was linking to:

It just seemed incredible to me that Countrywide, the biggest mortgage lender was apparently doing business as usual right after New Century went belly up. Then some weeks later I saw their CEO, Angelo Mozilo, co-hosting Squawk Box. He was all tanned (just off a nice vacation?) and kept talking about how everything was all good for the company despite what was going on in subprime land. I'm pretty sure he even talked about buying back stock (the stock is now about 05 lower). Well the real deal was revealed on July 24th when they released earnings. Here's what Mr. Mozilo had to say:

"This is a huge battleship, and we're headed in the wrong direction," Chief Executive Angelo Mozilo said on an analyst conference call, referring to the housing environment.

He said it may be 2009 before the market recovers from oversupply, stagnant home prices, and increasingly lax lending standards that left many borrowers overstretched.

"Nobody saw this coming," Mozilo, a 54-year mortgage industry veteran, said on the nearly three-hour call.

Nobody saw it coming? Really? I call bullsh*t. A lot of people called it in March if not earlier than that. Anyway, the death spiral in this stock has been simply amazing to watch. I just hope we don't start seeing these bank runs spread to other financial institutions.

P.S. It's interesting to go back and see/hear what was being said about Countywide earlier this year. This CBS News report from May 29th is an example: "Why is Countrywide Financial, one of the country's largest subprime mortgage lenders, doing so well despite the recent lending crisis? Geoff Colvin reports."

PIMCO's Bill Gross covers the Bear Stearns/subprime crisis in his July 2007 investment outlook, which is entitled "Looking for Contagion in All the Wrong Places". Here are some snippets:

Many of these good looking girls are not high-class assets worth 100 cents on the dollar. And sorry Ben, but derivatives are a two-edged sword. Yes, they diversify risk and direct it away from the banking system into the eventual hands of unknown buyers, but they multiply leverage like the Andromeda strain. When interest rates go up, the Petri dish turns from a benign experiment in financial engineering to a destructive virus because the cost of that leverage ultimately reduces the price of assets. Houses anyone?

[SNIP]

Those that point to a crisis averted and a return to normalcy are really looking for contagion in all the wrong places. Because the problem lies not in a Bear Stearns hedge fund that can be papered over with 100 cents on the dollar marks. The flaw resides in the Summerlin suburbs of Las Vegas, Nevada, in the extended city limits of Chicago headed west towards Rockford, and yes, the naked (and empty) rows of multistoried condos in Miami, Florida. The flaw, dear readers, lies in the homes that were financed with cheap and in some cases gratuitous money in 2004, 2005, and 2006. Because while the Bear hedge funds are now primarily history, those millions and millions of homes are not. They’re not going anywhere…except for their mortgages that is. Mortgage payments are going up, up, and up…and so are delinquencies and defaults.

[SNIP]

The right places to look for contagion are therefore not in the white-washed Bear Stearns hedge funds, but in the subprime resets to come and the ultimate effect they will have on the prices of homes – the collateral that’s so critical in this asset-backed, and therefore interest-sensitive financed-based economy of 2007 and beyond. If delinquencies lead to defaults and then to lower home prices, then we have problems and the potential for an extended – not a 27-day Paris Hilton sentence.

[SNIP]

If subprime total losses hit 10% then even some single-A tranches face the grim reaper. AAA’s? Folks the point is that there are hundreds of billions of dollars of this toxic waste and whether or not they’re in CDOs or Bear Stearns hedge funds matters only to the extent of the timing of the unwind. To death and taxes you can add this to your list of inevitabilities: the subprime crisis is not an isolated event and it won’t be contained by a few days of headlines in The New York Times. And it will not remain confined to a neat little Petri dish in some mad financial derivative scientist’s laboratory. Ultimately through capital market arbitrage it will affect risk spreads in markets completely divorced from U.S. housing.

[SNIP]

Importantly, as well, and this point is neglected by most pundits, the willingness to extend credit in other areas – high yield, bank loans, and even certain segments of the AAA asset-backed commercial paper market should feel the cooling Arctic winds of a liquidity constriction.

If not taken too far – and there is no hint yet of a true “crisis” – these developments may be just what the Fed has been looking for: easy credit becoming less easy; excessive liquidity returning to more rational levels. Still, PIMCO looks for the Fed to issue an insurance policy in the form of lower Fed Funds at some point over the next 6 months...

I'm not sure what just caused this air pocket in the market but these note from the Mortgage Bankers Association (MBA) that hit right at noon must have contributed to the slide:

12:02 MBA says U.S. MORTGAGE DELINQUENCY RATE 4.95 PCT IN Q4, UP FROM 4.67 PCT IN Q3 AND FROM 4.70 PCT IN Q4 2005

12:02 MBA says subprime borrowers more vulnerable to higher interest rates, slower home price gains or price drops

12:01 MBA pushes back forecast for housing market to regain footing to end of 2007 vs middle of year

12:01 MBA says delinquency rates rose in 49 states in Q4; foreclosure inventory rates grew in 44 states

12:01 Late payments rise for all loan types but driven mainly by subprime and FHA loans

12:00 According to MBA, Mississippi, Louisiana, Michigan had highest overall late payment rates across all loan types in Q4

12:00 U.S. Mortgage delinquencies, foreclosures rise in Q4 2006 vs prior quarter and year ago, according to MBA

Here's an intraday shot of QQQQ with 15 minute bars. Note the volume on the big drop:

It's carnival time! No, not that carnaval but the much more exciting 9th edition of the Carnival of Investing. For the uninitiated, this carnival consists of recent articles about investing from the blogosphere. Without further ado, here are this week's submissions:

Welcome to week 57 of the Carnival of the Capitalists. This is an exciting weekend for me, yesterday this blog was highlighted in Barron's and today I get to host the carnival. I encourage all of my new visitors to visit the blogs listed below. You may be surprised at the high quality of writing being done in the blogosphere.

As usual there are a lot of good articles submitted by bloggers on a variety of topics. I didn't even attempt to categorize the articles, as many of them cross multiple topics. I did do a quick sorting of them, so the list below generally flows in this order: entrepreneurship, business, technology, blogging, marketing, internet, financial markets, economy and taxes. Enjoy...

Earlier this morning I watched a short film that I TiVo'd the other day. It's a profile of a the South China Mall in Dongguan, China which is twice the size of the Mall of America. The problem is that the geniuses who developed the mall built it in the middle of nowhere. There are no freeways nearby, nor is there an airport. I guess they thought "build it and they will come" but it didn't work out that way. For the first minute or so that i was watching it I thought the mall was still under construction. But it had actually been open for a while. (I'm late to this story. The mall was opened in 2005 and I think this film was shot in 2008.) What's more, a government funded group bought the property from the previous owners in order to save it from bankruptcy. Hmm, a government funded bailout. Why does that sound familiar?

Here's a link to the video -- Utopia, Part 3: The World's Largest Shopping Mall. There's also an interview with the filmmaker.

P.S. This also reminds me of a photo essay on Dubai that I recently saw in Fast Company magazine. Ah, such folly.

If, like me, you missed I.O.U.S.A. during its theatrical run you can now watch the condensed, 30 minute version online:

By now, you may have heard about our acclaimed documentary I.O.U.S.A., a film that boldly examines the rapidly growing national debt and its consequences for the United States and its citizens. The film has been a huge hit, getting rave reviews from Roger Ebert and others.

Now, we proudly release a 30-minute condensed version of I.O.U.S.A. designed specifically for watching and sharing on the web - for free.

So if you haven't had a chance to see the movie yet, watch the condensed I.O.U.S.A. today. If you've already seen it in a theater, check out the abbreviated version for a refresher. Then, tell your friends, your family, your Facebook friends and your Twitter followers about the staggering amount of money - $53 trillion - in financial obligations owed by the federal government to foreign investors and to every single American in the form of pensions, health benefits, Social Security and Medicare.

Then, visit http://www.IOUSAtheMovie.com and join us in our Fiscal Wake-Up Movement. Together, we can make American fiscal responsibility a reality.

A comment by Andrew on Barry's post about the SEC wanting to ban all short selling sent me to my copy of Michael Panzner's book Financial Armageddon. Andrew stated that "tonight's event draws me to the last paragraph of ch.7 in Michael Panzer's Financial Armageddon". When I read that paragraph I was reminded of how I felt while reading the book back in March 2007. The scenarios that Panzner laid out were nothing short of chilling. I kept wondering if he really believed all those dire things would actually happen or if they were just a worst case scenario. In flipping through a few chapters tonight it's scary to see just how much of what Panzner wrote has come to pass. Here are the last two paragraph from chapter 7 ("Depression") which Andrew was talking about (hopefully Michael won't mind me posting so much of his text):

Eventually, with a decades-long orgy of credit expansion unraveling fast; the meltdown of stock, bond, commodity, and other markets; a cratering economy; and more of the nation's largest financial institutions precariously on the edge, the Federal Reserve and Washington as a whole will have reached a critical juncture. There will be widespread pressure, bordering perhaps on hysteria, for somebody, somewhere to take action and stem the rapidly rising tide of disaster.

Only then, after being unwilling to react quickly and forcefully enough early on, the Federal Reserve will abruptly shift gears, no longer fearing the consequences of an aggressive monetary response. In a sense, they will have nothing to lose. With immediate effect, they will give up their self-imposed yoke of restraint and move wholeheartedly into money-creation mode. That will mark the beginning of the second phase of the great unraveling.

Sound familiar? Here's some more from Chapter 6 ("Systemic Crisis")

No doubt a systemic meltdown will provoke a similar response. For the financial system and the markets, however, the fallout will likely be worse than any downturn in many decades, owing to a unique combination of modern developments and incendiary circumstances. The explosive growth of derivatives trading and leveraged hedge fund investing, hidden behind a shroud of lightly regulated secrecy, means that few people will have a handle on where dangerous risk is concentrated or overall levels of exposure -- not until it's too late...

-SNIP-

Simply put, people will find it difficult to react in timely, logical or focused fashion to the unfolding calamity...

-SNIP-

Despite increased levels of sophistication and the broad use of modern risk management systems, no one can be sure how new or exotic instruments and markets will behave when conditions take an ominous turn. The sheer scale of the unfolding financial crisis—in terms of the number of participants, firms, regulators, products, countries, and markets—will make it difficult to penetrate the problems...

-SNIP-

This time, however, a vast and efficient global communications network will ensure that destructive energies are rapidly transmitted to billions of people. So, too, will trading technology that facilitates and encourages traders and investors to act on their impulses. Many will find it too easy to shoot first -- or point and click -- and ask questions later in a 21st-century rush for the exits.. Not only will the fastest or sharpest operators look to get out. Firms that have come to depend on leverage, including hedge funds, brokers, and even banks, will also face immediate and rapidly growing pressure to scale back positions because of demands for additional cash collateral or reduced access to financing. Meanwhile, those who still have the wherewithal to initiate fresh positions or act independently will look to dive in and take advantage of the stampede.

-SNIP-

A constant global ripple effect will occur as positions are adjusted to take account of risk management strategies or cash-raising demands. The widespread use of flawed models will further aggravate the situation.

-SNIP-

By the time the systemic crisis is full-blown, there will almost certainly have been a domino-like collapse of more than a few large intermediaries and allegedly sophisticated global financial firms, including hedge funds, insurers, and brokers. As the number of failures grows, concerns over counterparty risk will take center stage. Lenders, investors, and risk managers will fret and gossip about which institution is next. Worries about fraud and chicanery will boost anxiety to a fever pitch. Even firms not in dire straits may suddenly find themselves at risk. In times of upheaval, a lack of information and concern about the ability of others to manage their exposure often spurs a self-fulfilling prophecy, where idle chatter alone leads to institutions being squeezed or cut off—just when they need access to financing most.

-SNIP-

Few areas of the financial system will be unaffected when the meltdown rages. In the insurance sector, for example, debt downgrades and defaults will occur at a quickening pace... At least some of the $2 trillion held in money market funds will anxiously flee to safer pastures as the prices of one or more pools fall below par -- "breaks the buck" -- because of shaky markets and holdings that turn out to be much riskier than expected.

Pretty much all of this has taken place over the last few weeks. Kudos to Michael Panzner for nailing all of this. And somehow I still have hope that much of the other stuff in the book is worst case scenario and won't come to pass. But I'm losing hope by the day.

I've long wondered how long current supplies of all kinds of commodities (natural resources) will last given how rapacious humans (especially Westerners) can be. After watching 'Human Footprint' on National Geographic Channel last week I was more convinced than ever that I needed to be long every conceivable hard commodity and probably most of the soft ones too! :-) Today I got wind of another article about food shortages, except this one isn't about some "developing" country, it's about shortages & rationing right here in the U.S.A. Some snippets:

MOUNTAIN VIEW, Calif. — Many parts of America, long considered the breadbasket of the world, are now confronting a once unthinkable phenomenon: food rationing. Major retailers in New York, in areas of New England, and on the West Coast are limiting purchases of flour, rice, and cooking oil as demand outstrips supply. There are also anecdotal reports that some consumers are hoarding grain stocks.

At a Costco Warehouse in Mountain View, Calif., yesterday, shoppers grew frustrated and occasionally uttered expletives as they searched in vain for the large sacks of rice they usually buy.

"Where's the rice?" an engineer from Palo Alto, Calif., Yajun Liu, said. "You should be able to buy something like rice. This is ridiculous."

[SNIP]

"You can't eat this every day. It's too heavy," a health care executive from Palo Alto, Sharad Patel, grumbled as his son loaded two sacks of the Basmati into a shopping cart. "We only need one bag but I'm getting two in case a neighbor or a friend needs it," the elder man said.

The Patels seemed headed for disappointment, as most Costco members were being allowed to buy only one bag. Moments earlier, a clerk dropped two sacks back on the stack after taking them from another customer who tried to exceed the one-bag cap.

"Due to the limited availability of rice, we are limiting rice purchases based on your prior purchasing history," a sign above the dwindling supply said.

[SNIP]

An employee at the Costco store in Queens said there were no restrictions on rice buying, but limits were being imposed on purchases of oil and flour. Internet postings attributed some of the shortage at the retail level to bakery owners who flocked to warehouse stores when the price of flour from commercial suppliers doubled.

[SNIP]

The curbs and shortages are being tracked with concern by survivalists who view the phenomenon as a harbinger of more serious trouble to come.

"It's sporadic. It's not every store, but it's becoming more commonplace," the editor of SurvivalBlog.com, James Rawles, said. "The number of reports I've been getting from readers who have seen signs posted with limits has increased almost exponentially, I'd say in the last three to five weeks."

But here's the part that really gets me. We've got the same dynamic working as with gasoline. This reminds me so much of our little fake gas scare & mania here in Atlanta that I documented back in 2005, post-Katrina -- when gas rose from sub $3 to over $5 in a matter of hours:

"There have been so many stories about worldwide shortages that it encourages people to stock up. What most people don't realize is that supply chains have changed, so inventories are very short," Mr. Rawles, a former Army intelligence officer, said. "Even if people increased their purchasing by 20%, all the store shelves would be wiped out."

[SNIP]

An anonymous high-tech professional writing on an investment Web site, Seeking Alpha, said he recently bought 10 50-pound bags of rice at Costco. "I am concerned that when the news of rice shortage spreads, there will be panic buying and the shelves will be empty in no time. I do not intend to cause a panic, and I am not speculating on rice to make profit. I am just hoarding some for my own consumption," he wrote.

Ah, the old I'll just panic before everybody else panics solution! As Duru & I say to each other almost daily, "we live in interesting times". Now where are those food ETFs trading...

Here's a good interview with Barry Ritholtz from Friday's WallStrip Chat:

The Chairman posted a link to an article about a "bank run" on Countrywide Financial Corp. (CFC) . I just had to shake my head and laugh after reading that article. I've been watching that company, which happens to hold my mortgage, closely this year. Back in March when the subprime/credit concerns first got serious and just after New Century blew up, I posted this in my links section:

Mortgage Lenders Whistling Past the Sub-Prime Graveyard? -- I just noticed this Countrywide (CFC) ad on my site. I wonder how much longer we'll be seeing these.

Here's the ad I was linking to:

It just seemed incredible to me that Countrywide, the biggest mortgage lender was apparently doing business as usual right after New Century went belly up. Then some weeks later I saw their CEO, Angelo Mozilo, co-hosting Squawk Box. He was all tanned (just off a nice vacation?) and kept talking about how everything was all good for the company despite what was going on in subprime land. I'm pretty sure he even talked about buying back stock (the stock is now about 05 lower). Well the real deal was revealed on July 24th when they released earnings. Here's what Mr. Mozilo had to say:

"This is a huge battleship, and we're headed in the wrong direction," Chief Executive Angelo Mozilo said on an analyst conference call, referring to the housing environment.

He said it may be 2009 before the market recovers from oversupply, stagnant home prices, and increasingly lax lending standards that left many borrowers overstretched.

"Nobody saw this coming," Mozilo, a 54-year mortgage industry veteran, said on the nearly three-hour call.

Nobody saw it coming? Really? I call bullsh*t. A lot of people called it in March if not earlier than that. Anyway, the death spiral in this stock has been simply amazing to watch. I just hope we don't start seeing these bank runs spread to other financial institutions.

P.S. It's interesting to go back and see/hear what was being said about Countywide earlier this year. This CBS News report from May 29th is an example: "Why is Countrywide Financial, one of the country's largest subprime mortgage lenders, doing so well despite the recent lending crisis? Geoff Colvin reports."

PIMCO's Bill Gross covers the Bear Stearns/subprime crisis in his July 2007 investment outlook, which is entitled "Looking for Contagion in All the Wrong Places". Here are some snippets:

Many of these good looking girls are not high-class assets worth 100 cents on the dollar. And sorry Ben, but derivatives are a two-edged sword. Yes, they diversify risk and direct it away from the banking system into the eventual hands of unknown buyers, but they multiply leverage like the Andromeda strain. When interest rates go up, the Petri dish turns from a benign experiment in financial engineering to a destructive virus because the cost of that leverage ultimately reduces the price of assets. Houses anyone?

[SNIP]

Those that point to a crisis averted and a return to normalcy are really looking for contagion in all the wrong places. Because the problem lies not in a Bear Stearns hedge fund that can be papered over with 100 cents on the dollar marks. The flaw resides in the Summerlin suburbs of Las Vegas, Nevada, in the extended city limits of Chicago headed west towards Rockford, and yes, the naked (and empty) rows of multistoried condos in Miami, Florida. The flaw, dear readers, lies in the homes that were financed with cheap and in some cases gratuitous money in 2004, 2005, and 2006. Because while the Bear hedge funds are now primarily history, those millions and millions of homes are not. They’re not going anywhere…except for their mortgages that is. Mortgage payments are going up, up, and up…and so are delinquencies and defaults.

[SNIP]

The right places to look for contagion are therefore not in the white-washed Bear Stearns hedge funds, but in the subprime resets to come and the ultimate effect they will have on the prices of homes – the collateral that’s so critical in this asset-backed, and therefore interest-sensitive financed-based economy of 2007 and beyond. If delinquencies lead to defaults and then to lower home prices, then we have problems and the potential for an extended – not a 27-day Paris Hilton sentence.

[SNIP]

If subprime total losses hit 10% then even some single-A tranches face the grim reaper. AAA’s? Folks the point is that there are hundreds of billions of dollars of this toxic waste and whether or not they’re in CDOs or Bear Stearns hedge funds matters only to the extent of the timing of the unwind. To death and taxes you can add this to your list of inevitabilities: the subprime crisis is not an isolated event and it won’t be contained by a few days of headlines in The New York Times. And it will not remain confined to a neat little Petri dish in some mad financial derivative scientist’s laboratory. Ultimately through capital market arbitrage it will affect risk spreads in markets completely divorced from U.S. housing.

[SNIP]

Importantly, as well, and this point is neglected by most pundits, the willingness to extend credit in other areas – high yield, bank loans, and even certain segments of the AAA asset-backed commercial paper market should feel the cooling Arctic winds of a liquidity constriction.

If not taken too far – and there is no hint yet of a true “crisis” – these developments may be just what the Fed has been looking for: easy credit becoming less easy; excessive liquidity returning to more rational levels. Still, PIMCO looks for the Fed to issue an insurance policy in the form of lower Fed Funds at some point over the next 6 months...

I'm not sure what just caused this air pocket in the market but these note from the Mortgage Bankers Association (MBA) that hit right at noon must have contributed to the slide:

12:02 MBA says U.S. MORTGAGE DELINQUENCY RATE 4.95 PCT IN Q4, UP FROM 4.67 PCT IN Q3 AND FROM 4.70 PCT IN Q4 2005

12:02 MBA says subprime borrowers more vulnerable to higher interest rates, slower home price gains or price drops

12:01 MBA pushes back forecast for housing market to regain footing to end of 2007 vs middle of year

12:01 MBA says delinquency rates rose in 49 states in Q4; foreclosure inventory rates grew in 44 states

12:01 Late payments rise for all loan types but driven mainly by subprime and FHA loans

12:00 According to MBA, Mississippi, Louisiana, Michigan had highest overall late payment rates across all loan types in Q4

12:00 U.S. Mortgage delinquencies, foreclosures rise in Q4 2006 vs prior quarter and year ago, according to MBA

Here's an intraday shot of QQQQ with 15 minute bars. Note the volume on the big drop:

It's carnival time! No, not that carnaval but the much more exciting 9th edition of the Carnival of Investing. For the uninitiated, this carnival consists of recent articles about investing from the blogosphere. Without further ado, here are this week's submissions:

Welcome to week 57 of the Carnival of the Capitalists. This is an exciting weekend for me, yesterday this blog was highlighted in Barron's and today I get to host the carnival. I encourage all of my new visitors to visit the blogs listed below. You may be surprised at the high quality of writing being done in the blogosphere.

As usual there are a lot of good articles submitted by bloggers on a variety of topics. I didn't even attempt to categorize the articles, as many of them cross multiple topics. I did do a quick sorting of them, so the list below generally flows in this order: entrepreneurship, business, technology, blogging, marketing, internet, financial markets, economy and taxes. Enjoy...

Earlier this morning I watched a short film that I TiVo'd the other day. It's a profile of a the South China Mall in Dongguan, China which is twice the size of the Mall of America. The problem is that the geniuses who developed the mall built it in the middle of nowhere. There are no freeways nearby, nor is there an airport. I guess they thought "build it and they will come" but it didn't work out that way. For the first minute or so that i was watching it I thought the mall was still under construction. But it had actually been open for a while. (I'm late to this story. The mall was opened in 2005 and I think this film was shot in 2008.) What's more, a government funded group bought the property from the previous owners in order to save it from bankruptcy. Hmm, a government funded bailout. Why does that sound familiar?

Here's a link to the video -- Utopia, Part 3: The World's Largest Shopping Mall. There's also an interview with the filmmaker.

P.S. This also reminds me of a photo essay on Dubai that I recently saw in Fast Company magazine. Ah, such folly.

If, like me, you missed I.O.U.S.A. during its theatrical run you can now watch the condensed, 30 minute version online:

By now, you may have heard about our acclaimed documentary I.O.U.S.A., a film that boldly examines the rapidly growing national debt and its consequences for the United States and its citizens. The film has been a huge hit, getting rave reviews from Roger Ebert and others.

Now, we proudly release a 30-minute condensed version of I.O.U.S.A. designed specifically for watching and sharing on the web - for free.

So if you haven't had a chance to see the movie yet, watch the condensed I.O.U.S.A. today. If you've already seen it in a theater, check out the abbreviated version for a refresher. Then, tell your friends, your family, your Facebook friends and your Twitter followers about the staggering amount of money - $53 trillion - in financial obligations owed by the federal government to foreign investors and to every single American in the form of pensions, health benefits, Social Security and Medicare.

Then, visit http://www.IOUSAtheMovie.com and join us in our Fiscal Wake-Up Movement. Together, we can make American fiscal responsibility a reality.

A comment by Andrew on Barry's post about the SEC wanting to ban all short selling sent me to my copy of Michael Panzner's book Financial Armageddon. Andrew stated that "tonight's event draws me to the last paragraph of ch.7 in Michael Panzer's Financial Armageddon". When I read that paragraph I was reminded of how I felt while reading the book back in March 2007. The scenarios that Panzner laid out were nothing short of chilling. I kept wondering if he really believed all those dire things would actually happen or if they were just a worst case scenario. In flipping through a few chapters tonight it's scary to see just how much of what Panzner wrote has come to pass. Here are the last two paragraph from chapter 7 ("Depression") which Andrew was talking about (hopefully Michael won't mind me posting so much of his text):

Eventually, with a decades-long orgy of credit expansion unraveling fast; the meltdown of stock, bond, commodity, and other markets; a cratering economy; and more of the nation's largest financial institutions precariously on the edge, the Federal Reserve and Washington as a whole will have reached a critical juncture. There will be widespread pressure, bordering perhaps on hysteria, for somebody, somewhere to take action and stem the rapidly rising tide of disaster.

Only then, after being unwilling to react quickly and forcefully enough early on, the Federal Reserve will abruptly shift gears, no longer fearing the consequences of an aggressive monetary response. In a sense, they will have nothing to lose. With immediate effect, they will give up their self-imposed yoke of restraint and move wholeheartedly into money-creation mode. That will mark the beginning of the second phase of the great unraveling.

Sound familiar? Here's some more from Chapter 6 ("Systemic Crisis")

No doubt a systemic meltdown will provoke a similar response. For the financial system and the markets, however, the fallout will likely be worse than any downturn in many decades, owing to a unique combination of modern developments and incendiary circumstances. The explosive growth of derivatives trading and leveraged hedge fund investing, hidden behind a shroud of lightly regulated secrecy, means that few people will have a handle on where dangerous risk is concentrated or overall levels of exposure -- not until it's too late...

-SNIP-

Simply put, people will find it difficult to react in timely, logical or focused fashion to the unfolding calamity...

-SNIP-

Despite increased levels of sophistication and the broad use of modern risk management systems, no one can be sure how new or exotic instruments and markets will behave when conditions take an ominous turn. The sheer scale of the unfolding financial crisis—in terms of the number of participants, firms, regulators, products, countries, and markets—will make it difficult to penetrate the problems...

-SNIP-

This time, however, a vast and efficient global communications network will ensure that destructive energies are rapidly transmitted to billions of people. So, too, will trading technology that facilitates and encourages traders and investors to act on their impulses. Many will find it too easy to shoot first -- or point and click -- and ask questions later in a 21st-century rush for the exits.. Not only will the fastest or sharpest operators look to get out. Firms that have come to depend on leverage, including hedge funds, brokers, and even banks, will also face immediate and rapidly growing pressure to scale back positions because of demands for additional cash collateral or reduced access to financing. Meanwhile, those who still have the wherewithal to initiate fresh positions or act independently will look to dive in and take advantage of the stampede.

-SNIP-

A constant global ripple effect will occur as positions are adjusted to take account of risk management strategies or cash-raising demands. The widespread use of flawed models will further aggravate the situation.

-SNIP-

By the time the systemic crisis is full-blown, there will almost certainly have been a domino-like collapse of more than a few large intermediaries and allegedly sophisticated global financial firms, including hedge funds, insurers, and brokers. As the number of failures grows, concerns over counterparty risk will take center stage. Lenders, investors, and risk managers will fret and gossip about which institution is next. Worries about fraud and chicanery will boost anxiety to a fever pitch. Even firms not in dire straits may suddenly find themselves at risk. In times of upheaval, a lack of information and concern about the ability of others to manage their exposure often spurs a self-fulfilling prophecy, where idle chatter alone leads to institutions being squeezed or cut off—just when they need access to financing most.

-SNIP-

Few areas of the financial system will be unaffected when the meltdown rages. In the insurance sector, for example, debt downgrades and defaults will occur at a quickening pace... At least some of the $2 trillion held in money market funds will anxiously flee to safer pastures as the prices of one or more pools fall below par -- "breaks the buck" -- because of shaky markets and holdings that turn out to be much riskier than expected.

Pretty much all of this has taken place over the last few weeks. Kudos to Michael Panzner for nailing all of this. And somehow I still have hope that much of the other stuff in the book is worst case scenario and won't come to pass. But I'm losing hope by the day.

I've long wondered how long current supplies of all kinds of commodities (natural resources) will last given how rapacious humans (especially Westerners) can be. After watching 'Human Footprint' on National Geographic Channel last week I was more convinced than ever that I needed to be long every conceivable hard commodity and probably most of the soft ones too! :-) Today I got wind of another article about food shortages, except this one isn't about some "developing" country, it's about shortages & rationing right here in the U.S.A. Some snippets:

MOUNTAIN VIEW, Calif. — Many parts of America, long considered the breadbasket of the world, are now confronting a once unthinkable phenomenon: food rationing. Major retailers in New York, in areas of New England, and on the West Coast are limiting purchases of flour, rice, and cooking oil as demand outstrips supply. There are also anecdotal reports that some consumers are hoarding grain stocks.

At a Costco Warehouse in Mountain View, Calif., yesterday, shoppers grew frustrated and occasionally uttered expletives as they searched in vain for the large sacks of rice they usually buy.

"Where's the rice?" an engineer from Palo Alto, Calif., Yajun Liu, said. "You should be able to buy something like rice. This is ridiculous."

[SNIP]

"You can't eat this every day. It's too heavy," a health care executive from Palo Alto, Sharad Patel, grumbled as his son loaded two sacks of the Basmati into a shopping cart. "We only need one bag but I'm getting two in case a neighbor or a friend needs it," the elder man said.

The Patels seemed headed for disappointment, as most Costco members were being allowed to buy only one bag. Moments earlier, a clerk dropped two sacks back on the stack after taking them from another customer who tried to exceed the one-bag cap.

"Due to the limited availability of rice, we are limiting rice purchases based on your prior purchasing history," a sign above the dwindling supply said.

[SNIP]

An employee at the Costco store in Queens said there were no restrictions on rice buying, but limits were being imposed on purchases of oil and flour. Internet postings attributed some of the shortage at the retail level to bakery owners who flocked to warehouse stores when the price of flour from commercial suppliers doubled.

[SNIP]

The curbs and shortages are being tracked with concern by survivalists who view the phenomenon as a harbinger of more serious trouble to come.

"It's sporadic. It's not every store, but it's becoming more commonplace," the editor of SurvivalBlog.com, James Rawles, said. "The number of reports I've been getting from readers who have seen signs posted with limits has increased almost exponentially, I'd say in the last three to five weeks."

But here's the part that really gets me. We've got the same dynamic working as with gasoline. This reminds me so much of our little fake gas scare & mania here in Atlanta that I documented back in 2005, post-Katrina -- when gas rose from sub $3 to over $5 in a matter of hours:

"There have been so many stories about worldwide shortages that it encourages people to stock up. What most people don't realize is that supply chains have changed, so inventories are very short," Mr. Rawles, a former Army intelligence officer, said. "Even if people increased their purchasing by 20%, all the store shelves would be wiped out."

[SNIP]

An anonymous high-tech professional writing on an investment Web site, Seeking Alpha, said he recently bought 10 50-pound bags of rice at Costco. "I am concerned that when the news of rice shortage spreads, there will be panic buying and the shelves will be empty in no time. I do not intend to cause a panic, and I am not speculating on rice to make profit. I am just hoarding some for my own consumption," he wrote.

Ah, the old I'll just panic before everybody else panics solution! As Duru & I say to each other almost daily, "we live in interesting times". Now where are those food ETFs trading...

Here's a good interview with Barry Ritholtz from Friday's WallStrip Chat:

The Chairman posted a link to an article about a "bank run" on Countrywide Financial Corp. (CFC) . I just had to shake my head and laugh after reading that article. I've been watching that company, which happens to hold my mortgage, closely this year. Back in March when the subprime/credit concerns first got serious and just after New Century blew up, I posted this in my links section:

Mortgage Lenders Whistling Past the Sub-Prime Graveyard? -- I just noticed this Countrywide (CFC) ad on my site. I wonder how much longer we'll be seeing these.

Here's the ad I was linking to:

It just seemed incredible to me that Countrywide, the biggest mortgage lender was apparently doing business as usual right after New Century went belly up. Then some weeks later I saw their CEO, Angelo Mozilo, co-hosting Squawk Box. He was all tanned (just off a nice vacation?) and kept talking about how everything was all good for the company despite what was going on in subprime land. I'm pretty sure he even talked about buying back stock (the stock is now about 05 lower). Well the real deal was revealed on July 24th when they released earnings. Here's what Mr. Mozilo had to say:

"This is a huge battleship, and we're headed in the wrong direction," Chief Executive Angelo Mozilo said on an analyst conference call, referring to the housing environment.

He said it may be 2009 before the market recovers from oversupply, stagnant home prices, and increasingly lax lending standards that left many borrowers overstretched.

"Nobody saw this coming," Mozilo, a 54-year mortgage industry veteran, said on the nearly three-hour call.

Nobody saw it coming? Really? I call bullsh*t. A lot of people called it in March if not earlier than that. Anyway, the death spiral in this stock has been simply amazing to watch. I just hope we don't start seeing these bank runs spread to other financial institutions.

P.S. It's interesting to go back and see/hear what was being said about Countywide earlier this year. This CBS News report from May 29th is an example: "Why is Countrywide Financial, one of the country's largest subprime mortgage lenders, doing so well despite the recent lending crisis? Geoff Colvin reports."

PIMCO's Bill Gross covers the Bear Stearns/subprime crisis in his July 2007 investment outlook, which is entitled "Looking for Contagion in All the Wrong Places". Here are some snippets:

Many of these good looking girls are not high-class assets worth 100 cents on the dollar. And sorry Ben, but derivatives are a two-edged sword. Yes, they diversify risk and direct it away from the banking system into the eventual hands of unknown buyers, but they multiply leverage like the Andromeda strain. When interest rates go up, the Petri dish turns from a benign experiment in financial engineering to a destructive virus because the cost of that leverage ultimately reduces the price of assets. Houses anyone?

[SNIP]

Those that point to a crisis averted and a return to normalcy are really looking for contagion in all the wrong places. Because the problem lies not in a Bear Stearns hedge fund that can be papered over with 100 cents on the dollar marks. The flaw resides in the Summerlin suburbs of Las Vegas, Nevada, in the extended city limits of Chicago headed west towards Rockford, and yes, the naked (and empty) rows of multistoried condos in Miami, Florida. The flaw, dear readers, lies in the homes that were financed with cheap and in some cases gratuitous money in 2004, 2005, and 2006. Because while the Bear hedge funds are now primarily history, those millions and millions of homes are not. They’re not going anywhere…except for their mortgages that is. Mortgage payments are going up, up, and up…and so are delinquencies and defaults.

[SNIP]

The right places to look for contagion are therefore not in the white-washed Bear Stearns hedge funds, but in the subprime resets to come and the ultimate effect they will have on the prices of homes – the collateral that’s so critical in this asset-backed, and therefore interest-sensitive financed-based economy of 2007 and beyond. If delinquencies lead to defaults and then to lower home prices, then we have problems and the potential for an extended – not a 27-day Paris Hilton sentence.

[SNIP]

If subprime total losses hit 10% then even some single-A tranches face the grim reaper. AAA’s? Folks the point is that there are hundreds of billions of dollars of this toxic waste and whether or not they’re in CDOs or Bear Stearns hedge funds matters only to the extent of the timing of the unwind. To death and taxes you can add this to your list of inevitabilities: the subprime crisis is not an isolated event and it won’t be contained by a few days of headlines in The New York Times. And it will not remain confined to a neat little Petri dish in some mad financial derivative scientist’s laboratory. Ultimately through capital market arbitrage it will affect risk spreads in markets completely divorced from U.S. housing.

[SNIP]

Importantly, as well, and this point is neglected by most pundits, the willingness to extend credit in other areas – high yield, bank loans, and even certain segments of the AAA asset-backed commercial paper market should feel the cooling Arctic winds of a liquidity constriction.

If not taken too far – and there is no hint yet of a true “crisis” – these developments may be just what the Fed has been looking for: easy credit becoming less easy; excessive liquidity returning to more rational levels. Still, PIMCO looks for the Fed to issue an insurance policy in the form of lower Fed Funds at some point over the next 6 months...

I'm not sure what just caused this air pocket in the market but these note from the Mortgage Bankers Association (MBA) that hit right at noon must have contributed to the slide:

12:02 MBA says U.S. MORTGAGE DELINQUENCY RATE 4.95 PCT IN Q4, UP FROM 4.67 PCT IN Q3 AND FROM 4.70 PCT IN Q4 2005

12:02 MBA says subprime borrowers more vulnerable to higher interest rates, slower home price gains or price drops

12:01 MBA pushes back forecast for housing market to regain footing to end of 2007 vs middle of year

12:01 MBA says delinquency rates rose in 49 states in Q4; foreclosure inventory rates grew in 44 states

12:01 Late payments rise for all loan types but driven mainly by subprime and FHA loans

12:00 According to MBA, Mississippi, Louisiana, Michigan had highest overall late payment rates across all loan types in Q4

12:00 U.S. Mortgage delinquencies, foreclosures rise in Q4 2006 vs prior quarter and year ago, according to MBA

Here's an intraday shot of QQQQ with 15 minute bars. Note the volume on the big drop:

It's carnival time! No, not that carnaval but the much more exciting 9th edition of the Carnival of Investing. For the uninitiated, this carnival consists of recent articles about investing from the blogosphere. Without further ado, here are this week's submissions:

Welcome to week 57 of the Carnival of the Capitalists. This is an exciting weekend for me, yesterday this blog was highlighted in Barron's and today I get to host the carnival. I encourage all of my new visitors to visit the blogs listed below. You may be surprised at the high quality of writing being done in the blogosphere.

As usual there are a lot of good articles submitted by bloggers on a variety of topics. I didn't even attempt to categorize the articles, as many of them cross multiple topics. I did do a quick sorting of them, so the list below generally flows in this order: entrepreneurship, business, technology, blogging, marketing, internet, financial markets, economy and taxes. Enjoy...

Earlier this morning I watched a short film that I TiVo'd the other day. It's a profile of a the South China Mall in Dongguan, China which is twice the size of the Mall of America. The problem is that the geniuses who developed the mall built it in the middle of nowhere. There are no freeways nearby, nor is there an airport. I guess they thought "build it and they will come" but it didn't work out that way. For the first minute or so that i was watching it I thought the mall was still under construction. But it had actually been open for a while. (I'm late to this story. The mall was opened in 2005 and I think this film was shot in 2008.) What's more, a government funded group bought the property from the previous owners in order to save it from bankruptcy. Hmm, a government funded bailout. Why does that sound familiar?

Here's a link to the video -- Utopia, Part 3: The World's Largest Shopping Mall. There's also an interview with the filmmaker.

P.S. This also reminds me of a photo essay on Dubai that I recently saw in Fast Company magazine. Ah, such folly.

If, like me, you missed I.O.U.S.A. during its theatrical run you can now watch the condensed, 30 minute version online:

By now, you may have heard about our acclaimed documentary I.O.U.S.A., a film that boldly examines the rapidly growing national debt and its consequences for the United States and its citizens. The film has been a huge hit, getting rave reviews from Roger Ebert and others.

Now, we proudly release a 30-minute condensed version of I.O.U.S.A. designed specifically for watching and sharing on the web - for free.

So if you haven't had a chance to see the movie yet, watch the condensed I.O.U.S.A. today. If you've already seen it in a theater, check out the abbreviated version for a refresher. Then, tell your friends, your family, your Facebook friends and your Twitter followers about the staggering amount of money - $53 trillion - in financial obligations owed by the federal government to foreign investors and to every single American in the form of pensions, health benefits, Social Security and Medicare.

Then, visit http://www.IOUSAtheMovie.com and join us in our Fiscal Wake-Up Movement. Together, we can make American fiscal responsibility a reality.

A comment by Andrew on Barry's post about the SEC wanting to ban all short selling sent me to my copy of Michael Panzner's book Financial Armageddon. Andrew stated that "tonight's event draws me to the last paragraph of ch.7 in Michael Panzer's Financial Armageddon". When I read that paragraph I was reminded of how I felt while reading the book back in March 2007. The scenarios that Panzner laid out were nothing short of chilling. I kept wondering if he really believed all those dire things would actually happen or if they were just a worst case scenario. In flipping through a few chapters tonight it's scary to see just how much of what Panzner wrote has come to pass. Here are the last two paragraph from chapter 7 ("Depression") which Andrew was talking about (hopefully Michael won't mind me posting so much of his text):

Eventually, with a decades-long orgy of credit expansion unraveling fast; the meltdown of stock, bond, commodity, and other markets; a cratering economy; and more of the nation's largest financial institutions precariously on the edge, the Federal Reserve and Washington as a whole will have reached a critical juncture. There will be widespread pressure, bordering perhaps on hysteria, for somebody, somewhere to take action and stem the rapidly rising tide of disaster.

Only then, after being unwilling to react quickly and forcefully enough early on, the Federal Reserve will abruptly shift gears, no longer fearing the consequences of an aggressive monetary response. In a sense, they will have nothing to lose. With immediate effect, they will give up their self-imposed yoke of restraint and move wholeheartedly into money-creation mode. That will mark the beginning of the second phase of the great unraveling.

Sound familiar? Here's some more from Chapter 6 ("Systemic Crisis")

No doubt a systemic meltdown will provoke a similar response. For the financial system and the markets, however, the fallout will likely be worse than any downturn in many decades, owing to a unique combination of modern developments and incendiary circumstances. The explosive growth of derivatives trading and leveraged hedge fund investing, hidden behind a shroud of lightly regulated secrecy, means that few people will have a handle on where dangerous risk is concentrated or overall levels of exposure -- not until it's too late...

-SNIP-

Simply put, people will find it difficult to react in timely, logical or focused fashion to the unfolding calamity...

-SNIP-

Despite increased levels of sophistication and the broad use of modern risk management systems, no one can be sure how new or exotic instruments and markets will behave when conditions take an ominous turn. The sheer scale of the unfolding financial crisis—in terms of the number of participants, firms, regulators, products, countries, and markets—will make it difficult to penetrate the problems...

-SNIP-

This time, however, a vast and efficient global communications network will ensure that destructive energies are rapidly transmitted to billions of people. So, too, will trading technology that facilitates and encourages traders and investors to act on their impulses. Many will find it too easy to shoot first -- or point and click -- and ask questions later in a 21st-century rush for the exits.. Not only will the fastest or sharpest operators look to get out. Firms that have come to depend on leverage, including hedge funds, brokers, and even banks, will also face immediate and rapidly growing pressure to scale back positions because of demands for additional cash collateral or reduced access to financing. Meanwhile, those who still have the wherewithal to initiate fresh positions or act independently will look to dive in and take advantage of the stampede.

-SNIP-

A constant global ripple effect will occur as positions are adjusted to take account of risk management strategies or cash-raising demands. The widespread use of flawed models will further aggravate the situation.

-SNIP-

By the time the systemic crisis is full-blown, there will almost certainly have been a domino-like collapse of more than a few large intermediaries and allegedly sophisticated global financial firms, including hedge funds, insurers, and brokers. As the number of failures grows, concerns over counterparty risk will take center stage. Lenders, investors, and risk managers will fret and gossip about which institution is next. Worries about fraud and chicanery will boost anxiety to a fever pitch. Even firms not in dire straits may suddenly find themselves at risk. In times of upheaval, a lack of information and concern about the ability of others to manage their exposure often spurs a self-fulfilling prophecy, where idle chatter alone leads to institutions being squeezed or cut off—just when they need access to financing most.

-SNIP-

Few areas of the financial system will be unaffected when the meltdown rages. In the insurance sector, for example, debt downgrades and defaults will occur at a quickening pace... At least some of the $2 trillion held in money market funds will anxiously flee to safer pastures as the prices of one or more pools fall below par -- "breaks the buck" -- because of shaky markets and holdings that turn out to be much riskier than expected.

Pretty much all of this has taken place over the last few weeks. Kudos to Michael Panzner for nailing all of this. And somehow I still have hope that much of the other stuff in the book is worst case scenario and won't come to pass. But I'm losing hope by the day.

I've long wondered how long current supplies of all kinds of commodities (natural resources) will last given how rapacious humans (especially Westerners) can be. After watching 'Human Footprint' on National Geographic Channel last week I was more convinced than ever that I needed to be long every conceivable hard commodity and probably most of the soft ones too! :-) Today I got wind of another article about food shortages, except this one isn't about some "developing" country, it's about shortages & rationing right here in the U.S.A. Some snippets:

MOUNTAIN VIEW, Calif. — Many parts of America, long considered the breadbasket of the world, are now confronting a once unthinkable phenomenon: food rationing. Major retailers in New York, in areas of New England, and on the West Coast are limiting purchases of flour, rice, and cooking oil as demand outstrips supply. There are also anecdotal reports that some consumers are hoarding grain stocks.

At a Costco Warehouse in Mountain View, Calif., yesterday, shoppers grew frustrated and occasionally uttered expletives as they searched in vain for the large sacks of rice they usually buy.

"Where's the rice?" an engineer from Palo Alto, Calif., Yajun Liu, said. "You should be able to buy something like rice. This is ridiculous."

[SNIP]

"You can't eat this every day. It's too heavy," a health care executive from Palo Alto, Sharad Patel, grumbled as his son loaded two sacks of the Basmati into a shopping cart. "We only need one bag but I'm getting two in case a neighbor or a friend needs it," the elder man said.

The Patels seemed headed for disappointment, as most Costco members were being allowed to buy only one bag. Moments earlier, a clerk dropped two sacks back on the stack after taking them from another customer who tried to exceed the one-bag cap.

"Due to the limited availability of rice, we are limiting rice purchases based on your prior purchasing history," a sign above the dwindling supply said.

[SNIP]

An employee at the Costco store in Queens said there were no restrictions on rice buying, but limits were being imposed on purchases of oil and flour. Internet postings attributed some of the shortage at the retail level to bakery owners who flocked to warehouse stores when the price of flour from commercial suppliers doubled.

[SNIP]

The curbs and shortages are being tracked with concern by survivalists who view the phenomenon as a harbinger of more serious trouble to come.

"It's sporadic. It's not every store, but it's becoming more commonplace," the editor of SurvivalBlog.com, James Rawles, said. "The number of reports I've been getting from readers who have seen signs posted with limits has increased almost exponentially, I'd say in the last three to five weeks."

But here's the part that really gets me. We've got the same dynamic working as with gasoline. This reminds me so much of our little fake gas scare & mania here in Atlanta that I documented back in 2005, post-Katrina -- when gas rose from sub $3 to over $5 in a matter of hours:

"There have been so many stories about worldwide shortages that it encourages people to stock up. What most people don't realize is that supply chains have changed, so inventories are very short," Mr. Rawles, a former Army intelligence officer, said. "Even if people increased their purchasing by 20%, all the store shelves would be wiped out."

[SNIP]

An anonymous high-tech professional writing on an investment Web site, Seeking Alpha, said he recently bought 10 50-pound bags of rice at Costco. "I am concerned that when the news of rice shortage spreads, there will be panic buying and the shelves will be empty in no time. I do not intend to cause a panic, and I am not speculating on rice to make profit. I am just hoarding some for my own consumption," he wrote.

Ah, the old I'll just panic before everybody else panics solution! As Duru & I say to each other almost daily, "we live in interesting times". Now where are those food ETFs trading...

Here's a good interview with Barry Ritholtz from Friday's WallStrip Chat:

The Chairman posted a link to an article about a "bank run" on Countrywide Financial Corp. (CFC) . I just had to shake my head and laugh after reading that article. I've been watching that company, which happens to hold my mortgage, closely this year. Back in March when the subprime/credit concerns first got serious and just after New Century blew up, I posted this in my links section:

Mortgage Lenders Whistling Past the Sub-Prime Graveyard? -- I just noticed this Countrywide (CFC) ad on my site. I wonder how much longer we'll be seeing these.

Here's the ad I was linking to:

It just seemed incredible to me that Countrywide, the biggest mortgage lender was apparently doing business as usual right after New Century went belly up. Then some weeks later I saw their CEO, Angelo Mozilo, co-hosting Squawk Box. He was all tanned (just off a nice vacation?) and kept talking about how everything was all good for the company despite what was going on in subprime land. I'm pretty sure he even talked about buying back stock (the stock is now about 05 lower). Well the real deal was revealed on July 24th when they released earnings. Here's what Mr. Mozilo had to say:

"This is a huge battleship, and we're headed in the wrong direction," Chief Executive Angelo Mozilo said on an analyst conference call, referring to the housing environment.

He said it may be 2009 before the market recovers from oversupply, stagnant home prices, and increasingly lax lending standards that left many borrowers overstretched.

"Nobody saw this coming," Mozilo, a 54-year mortgage industry veteran, said on the nearly three-hour call.

Nobody saw it coming? Really? I call bullsh*t. A lot of people called it in March if not earlier than that. Anyway, the death spiral in this stock has been simply amazing to watch. I just hope we don't start seeing these bank runs spread to other financial institutions.

P.S. It's interesting to go back and see/hear what was being said about Countywide earlier this year. This CBS News report from May 29th is an example: "Why is Countrywide Financial, one of the country's largest subprime mortgage lenders, doing so well despite the recent lending crisis? Geoff Colvin reports."

PIMCO's Bill Gross covers the Bear Stearns/subprime crisis in his July 2007 investment outlook, which is entitled "Looking for Contagion in All the Wrong Places". Here are some snippets:

Many of these good looking girls are not high-class assets worth 100 cents on the dollar. And sorry Ben, but derivatives are a two-edged sword. Yes, they diversify risk and direct it away from the banking system into the eventual hands of unknown buyers, but they multiply leverage like the Andromeda strain. When interest rates go up, the Petri dish turns from a benign experiment in financial engineering to a destructive virus because the cost of that leverage ultimately reduces the price of assets. Houses anyone?

[SNIP]

Those that point to a crisis averted and a return to normalcy are really looking for contagion in all the wrong places. Because the problem lies not in a Bear Stearns hedge fund that can be papered over with 100 cents on the dollar marks. The flaw resides in the Summerlin suburbs of Las Vegas, Nevada, in the extended city limits of Chicago headed west towards Rockford, and yes, the naked (and empty) rows of multistoried condos in Miami, Florida. The flaw, dear readers, lies in the homes that were financed with cheap and in some cases gratuitous money in 2004, 2005, and 2006. Because while the Bear hedge funds are now primarily history, those millions and millions of homes are not. They’re not going anywhere…except for their mortgages that is. Mortgage payments are going up, up, and up…and so are delinquencies and defaults.

[SNIP]

The right places to look for contagion are therefore not in the white-washed Bear Stearns hedge funds, but in the subprime resets to come and the ultimate effect they will have on the prices of homes – the collateral that’s so critical in this asset-backed, and therefore interest-sensitive financed-based economy of 2007 and beyond. If delinquencies lead to defaults and then to lower home prices, then we have problems and the potential for an extended – not a 27-day Paris Hilton sentence.

[SNIP]

If subprime total losses hit 10% then even some single-A tranches face the grim reaper. AAA’s? Folks the point is that there are hundreds of billions of dollars of this toxic waste and whether or not they’re in CDOs or Bear Stearns hedge funds matters only to the extent of the timing of the unwind. To death and taxes you can add this to your list of inevitabilities: the subprime crisis is not an isolated event and it won’t be contained by a few days of headlines in The New York Times. And it will not remain confined to a neat little Petri dish in some mad financial derivative scientist’s laboratory. Ultimately through capital market arbitrage it will affect risk spreads in markets completely divorced from U.S. housing.

[SNIP]

Importantly, as well, and this point is neglected by most pundits, the willingness to extend credit in other areas – high yield, bank loans, and even certain segments of the AAA asset-backed commercial paper market should feel the cooling Arctic winds of a liquidity constriction.

If not taken too far – and there is no hint yet of a true “crisis” – these developments may be just what the Fed has been looking for: easy credit becoming less easy; excessive liquidity returning to more rational levels. Still, PIMCO looks for the Fed to issue an insurance policy in the form of lower Fed Funds at some point over the next 6 months...

I'm not sure what just caused this air pocket in the market but these note from the Mortgage Bankers Association (MBA) that hit right at noon must have contributed to the slide:

12:02 MBA says U.S. MORTGAGE DELINQUENCY RATE 4.95 PCT IN Q4, UP FROM 4.67 PCT IN Q3 AND FROM 4.70 PCT IN Q4 2005

12:02 MBA says subprime borrowers more vulnerable to higher interest rates, slower home price gains or price drops

12:01 MBA pushes back forecast for housing market to regain footing to end of 2007 vs middle of year

12:01 MBA says delinquency rates rose in 49 states in Q4; foreclosure inventory rates grew in 44 states

12:01 Late payments rise for all loan types but driven mainly by subprime and FHA loans

12:00 According to MBA, Mississippi, Louisiana, Michigan had highest overall late payment rates across all loan types in Q4

12:00 U.S. Mortgage delinquencies, foreclosures rise in Q4 2006 vs prior quarter and year ago, according to MBA

Here's an intraday shot of QQQQ with 15 minute bars. Note the volume on the big drop:

It's carnival time! No, not that carnaval but the much more exciting 9th edition of the Carnival of Investing. For the uninitiated, this carnival consists of recent articles about investing from the blogosphere. Without further ado, here are this week's submissions:

Welcome to week 57 of the Carnival of the Capitalists. This is an exciting weekend for me, yesterday this blog was highlighted in Barron's and today I get to host the carnival. I encourage all of my new visitors to visit the blogs listed below. You may be surprised at the high quality of writing being done in the blogosphere.

As usual there are a lot of good articles submitted by bloggers on a variety of topics. I didn't even attempt to categorize the articles, as many of them cross multiple topics. I did do a quick sorting of them, so the list below generally flows in this order: entrepreneurship, business, technology, blogging, marketing, internet, financial markets, economy and taxes. Enjoy...

Earlier this morning I watched a short film that I TiVo'd the other day. It's a profile of a the South China Mall in Dongguan, China which is twice the size of the Mall of America. The problem is that the geniuses who developed the mall built it in the middle of nowhere. There are no freeways nearby, nor is there an airport. I guess they thought "build it and they will come" but it didn't work out that way. For the first minute or so that i was watching it I thought the mall was still under construction. But it had actually been open for a while. (I'm late to this story. The mall was opened in 2005 and I think this film was shot in 2008.) What's more, a government funded group bought the property from the previous owners in order to save it from bankruptcy. Hmm, a government funded bailout. Why does that sound familiar?

Here's a link to the video -- Utopia, Part 3: The World's Largest Shopping Mall. There's also an interview with the filmmaker.

P.S. This also reminds me of a photo essay on Dubai that I recently saw in Fast Company magazine. Ah, such folly.

If, like me, you missed I.O.U.S.A. during its theatrical run you can now watch the condensed, 30 minute version online:

By now, you may have heard about our acclaimed documentary I.O.U.S.A., a film that boldly examines the rapidly growing national debt and its consequences for the United States and its citizens. The film has been a huge hit, getting rave reviews from Roger Ebert and others.

Now, we proudly release a 30-minute condensed version of I.O.U.S.A. designed specifically for watching and sharing on the web - for free.

So if you haven't had a chance to see the movie yet, watch the condensed I.O.U.S.A. today. If you've already seen it in a theater, check out the abbreviated version for a refresher. Then, tell your friends, your family, your Facebook friends and your Twitter followers about the staggering amount of money - $53 trillion - in financial obligations owed by the federal government to foreign investors and to every single American in the form of pensions, health benefits, Social Security and Medicare.

Then, visit http://www.IOUSAtheMovie.com and join us in our Fiscal Wake-Up Movement. Together, we can make American fiscal responsibility a reality.

A comment by Andrew on Barry's post about the SEC wanting to ban all short selling sent me to my copy of Michael Panzner's book Financial Armageddon. Andrew stated that "tonight's event draws me to the last paragraph of ch.7 in Michael Panzer's Financial Armageddon". When I read that paragraph I was reminded of how I felt while reading the book back in March 2007. The scenarios that Panzner laid out were nothing short of chilling. I kept wondering if he really believed all those dire things would actually happen or if they were just a worst case scenario. In flipping through a few chapters tonight it's scary to see just how much of what Panzner wrote has come to pass. Here are the last two paragraph from chapter 7 ("Depression") which Andrew was talking about (hopefully Michael won't mind me posting so much of his text):

Eventually, with a decades-long orgy of credit expansion unraveling fast; the meltdown of stock, bond, commodity, and other markets; a cratering economy; and more of the nation's largest financial institutions precariously on the edge, the Federal Reserve and Washington as a whole will have reached a critical juncture. There will be widespread pressure, bordering perhaps on hysteria, for somebody, somewhere to take action and stem the rapidly rising tide of disaster.

Only then, after being unwilling to react quickly and forcefully enough early on, the Federal Reserve will abruptly shift gears, no longer fearing the consequences of an aggressive monetary response. In a sense, they will have nothing to lose. With immediate effect, they will give up their self-imposed yoke of restraint and move wholeheartedly into money-creation mode. That will mark the beginning of the second phase of the great unraveling.

Sound familiar? Here's some more from Chapter 6 ("Systemic Crisis")

No doubt a systemic meltdown will provoke a similar response. For the financial system and the markets, however, the fallout will likely be worse than any downturn in many decades, owing to a unique combination of modern developments and incendiary circumstances. The explosive growth of derivatives trading and leveraged hedge fund investing, hidden behind a shroud of lightly regulated secrecy, means that few people will have a handle on where dangerous risk is concentrated or overall levels of exposure -- not until it's too late...

-SNIP-

Simply put, people will find it difficult to react in timely, logical or focused fashion to the unfolding calamity...

-SNIP-

Despite increased levels of sophistication and the broad use of modern risk management systems, no one can be sure how new or exotic instruments and markets will behave when conditions take an ominous turn. The sheer scale of the unfolding financial crisis—in terms of the number of participants, firms, regulators, products, countries, and markets—will make it difficult to penetrate the problems...

-SNIP-

This time, however, a vast and efficient global communications network will ensure that destructive energies are rapidly transmitted to billions of people. So, too, will trading technology that facilitates and encourages traders and investors to act on their impulses. Many will find it too easy to shoot first -- or point and click -- and ask questions later in a 21st-century rush for the exits.. Not only will the fastest or sharpest operators look to get out. Firms that have come to depend on leverage, including hedge funds, brokers, and even banks, will also face immediate and rapidly growing pressure to scale back positions because of demands for additional cash collateral or reduced access to financing. Meanwhile, those who still have the wherewithal to initiate fresh positions or act independently will look to dive in and take advantage of the stampede.

-SNIP-

A constant global ripple effect will occur as positions are adjusted to take account of risk management strategies or cash-raising demands. The widespread use of flawed models will further aggravate the situation.

-SNIP-

By the time the systemic crisis is full-blown, there will almost certainly have been a domino-like collapse of more than a few large intermediaries and allegedly sophisticated global financial firms, including hedge funds, insurers, and brokers. As the number of failures grows, concerns over counterparty risk will take center stage. Lenders, investors, and risk managers will fret and gossip about which institution is next. Worries about fraud and chicanery will boost anxiety to a fever pitch. Even firms not in dire straits may suddenly find themselves at risk. In times of upheaval, a lack of information and concern about the ability of others to manage their exposure often spurs a self-fulfilling prophecy, where idle chatter alone leads to institutions being squeezed or cut off—just when they need access to financing most.

-SNIP-

Few areas of the financial system will be unaffected when the meltdown rages. In the insurance sector, for example, debt downgrades and defaults will occur at a quickening pace... At least some of the $2 trillion held in money market funds will anxiously flee to safer pastures as the prices of one or more pools fall below par -- "breaks the buck" -- because of shaky markets and holdings that turn out to be much riskier than expected.

Pretty much all of this has taken place over the last few weeks. Kudos to Michael Panzner for nailing all of this. And somehow I still have hope that much of the other stuff in the book is worst case scenario and won't come to pass. But I'm losing hope by the day.

I've long wondered how long current supplies of all kinds of commodities (natural resources) will last given how rapacious humans (especially Westerners) can be. After watching 'Human Footprint' on National Geographic Channel last week I was more convinced than ever that I needed to be long every conceivable hard commodity and probably most of the soft ones too! :-) Today I got wind of another article about food shortages, except this one isn't about some "developing" country, it's about shortages & rationing right here in the U.S.A. Some snippets:

MOUNTAIN VIEW, Calif. — Many parts of America, long considered the breadbasket of the world, are now confronting a once unthinkable phenomenon: food rationing. Major retailers in New York, in areas of New England, and on the West Coast are limiting purchases of flour, rice, and cooking oil as demand outstrips supply. There are also anecdotal reports that some consumers are hoarding grain stocks.

At a Costco Warehouse in Mountain View, Calif., yesterday, shoppers grew frustrated and occasionally uttered expletives as they searched in vain for the large sacks of rice they usually buy.

"Where's the rice?" an engineer from Palo Alto, Calif., Yajun Liu, said. "You should be able to buy something like rice. This is ridiculous."

[SNIP]

"You can't eat this every day. It's too heavy," a health care executive from Palo Alto, Sharad Patel, grumbled as his son loaded two sacks of the Basmati into a shopping cart. "We only need one bag but I'm getting two in case a neighbor or a friend needs it," the elder man said.

The Patels seemed headed for disappointment, as most Costco members were being allowed to buy only one bag. Moments earlier, a clerk dropped two sacks back on the stack after taking them from another customer who tried to exceed the one-bag cap.

"Due to the limited availability of rice, we are limiting rice purchases based on your prior purchasing history," a sign above the dwindling supply said.

[SNIP]

An employee at the Costco store in Queens said there were no restrictions on rice buying, but limits were being imposed on purchases of oil and flour. Internet postings attributed some of the shortage at the retail level to bakery owners who flocked to warehouse stores when the price of flour from commercial suppliers doubled.

[SNIP]

The curbs and shortages are being tracked with concern by survivalists who view the phenomenon as a harbinger of more serious trouble to come.

"It's sporadic. It's not every store, but it's becoming more commonplace," the editor of SurvivalBlog.com, James Rawles, said. "The number of reports I've been getting from readers who have seen signs posted with limits has increased almost exponentially, I'd say in the last three to five weeks."

But here's the part that really gets me. We've got the same dynamic working as with gasoline. This reminds me so much of our little fake gas scare & mania here in Atlanta that I documented back in 2005, post-Katrina -- when gas rose from sub $3 to over $5 in a matter of hours:

"There have been so many stories about worldwide shortages that it encourages people to stock up. What most people don't realize is that supply chains have changed, so inventories are very short," Mr. Rawles, a former Army intelligence officer, said. "Even if people increased their purchasing by 20%, all the store shelves would be wiped out."

[SNIP]

An anonymous high-tech professional writing on an investment Web site, Seeking Alpha, said he recently bought 10 50-pound bags of rice at Costco. "I am concerned that when the news of rice shortage spreads, there will be panic buying and the shelves will be empty in no time. I do not intend to cause a panic, and I am not speculating on rice to make profit. I am just hoarding some for my own consumption," he wrote.

Ah, the old I'll just panic before everybody else panics solution! As Duru & I say to each other almost daily, "we live in interesting times". Now where are those food ETFs trading...

Here's a good interview with Barry Ritholtz from Friday's WallStrip Chat:

The Chairman posted a link to an article about a "bank run" on Countrywide Financial Corp. (CFC) . I just had to shake my head and laugh after reading that article. I've been watching that company, which happens to hold my mortgage, closely this year. Back in March when the subprime/credit concerns first got serious and just after New Century blew up, I posted this in my links section:

Mortgage Lenders Whistling Past the Sub-Prime Graveyard? -- I just noticed this Countrywide (CFC) ad on my site. I wonder how much longer we'll be seeing these.

Here's the ad I was linking to:

It just seemed incredible to me that Countrywide, the biggest mortgage lender was apparently doing business as usual right after New Century went belly up. Then some weeks later I saw their CEO, Angelo Mozilo, co-hosting Squawk Box. He was all tanned (just off a nice vacation?) and kept talking about how everything was all good for the company despite what was going on in subprime land. I'm pretty sure he even talked about buying back stock (the stock is now about 05 lower). Well the real deal was revealed on July 24th when they released earnings. Here's what Mr. Mozilo had to say:

"This is a huge battleship, and we're headed in the wrong direction," Chief Executive Angelo Mozilo said on an analyst conference call, referring to the housing environment.

He said it may be 2009 before the market recovers from oversupply, stagnant home prices, and increasingly lax lending standards that left many borrowers overstretched.

"Nobody saw this coming," Mozilo, a 54-year mortgage industry veteran, said on the nearly three-hour call.

Nobody saw it coming? Really? I call bullsh*t. A lot of people called it in March if not earlier than that. Anyway, the death spiral in this stock has been simply amazing to watch. I just hope we don't start seeing these bank runs spread to other financial institutions.

P.S. It's interesting to go back and see/hear what was being said about Countywide earlier this year. This CBS News report from May 29th is an example: "Why is Countrywide Financial, one of the country's largest subprime mortgage lenders, doing so well despite the recent lending crisis? Geoff Colvin reports."

PIMCO's Bill Gross covers the Bear Stearns/subprime crisis in his July 2007 investment outlook, which is entitled "Looking for Contagion in All the Wrong Places". Here are some snippets:

Many of these good looking girls are not high-class assets worth 100 cents on the dollar. And sorry Ben, but derivatives are a two-edged sword. Yes, they diversify risk and direct it away from the banking system into the eventual hands of unknown buyers, but they multiply leverage like the Andromeda strain. When interest rates go up, the Petri dish turns from a benign experiment in financial engineering to a destructive virus because the cost of that leverage ultimately reduces the price of assets. Houses anyone?

[SNIP]

Those that point to a crisis averted and a return to normalcy are really looking for contagion in all the wrong places. Because the problem lies not in a Bear Stearns hedge fund that can be papered over with 100 cents on the dollar marks. The flaw resides in the Summerlin suburbs of Las Vegas, Nevada, in the extended city limits of Chicago headed west towards Rockford, and yes, the naked (and empty) rows of multistoried condos in Miami, Florida. The flaw, dear readers, lies in the homes that were financed with cheap and in some cases gratuitous money in 2004, 2005, and 2006. Because while the Bear hedge funds are now primarily history, those millions and millions of homes are not. They’re not going anywhere…except for their mortgages that is. Mortgage payments are going up, up, and up…and so are delinquencies and defaults.

[SNIP]

The right places to look for contagion are therefore not in the white-washed Bear Stearns hedge funds, but in the subprime resets to come and the ultimate effect they will have on the prices of homes – the collateral that’s so critical in this asset-backed, and therefore interest-sensitive financed-based economy of 2007 and beyond. If delinquencies lead to defaults and then to lower home prices, then we have problems and the potential for an extended – not a 27-day Paris Hilton sentence.

[SNIP]

If subprime total losses hit 10% then even some single-A tranches face the grim reaper. AAA’s? Folks the point is that there are hundreds of billions of dollars of this toxic waste and whether or not they’re in CDOs or Bear Stearns hedge funds matters only to the extent of the timing of the unwind. To death and taxes you can add this to your list of inevitabilities: the subprime crisis is not an isolated event and it won’t be contained by a few days of headlines in The New York Times. And it will not remain confined to a neat little Petri dish in some mad financial derivative scientist’s laboratory. Ultimately through capital market arbitrage it will affect risk spreads in markets completely divorced from U.S. housing.

[SNIP]

Importantly, as well, and this point is neglected by most pundits, the willingness to extend credit in other areas – high yield, bank loans, and even certain segments of the AAA asset-backed commercial paper market should feel the cooling Arctic winds of a liquidity constriction.

If not taken too far – and there is no hint yet of a true “crisis” – these developments may be just what the Fed has been looking for: easy credit becoming less easy; excessive liquidity returning to more rational levels. Still, PIMCO looks for the Fed to issue an insurance policy in the form of lower Fed Funds at some point over the next 6 months...

I'm not sure what just caused this air pocket in the market but these note from the Mortgage Bankers Association (MBA) that hit right at noon must have contributed to the slide:

12:02 MBA says U.S. MORTGAGE DELINQUENCY RATE 4.95 PCT IN Q4, UP FROM 4.67 PCT IN Q3 AND FROM 4.70 PCT IN Q4 2005

12:02 MBA says subprime borrowers more vulnerable to higher interest rates, slower home price gains or price drops

12:01 MBA pushes back forecast for housing market to regain footing to end of 2007 vs middle of year

12:01 MBA says delinquency rates rose in 49 states in Q4; foreclosure inventory rates grew in 44 states

12:01 Late payments rise for all loan types but driven mainly by subprime and FHA loans

12:00 According to MBA, Mississippi, Louisiana, Michigan had highest overall late payment rates across all loan types in Q4

12:00 U.S. Mortgage delinquencies, foreclosures rise in Q4 2006 vs prior quarter and year ago, according to MBA

Here's an intraday shot of QQQQ with 15 minute bars. Note the volume on the big drop:

It's carnival time! No, not that carnaval but the much more exciting 9th edition of the Carnival of Investing. For the uninitiated, this carnival consists of recent articles about investing from the blogosphere. Without further ado, here are this week's submissions:

Welcome to week 57 of the Carnival of the Capitalists. This is an exciting weekend for me, yesterday this blog was highlighted in Barron's and today I get to host the carnival. I encourage all of my new visitors to visit the blogs listed below. You may be surprised at the high quality of writing being done in the blogosphere.

As usual there are a lot of good articles submitted by bloggers on a variety of topics. I didn't even attempt to categorize the articles, as many of them cross multiple topics. I did do a quick sorting of them, so the list below generally flows in this order: entrepreneurship, business, technology, blogging, marketing, internet, financial markets, economy and taxes. Enjoy...

Earlier this morning I watched a short film that I TiVo'd the other day. It's a profile of a the South China Mall in Dongguan, China which is twice the size of the Mall of America. The problem is that the geniuses who developed the mall built it in the middle of nowhere. There are no freeways nearby, nor is there an airport. I guess they thought "build it and they will come" but it didn't work out that way. For the first minute or so that i was watching it I thought the mall was still under construction. But it had actually been open for a while. (I'm late to this story. The mall was opened in 2005 and I think this film was shot in 2008.) What's more, a government funded group bought the property from the previous owners in order to save it from bankruptcy. Hmm, a government funded bailout. Why does that sound familiar?

Here's a link to the video -- Utopia, Part 3: The World's Largest Shopping Mall. There's also an interview with the filmmaker.

P.S. This also reminds me of a photo essay on Dubai that I recently saw in Fast Company magazine. Ah, such folly.

If, like me, you missed I.O.U.S.A. during its theatrical run you can now watch the condensed, 30 minute version online:

By now, you may have heard about our acclaimed documentary I.O.U.S.A., a film that boldly examines the rapidly growing national debt and its consequences for the United States and its citizens. The film has been a huge hit, getting rave reviews from Roger Ebert and others.

Now, we proudly release a 30-minute condensed version of I.O.U.S.A. designed specifically for watching and sharing on the web - for free.

So if you haven't had a chance to see the movie yet, watch the condensed I.O.U.S.A. today. If you've already seen it in a theater, check out the abbreviated version for a refresher. Then, tell your friends, your family, your Facebook friends and your Twitter followers about the staggering amount of money - $53 trillion - in financial obligations owed by the federal government to foreign investors and to every single American in the form of pensions, health benefits, Social Security and Medicare.

Then, visit http://www.IOUSAtheMovie.com and join us in our Fiscal Wake-Up Movement. Together, we can make American fiscal responsibility a reality.

A comment by Andrew on Barry's post about the SEC wanting to ban all short selling sent me to my copy of Michael Panzner's book Financial Armageddon. Andrew stated that "tonight's event draws me to the last paragraph of ch.7 in Michael Panzer's Financial Armageddon". When I read that paragraph I was reminded of how I felt while reading the book back in March 2007. The scenarios that Panzner laid out were nothing short of chilling. I kept wondering if he really believed all those dire things would actually happen or if they were just a worst case scenario. In flipping through a few chapters tonight it's scary to see just how much of what Panzner wrote has come to pass. Here are the last two paragraph from chapter 7 ("Depression") which Andrew was talking about (hopefully Michael won't mind me posting so much of his text):

Eventually, with a decades-long orgy of credit expansion unraveling fast; the meltdown of stock, bond, commodity, and other markets; a cratering economy; and more of the nation's largest financial institutions precariously on the edge, the Federal Reserve and Washington as a whole will have reached a critical juncture. There will be widespread pressure, bordering perhaps on hysteria, for somebody, somewhere to take action and stem the rapidly rising tide of disaster.

Only then, after being unwilling to react quickly and forcefully enough early on, the Federal Reserve will abruptly shift gears, no longer fearing the consequences of an aggressive monetary response. In a sense, they will have nothing to lose. With immediate effect, they will give up their self-imposed yoke of restraint and move wholeheartedly into money-creation mode. That will mark the beginning of the second phase of the great unraveling.

Sound familiar? Here's some more from Chapter 6 ("Systemic Crisis")

No doubt a systemic meltdown will provoke a similar response. For the financial system and the markets, however, the fallout will likely be worse than any downturn in many decades, owing to a unique combination of modern developments and incendiary circumstances. The explosive growth of derivatives trading and leveraged hedge fund investing, hidden behind a shroud of lightly regulated secrecy, means that few people will have a handle on where dangerous risk is concentrated or overall levels of exposure -- not until it's too late...

-SNIP-

Simply put, people will find it difficult to react in timely, logical or focused fashion to the unfolding calamity...

-SNIP-

Despite increased levels of sophistication and the broad use of modern risk management systems, no one can be sure how new or exotic instruments and markets will behave when conditions take an ominous turn. The sheer scale of the unfolding financial crisis—in terms of the number of participants, firms, regulators, products, countries, and markets—will make it difficult to penetrate the problems...

-SNIP-

This time, however, a vast and efficient global communications network will ensure that destructive energies are rapidly transmitted to billions of people. So, too, will trading technology that facilitates and encourages traders and investors to act on their impulses. Many will find it too easy to shoot first -- or point and click -- and ask questions later in a 21st-century rush for the exits.. Not only will the fastest or sharpest operators look to get out. Firms that have come to depend on leverage, including hedge funds, brokers, and even banks, will also face immediate and rapidly growing pressure to scale back positions because of demands for additional cash collateral or reduced access to financing. Meanwhile, those who still have the wherewithal to initiate fresh positions or act independently will look to dive in and take advantage of the stampede.

-SNIP-

A constant global ripple effect will occur as positions are adjusted to take account of risk management strategies or cash-raising demands. The widespread use of flawed models will further aggravate the situation.

-SNIP-

By the time the systemic crisis is full-blown, there will almost certainly have been a domino-like collapse of more than a few large intermediaries and allegedly sophisticated global financial firms, including hedge funds, insurers, and brokers. As the number of failures grows, concerns over counterparty risk will take center stage. Lenders, investors, and risk managers will fret and gossip about which institution is next. Worries about fraud and chicanery will boost anxiety to a fever pitch. Even firms not in dire straits may suddenly find themselves at risk. In times of upheaval, a lack of information and concern about the ability of others to manage their exposure often spurs a self-fulfilling prophecy, where idle chatter alone leads to institutions being squeezed or cut off—just when they need access to financing most.

-SNIP-

Few areas of the financial system will be unaffected when the meltdown rages. In the insurance sector, for example, debt downgrades and defaults will occur at a quickening pace... At least some of the $2 trillion held in money market funds will anxiously flee to safer pastures as the prices of one or more pools fall below par -- "breaks the buck" -- because of shaky markets and holdings that turn out to be much riskier than expected.

Pretty much all of this has taken place over the last few weeks. Kudos to Michael Panzner for nailing all of this. And somehow I still have hope that much of the other stuff in the book is worst case scenario and won't come to pass. But I'm losing hope by the day.

I've long wondered how long current supplies of all kinds of commodities (natural resources) will last given how rapacious humans (especially Westerners) can be. After watching 'Human Footprint' on National Geographic Channel last week I was more convinced than ever that I needed to be long every conceivable hard commodity and probably most of the soft ones too! :-) Today I got wind of another article about food shortages, except this one isn't about some "developing" country, it's about shortages & rationing right here in the U.S.A. Some snippets:

MOUNTAIN VIEW, Calif. — Many parts of America, long considered the breadbasket of the world, are now confronting a once unthinkable phenomenon: food rationing. Major retailers in New York, in areas of New England, and on the West Coast are limiting purchases of flour, rice, and cooking oil as demand outstrips supply. There are also anecdotal reports that some consumers are hoarding grain stocks.

At a Costco Warehouse in Mountain View, Calif., yesterday, shoppers grew frustrated and occasionally uttered expletives as they searched in vain for the large sacks of rice they usually buy.

"Where's the rice?" an engineer from Palo Alto, Calif., Yajun Liu, said. "You should be able to buy something like rice. This is ridiculous."

[SNIP]

"You can't eat this every day. It's too heavy," a health care executive from Palo Alto, Sharad Patel, grumbled as his son loaded two sacks of the Basmati into a shopping cart. "We only need one bag but I'm getting two in case a neighbor or a friend needs it," the elder man said.

The Patels seemed headed for disappointment, as most Costco members were being allowed to buy only one bag. Moments earlier, a clerk dropped two sacks back on the stack after taking them from another customer who tried to exceed the one-bag cap.

"Due to the limited availability of rice, we are limiting rice purchases based on your prior purchasing history," a sign above the dwindling supply said.

[SNIP]

An employee at the Costco store in Queens said there were no restrictions on rice buying, but limits were being imposed on purchases of oil and flour. Internet postings attributed some of the shortage at the retail level to bakery owners who flocked to warehouse stores when the price of flour from commercial suppliers doubled.

[SNIP]

The curbs and shortages are being tracked with concern by survivalists who view the phenomenon as a harbinger of more serious trouble to come.

"It's sporadic. It's not every store, but it's becoming more commonplace," the editor of SurvivalBlog.com, James Rawles, said. "The number of reports I've been getting from readers who have seen signs posted with limits has increased almost exponentially, I'd say in the last three to five weeks."

But here's the part that really gets me. We've got the same dynamic working as with gasoline. This reminds me so much of our little fake gas scare & mania here in Atlanta that I documented back in 2005, post-Katrina -- when gas rose from sub $3 to over $5 in a matter of hours:

"There have been so many stories about worldwide shortages that it encourages people to stock up. What most people don't realize is that supply chains have changed, so inventories are very short," Mr. Rawles, a former Army intelligence officer, said. "Even if people increased their purchasing by 20%, all the store shelves would be wiped out."

[SNIP]

An anonymous high-tech professional writing on an investment Web site, Seeking Alpha, said he recently bought 10 50-pound bags of rice at Costco. "I am concerned that when the news of rice shortage spreads, there will be panic buying and the shelves will be empty in no time. I do not intend to cause a panic, and I am not speculating on rice to make profit. I am just hoarding some for my own consumption," he wrote.

Ah, the old I'll just panic before everybody else panics solution! As Duru & I say to each other almost daily, "we live in interesting times". Now where are those food ETFs trading...

Here's a good interview with Barry Ritholtz from Friday's WallStrip Chat:

The Chairman posted a link to an article about a "bank run" on Countrywide Financial Corp. (CFC) . I just had to shake my head and laugh after reading that article. I've been watching that company, which happens to hold my mortgage, closely this year. Back in March when the subprime/credit concerns first got serious and just after New Century blew up, I posted this in my links section:

Mortgage Lenders Whistling Past the Sub-Prime Graveyard? -- I just noticed this Countrywide (CFC) ad on my site. I wonder how much longer we'll be seeing these.

Here's the ad I was linking to:

It just seemed incredible to me that Countrywide, the biggest mortgage lender was apparently doing business as usual right after New Century went belly up. Then some weeks later I saw their CEO, Angelo Mozilo, co-hosting Squawk Box. He was all tanned (just off a nice vacation?) and kept talking about how everything was all good for the company despite what was going on in subprime land. I'm pretty sure he even talked about buying back stock (the stock is now about 05 lower). Well the real deal was revealed on July 24th when they released earnings. Here's what Mr. Mozilo had to say:

"This is a huge battleship, and we're headed in the wrong direction," Chief Executive Angelo Mozilo said on an analyst conference call, referring to the housing environment.

He said it may be 2009 before the market recovers from oversupply, stagnant home prices, and increasingly lax lending standards that left many borrowers overstretched.

"Nobody saw this coming," Mozilo, a 54-year mortgage industry veteran, said on the nearly three-hour call.

Nobody saw it coming? Really? I call bullsh*t. A lot of people called it in March if not earlier than that. Anyway, the death spiral in this stock has been simply amazing to watch. I just hope we don't start seeing these bank runs spread to other financial institutions.

P.S. It's interesting to go back and see/hear what was being said about Countywide earlier this year. This CBS News report from May 29th is an example: "Why is Countrywide Financial, one of the country's largest subprime mortgage lenders, doing so well despite the recent lending crisis? Geoff Colvin reports."

PIMCO's Bill Gross covers the Bear Stearns/subprime crisis in his July 2007 investment outlook, which is entitled "Looking for Contagion in All the Wrong Places". Here are some snippets:

Many of these good looking girls are not high-class assets worth 100 cents on the dollar. And sorry Ben, but derivatives are a two-edged sword. Yes, they diversify risk and direct it away from the banking system into the eventual hands of unknown buyers, but they multiply leverage like the Andromeda strain. When interest rates go up, the Petri dish turns from a benign experiment in financial engineering to a destructive virus because the cost of that leverage ultimately reduces the price of assets. Houses anyone?

[SNIP]

Those that point to a crisis averted and a return to normalcy are really looking for contagion in all the wrong places. Because the problem lies not in a Bear Stearns hedge fund that can be papered over with 100 cents on the dollar marks. The flaw resides in the Summerlin suburbs of Las Vegas, Nevada, in the extended city limits of Chicago headed west towards Rockford, and yes, the naked (and empty) rows of multistoried condos in Miami, Florida. The flaw, dear readers, lies in the homes that were financed with cheap and in some cases gratuitous money in 2004, 2005, and 2006. Because while the Bear hedge funds are now primarily history, those millions and millions of homes are not. They’re not going anywhere…except for their mortgages that is. Mortgage payments are going up, up, and up…and so are delinquencies and defaults.

[SNIP]

The right places to look for contagion are therefore not in the white-washed Bear Stearns hedge funds, but in the subprime resets to come and the ultimate effect they will have on the prices of homes – the collateral that’s so critical in this asset-backed, and therefore interest-sensitive financed-based economy of 2007 and beyond. If delinquencies lead to defaults and then to lower home prices, then we have problems and the potential for an extended – not a 27-day Paris Hilton sentence.

[SNIP]

If subprime total losses hit 10% then even some single-A tranches face the grim reaper. AAA’s? Folks the point is that there are hundreds of billions of dollars of this toxic waste and whether or not they’re in CDOs or Bear Stearns hedge funds matters only to the extent of the timing of the unwind. To death and taxes you can add this to your list of inevitabilities: the subprime crisis is not an isolated event and it won’t be contained by a few days of headlines in The New York Times. And it will not remain confined to a neat little Petri dish in some mad financial derivative scientist’s laboratory. Ultimately through capital market arbitrage it will affect risk spreads in markets completely divorced from U.S. housing.

[SNIP]

Importantly, as well, and this point is neglected by most pundits, the willingness to extend credit in other areas – high yield, bank loans, and even certain segments of the AAA asset-backed commercial paper market should feel the cooling Arctic winds of a liquidity constriction.

If not taken too far – and there is no hint yet of a true “crisis” – these developments may be just what the Fed has been looking for: easy credit becoming less easy; excessive liquidity returning to more rational levels. Still, PIMCO looks for the Fed to issue an insurance policy in the form of lower Fed Funds at some point over the next 6 months...

I'm not sure what just caused this air pocket in the market but these note from the Mortgage Bankers Association (MBA) that hit right at noon must have contributed to the slide:

12:02 MBA says U.S. MORTGAGE DELINQUENCY RATE 4.95 PCT IN Q4, UP FROM 4.67 PCT IN Q3 AND FROM 4.70 PCT IN Q4 2005

12:02 MBA says subprime borrowers more vulnerable to higher interest rates, slower home price gains or price drops

12:01 MBA pushes back forecast for housing market to regain footing to end of 2007 vs middle of year

12:01 MBA says delinquency rates rose in 49 states in Q4; foreclosure inventory rates grew in 44 states

12:01 Late payments rise for all loan types but driven mainly by subprime and FHA loans

12:00 According to MBA, Mississippi, Louisiana, Michigan had highest overall late payment rates across all loan types in Q4

12:00 U.S. Mortgage delinquencies, foreclosures rise in Q4 2006 vs prior quarter and year ago, according to MBA

Here's an intraday shot of QQQQ with 15 minute bars. Note the volume on the big drop:

It's carnival time! No, not that carnaval but the much more exciting 9th edition of the Carnival of Investing. For the uninitiated, this carnival consists of recent articles about investing from the blogosphere. Without further ado, here are this week's submissions:

Welcome to week 57 of the Carnival of the Capitalists. This is an exciting weekend for me, yesterday this blog was highlighted in Barron's and today I get to host the carnival. I encourage all of my new visitors to visit the blogs listed below. You may be surprised at the high quality of writing being done in the blogosphere.

As usual there are a lot of good articles submitted by bloggers on a variety of topics. I didn't even attempt to categorize the articles, as many of them cross multiple topics. I did do a quick sorting of them, so the list below generally flows in this order: entrepreneurship, business, technology, blogging, marketing, internet, financial markets, economy and taxes. Enjoy...

Earlier this morning I watched a short film that I TiVo'd the other day. It's a profile of a the South China Mall in Dongguan, China which is twice the size of the Mall of America. The problem is that the geniuses who developed the mall built it in the middle of nowhere. There are no freeways nearby, nor is there an airport. I guess they thought "build it and they will come" but it didn't work out that way. For the first minute or so that i was watching it I thought the mall was still under construction. But it had actually been open for a while. (I'm late to this story. The mall was opened in 2005 and I think this film was shot in 2008.) What's more, a government funded group bought the property from the previous owners in order to save it from bankruptcy. Hmm, a government funded bailout. Why does that sound familiar?

Here's a link to the video -- Utopia, Part 3: The World's Largest Shopping Mall. There's also an interview with the filmmaker.

P.S. This also reminds me of a photo essay on Dubai that I recently saw in Fast Company magazine. Ah, such folly.

If, like me, you missed I.O.U.S.A. during its theatrical run you can now watch the condensed, 30 minute version online:

By now, you may have heard about our acclaimed documentary I.O.U.S.A., a film that boldly examines the rapidly growing national debt and its consequences for the United States and its citizens. The film has been a huge hit, getting rave reviews from Roger Ebert and others.

Now, we proudly release a 30-minute condensed version of I.O.U.S.A. designed specifically for watching and sharing on the web - for free.

So if you haven't had a chance to see the movie yet, watch the condensed I.O.U.S.A. today. If you've already seen it in a theater, check out the abbreviated version for a refresher. Then, tell your friends, your family, your Facebook friends and your Twitter followers about the staggering amount of money - $53 trillion - in financial obligations owed by the federal government to foreign investors and to every single American in the form of pensions, health benefits, Social Security and Medicare.

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A comment by Andrew on Barry's post about the SEC wanting to ban all short selling sent me to my copy of Michael Panzner's book Financial Armageddon. Andrew stated that "tonight's event draws me to the last paragraph of ch.7 in Michael Panzer's Financial Armageddon". When I read that paragraph I was reminded of how I felt while reading the book back in March 2007. The scenarios that Panzner laid out were nothing short of chilling. I kept wondering if he really believed all those dire things would actually happen or if they were just a worst case scenario. In flipping through a few chapters tonight it's scary to see just how much of what Panzner wrote has come to pass. Here are the last two paragraph from chapter 7 ("Depression") which Andrew was talking about (hopefully Michael won't mind me posting so much of his text):

Eventually, with a decades-long orgy of credit expansion unraveling fast; the meltdown of stock, bond, commodity, and other markets; a cratering economy; and more of the nation's largest financial institutions precariously on the edge, the Federal Reserve and Washington as a whole will have reached a critical juncture. There will be widespread pressure, bordering perhaps on hysteria, for somebody, somewhere to take action and stem the rapidly rising tide of disaster.

Only then, after being unwilling to react quickly and forcefully enough early on, the Federal Reserve will abruptly shift gears, no longer fearing the consequences of an aggressive monetary response. In a sense, they will have nothing to lose. With immediate effect, they will give up their self-imposed yoke of restraint and move wholeheartedly into money-creation mode. That will mark the beginning of the second phase of the great unraveling.

Sound familiar? Here's some more from Chapter 6 ("Systemic Crisis")

No doubt a systemic meltdown will provoke a similar response. For the financial system and the markets, however, the fallout will likely be worse than any downturn in many decades, owing to a unique combination of modern developments and incendiary circumstances. The explosive growth of derivatives trading and leveraged hedge fund investing, hidden behind a shroud of lightly regulated secrecy, means that few people will have a handle on where dangerous risk is concentrated or overall levels of exposure -- not until it's too late...

-SNIP-

Simply put, people will find it difficult to react in timely, logical or focused fashion to the unfolding calamity...

-SNIP-

Despite increased levels of sophistication and the broad use of modern risk management systems, no one can be sure how new or exotic instruments and markets will behave when conditions take an ominous turn. The sheer scale of the unfolding financial crisis—in terms of the number of participants, firms, regulators, products, countries, and markets—will make it difficult to penetrate the problems...

-SNIP-

This time, however, a vast and efficient global communications network will ensure that destructive energies are rapidly transmitted to billions of people. So, too, will trading technology that facilitates and encourages traders and investors to act on their impulses. Many will find it too easy to shoot first -- or point and click -- and ask questions later in a 21st-century rush for the exits.. Not only will the fastest or sharpest operators look to get out. Firms that have come to depend on leverage, including hedge funds, brokers, and even banks, will also face immediate and rapidly growing pressure to scale back positions because of demands for additional cash collateral or reduced access to financing. Meanwhile, those who still have the wherewithal to initiate fresh positions or act independently will look to dive in and take advantage of the stampede.

-SNIP-

A constant global ripple effect will occur as positions are adjusted to take account of risk management strategies or cash-raising demands. The widespread use of flawed models will further aggravate the situation.

-SNIP-

By the time the systemic crisis is full-blown, there will almost certainly have been a domino-like collapse of more than a few large intermediaries and allegedly sophisticated global financial firms, including hedge funds, insurers, and brokers. As the number of failures grows, concerns over counterparty risk will take center stage. Lenders, investors, and risk managers will fret and gossip about which institution is next. Worries about fraud and chicanery will boost anxiety to a fever pitch. Even firms not in dire straits may suddenly find themselves at risk. In times of upheaval, a lack of information and concern about the ability of others to manage their exposure often spurs a self-fulfilling prophecy, where idle chatter alone leads to institutions being squeezed or cut off—just when they need access to financing most.

-SNIP-

Few areas of the financial system will be unaffected when the meltdown rages. In the insurance sector, for example, debt downgrades and defaults will occur at a quickening pace... At least some of the $2 trillion held in money market funds will anxiously flee to safer pastures as the prices of one or more pools fall below par -- "breaks the buck" -- because of shaky markets and holdings that turn out to be much riskier than expected.

Pretty much all of this has taken place over the last few weeks. Kudos to Michael Panzner for nailing all of this. And somehow I still have hope that much of the other stuff in the book is worst case scenario and won't come to pass. But I'm losing hope by the day.

I've long wondered how long current supplies of all kinds of commodities (natural resources) will last given how rapacious humans (especially Westerners) can be. After watching 'Human Footprint' on National Geographic Channel last week I was more convinced than ever that I needed to be long every conceivable hard commodity and probably most of the soft ones too! :-) Today I got wind of another article about food shortages, except this one isn't about some "developing" country, it's about shortages & rationing right here in the U.S.A. Some snippets:

MOUNTAIN VIEW, Calif. — Many parts of America, long considered the breadbasket of the world, are now confronting a once unthinkable phenomenon: food rationing. Major retailers in New York, in areas of New England, and on the West Coast are limiting purchases of flour, rice, and cooking oil as demand outstrips supply. There are also anecdotal reports that some consumers are hoarding grain stocks.

At a Costco Warehouse in Mountain View, Calif., yesterday, shoppers grew frustrated and occasionally uttered expletives as they searched in vain for the large sacks of rice they usually buy.

"Where's the rice?" an engineer from Palo Alto, Calif., Yajun Liu, said. "You should be able to buy something like rice. This is ridiculous."

[SNIP]

"You can't eat this every day. It's too heavy," a health care executive from Palo Alto, Sharad Patel, grumbled as his son loaded two sacks of the Basmati into a shopping cart. "We only need one bag but I'm getting two in case a neighbor or a friend needs it," the elder man said.

The Patels seemed headed for disappointment, as most Costco members were being allowed to buy only one bag. Moments earlier, a clerk dropped two sacks back on the stack after taking them from another customer who tried to exceed the one-bag cap.

"Due to the limited availability of rice, we are limiting rice purchases based on your prior purchasing history," a sign above the dwindling supply said.

[SNIP]

An employee at the Costco store in Queens said there were no restrictions on rice buying, but limits were being imposed on purchases of oil and flour. Internet postings attributed some of the shortage at the retail level to bakery owners who flocked to warehouse stores when the price of flour from commercial suppliers doubled.

[SNIP]

The curbs and shortages are being tracked with concern by survivalists who view the phenomenon as a harbinger of more serious trouble to come.

"It's sporadic. It's not every store, but it's becoming more commonplace," the editor of SurvivalBlog.com, James Rawles, said. "The number of reports I've been getting from readers who have seen signs posted with limits has increased almost exponentially, I'd say in the last three to five weeks."

But here's the part that really gets me. We've got the same dynamic working as with gasoline. This reminds me so much of our little fake gas scare & mania here in Atlanta that I documented back in 2005, post-Katrina -- when gas rose from sub $3 to over $5 in a matter of hours:

"There have been so many stories about worldwide shortages that it encourages people to stock up. What most people don't realize is that supply chains have changed, so inventories are very short," Mr. Rawles, a former Army intelligence officer, said. "Even if people increased their purchasing by 20%, all the store shelves would be wiped out."

[SNIP]

An anonymous high-tech professional writing on an investment Web site, Seeking Alpha, said he recently bought 10 50-pound bags of rice at Costco. "I am concerned that when the news of rice shortage spreads, there will be panic buying and the shelves will be empty in no time. I do not intend to cause a panic, and I am not speculating on rice to make profit. I am just hoarding some for my own consumption," he wrote.

Ah, the old I'll just panic before everybody else panics solution! As Duru & I say to each other almost daily, "we live in interesting times". Now where are those food ETFs trading...

Here's a good interview with Barry Ritholtz from Friday's WallStrip Chat:

The Chairman posted a link to an article about a "bank run" on Countrywide Financial Corp. (CFC) . I just had to shake my head and laugh after reading that article. I've been watching that company, which happens to hold my mortgage, closely this year. Back in March when the subprime/credit concerns first got serious and just after New Century blew up, I posted this in my links section:

Mortgage Lenders Whistling Past the Sub-Prime Graveyard? -- I just noticed this Countrywide (CFC) ad on my site. I wonder how much longer we'll be seeing these.

Here's the ad I was linking to:

It just seemed incredible to me that Countrywide, the biggest mortgage lender was apparently doing business as usual right after New Century went belly up. Then some weeks later I saw their CEO, Angelo Mozilo, co-hosting Squawk Box. He was all tanned (just off a nice vacation?) and kept talking about how everything was all good for the company despite what was going on in subprime land. I'm pretty sure he even talked about buying back stock (the stock is now about 05 lower). Well the real deal was revealed on July 24th when they released earnings. Here's what Mr. Mozilo had to say:

"This is a huge battleship, and we're headed in the wrong direction," Chief Executive Angelo Mozilo said on an analyst conference call, referring to the housing environment.

He said it may be 2009 before the market recovers from oversupply, stagnant home prices, and increasingly lax lending standards that left many borrowers overstretched.

"Nobody saw this coming," Mozilo, a 54-year mortgage industry veteran, said on the nearly three-hour call.

Nobody saw it coming? Really? I call bullsh*t. A lot of people called it in March if not earlier than that. Anyway, the death spiral in this stock has been simply amazing to watch. I just hope we don't start seeing these bank runs spread to other financial institutions.

P.S. It's interesting to go back and see/hear what was being said about Countywide earlier this year. This CBS News report from May 29th is an example: "Why is Countrywide Financial, one of the country's largest subprime mortgage lenders, doing so well despite the recent lending crisis? Geoff Colvin reports."

PIMCO's Bill Gross covers the Bear Stearns/subprime crisis in his July 2007 investment outlook, which is entitled "Looking for Contagion in All the Wrong Places". Here are some snippets:

Many of these good looking girls are not high-class assets worth 100 cents on the dollar. And sorry Ben, but derivatives are a two-edged sword. Yes, they diversify risk and direct it away from the banking system into the eventual hands of unknown buyers, but they multiply leverage like the Andromeda strain. When interest rates go up, the Petri dish turns from a benign experiment in financial engineering to a destructive virus because the cost of that leverage ultimately reduces the price of assets. Houses anyone?

[SNIP]

Those that point to a crisis averted and a return to normalcy are really looking for contagion in all the wrong places. Because the problem lies not in a Bear Stearns hedge fund that can be papered over with 100 cents on the dollar marks. The flaw resides in the Summerlin suburbs of Las Vegas, Nevada, in the extended city limits of Chicago headed west towards Rockford, and yes, the naked (and empty) rows of multistoried condos in Miami, Florida. The flaw, dear readers, lies in the homes that were financed with cheap and in some cases gratuitous money in 2004, 2005, and 2006. Because while the Bear hedge funds are now primarily history, those millions and millions of homes are not. They’re not going anywhere…except for their mortgages that is. Mortgage payments are going up, up, and up…and so are delinquencies and defaults.

[SNIP]

The right places to look for contagion are therefore not in the white-washed Bear Stearns hedge funds, but in the subprime resets to come and the ultimate effect they will have on the prices of homes – the collateral that’s so critical in this asset-backed, and therefore interest-sensitive financed-based economy of 2007 and beyond. If delinquencies lead to defaults and then to lower home prices, then we have problems and the potential for an extended – not a 27-day Paris Hilton sentence.

[SNIP]

If subprime total losses hit 10% then even some single-A tranches face the grim reaper. AAA’s? Folks the point is that there are hundreds of billions of dollars of this toxic waste and whether or not they’re in CDOs or Bear Stearns hedge funds matters only to the extent of the timing of the unwind. To death and taxes you can add this to your list of inevitabilities: the subprime crisis is not an isolated event and it won’t be contained by a few days of headlines in The New York Times. And it will not remain confined to a neat little Petri dish in some mad financial derivative scientist’s laboratory. Ultimately through capital market arbitrage it will affect risk spreads in markets completely divorced from U.S. housing.

[SNIP]

Importantly, as well, and this point is neglected by most pundits, the willingness to extend credit in other areas – high yield, bank loans, and even certain segments of the AAA asset-backed commercial paper market should feel the cooling Arctic winds of a liquidity constriction.

If not taken too far – and there is no hint yet of a true “crisis” – these developments may be just what the Fed has been looking for: easy credit becoming less easy; excessive liquidity returning to more rational levels. Still, PIMCO looks for the Fed to issue an insurance policy in the form of lower Fed Funds at some point over the next 6 months...

I'm not sure what just caused this air pocket in the market but these note from the Mortgage Bankers Association (MBA) that hit right at noon must have contributed to the slide:

12:02 MBA says U.S. MORTGAGE DELINQUENCY RATE 4.95 PCT IN Q4, UP FROM 4.67 PCT IN Q3 AND FROM 4.70 PCT IN Q4 2005

12:02 MBA says subprime borrowers more vulnerable to higher interest rates, slower home price gains or price drops

12:01 MBA pushes back forecast for housing market to regain footing to end of 2007 vs middle of year

12:01 MBA says delinquency rates rose in 49 states in Q4; foreclosure inventory rates grew in 44 states

12:01 Late payments rise for all loan types but driven mainly by subprime and FHA loans

12:00 According to MBA, Mississippi, Louisiana, Michigan had highest overall late payment rates across all loan types in Q4

12:00 U.S. Mortgage delinquencies, foreclosures rise in Q4 2006 vs prior quarter and year ago, according to MBA

Here's an intraday shot of QQQQ with 15 minute bars. Note the volume on the big drop:

It's carnival time! No, not that carnaval but the much more exciting 9th edition of the Carnival of Investing. For the uninitiated, this carnival consists of recent articles about investing from the blogosphere. Without further ado, here are this week's submissions:

Welcome to week 57 of the Carnival of the Capitalists. This is an exciting weekend for me, yesterday this blog was highlighted in Barron's and today I get to host the carnival. I encourage all of my new visitors to visit the blogs listed below. You may be surprised at the high quality of writing being done in the blogosphere.

As usual there are a lot of good articles submitted by bloggers on a variety of topics. I didn't even attempt to categorize the articles, as many of them cross multiple topics. I did do a quick sorting of them, so the list below generally flows in this order: entrepreneurship, business, technology, blogging, marketing, internet, financial markets, economy and taxes. Enjoy...