Good morning, worker drones: This Week in Mayhem

Project Mayhem's picture

Good morning, worker drones:  This Week in Mayhem
by Project Mayhem

Zerohedge Treasury

After some interesting disclosures over the past week -- including the fact that a large percentage of the U.S. market volume is comprised of just five financial stocks -- let us review new information and take a look at the week ahead, in order to make some sense of the train wreck already in progress.



PART I:  Last Week in Mayhem

Project Mayhem highlights the most important stories of the last week

1) Five Financial Stocks Dominate Market Volume

Five Stocks No Need To Talk

An increasing majority of equity market volume has been comprised of just five financial stocks -- Citi, AIG, CIT, Fannie, and Freddie.  On Friday  August 21, these five stocks accounted for roughly 30% of overall market volume.  This is quite remarkable.


2) Federal Reserve Disclosed Trading $1.4 trillion in OTC "Other" Derivatives in March 2009  *corrected

Federal Reserve Does Derivatives

The Federal Reserve has apparently been engaged in OTC derivatives trading. As of March 2009, they began publishing this information in several categories broken down by 'risk'. Tyler discovered this bombshell last Friday. In Treasury TIC data there are large sums classified as "Other Contracts".  While it is not clear what specifically is being traded , we know these are not "Single-currency Interest Rate Contracts" nor are they "Foreign Exchange Contracts".  These contracts are classified as "Other Contracts by Type of Risk" -- and they include $85 billion in OTC equity derivatives , and $1.169 trillion (yes, with a T) in OTC credit derivatives. 

Federal Reserve OTC Contract Growth

What is interesting here is that prior to March 2009 such trading was not reported in detail. The March disclosure by category is what is completely new.  These Fed OTC derivatives have $1 trillion+ in capital in "Other".  It is unclear what aspect of the credit capital markets this is allocated to or propping up:  is it CDS?   And if so, what entities are the contracts written on?  At this time, it is unclear what relationship, if any, these $1.4 trillion in Federal Reserve OTC derivatives have to the unusual market activity many of us have been observing.




3) Capital Flees U.S. -- Heads to Undisclosed Tropical Location

Capital Says GTFO

Jim Willie and JSmineset broke this story last week -- capital appears to be subscribing to Keynes's little-known "OMG GTFO" theory.  In other words, the flow of funds for US Corporate Bonds and US Government Agency Bonds have turned negative.   Let me run this through our CNBC translator -- ah yes, here we go, CNBC translation was successful:  "It's never been a better time to buy"

Indeed.  Come and catch these falling knives.





PART II: This Week in Mayhem

    Well there are several things brewing. Project Mayhem prefers to put world events in context. Those of you that are familiar with our style realize we prefer to look at finance through an international geopolitical lens, seasoned to taste with measured speculation. There are multiple financial and geopolitical plane crashes coinciding, although nothing have gone 'hot' as of yet. It is only a matter of time , worker bees!

Fail Plane

Unfortunately, we are all on this plane together.

    The slow motion disaster in progress could fly a bit further before the wings come off. So we need to pay attention to sources of trouble.  This is what we intend to highlight here. These trouble spots could simply fizzle, as they will likely do -- or they may be the source of a black swan which gets sucked into the engine.  You will know there is a problem when the airplane starts to shake.


    Let's start with the finance.


1) International Financial Situation:

a. Equity Rally May Be Hot Air; Bernanke Checks For Rips In USS Spaceblimp

Fail Blimp

Stockmarket Past 6 months

We have highlighted the two important disclosures in Part I -- namely the interesting yet strange facts regarding market volume, as well as the discovery of uncharacterized "other" OTC derivatives on the Federal Reserve TIC data. Based on this information , we believe that there is a good case to be made that this 'rally' is mostly running on gasoline fumes -- fumes provided by sprawling and corrupt institutions such as the Federal Reserve.    Something to keep in mind.  The rug may be pulled at any time.  If you want to trade this mess, you'd best know what you are doing.  Don't pass out.



b. FDIC Has Probably Depleted Its Funds; Tapped Emergency Credit Line



On Tuesday August 25th, the FDIC will release its Q2 report. At the end of Q1, the FDIC had drained its $52.8 billion down to a mere $13 billion.  There have been 56 bank failures since March 31st -- they have cost the FDIC an estimated $16 billion. Our math ain't so good , but captcha says that's a negative number.  We may find with the release of the FDIC's Q2 report that "the well ran dry".

What then, asks you, corporate worker drone?  We're not sure.  Unfortunately, our crystal ball had a segmentation fault early this morning.  There was blood everywhere. But yes, ultimately this really is a matter of perception -- and as such, is basically driven by the MSM and associated network idiocy. So it is difficult to say. Regardless of social effects, speaking pragmatically -- in May 2009, Congress extended the FDIC a Treasury line of credit worth $100bn -- with borrowing authority of up to $500 billion through 2010.  You ask: Has the FDIC quietly tapped this line of credit?   We may find out on Tuesday.  Keep in mind that this is immediate additional pressure on the USTbond complex -- which requires borrowing from Japan, China, and the PetroStates -- or else requires covert or semi-covert monetization by the Federal Reserve. 

Quick -- back to the well Little Timmy !


c. Treasury Wants to Borrow $207 billion -- Looks For Change In White House Sofa

Bernanke Bubbles

Treasury will attempt to borrow approx $200 billion in spacebucks this week.   There should be no issue -- as there are always those indirect bids coming out of the Carribean!  I hear the cocaine business is booming over there.  Anyway,  Karl Denninger writes





2) International Geopolitical situation:

a. Georgia Initiates Naval Blockade of Abkhazia

Saakashvilli Eats Tie

The President of Georgia, Tie-eating psychopath Mikheil Saakashvili, has decided to enforce a naval blockade on the breakaway province of Abkhazia -- on the Black Sea.  A naval blockade is usually an act of war.  But perhaps not here, with any luck.  As some may remember, Georgian shelling of S Ossetian civilians and subsequent Russian counterattack was responsible for a brief 'hot' war which began on 8/8/8.  The situation in Georgia could flare up once again.  

Map of Georgia and Abkhazia

This may be important to your crude investment positions as the BTC pipeline runs through Georgia, and carries approx 1 mmbpd from the Caspian Sea through Azerbaijan and Georgia to both Supsa and Cehyan -- ports on the Black Sea and Mediteranian Sea, respectively.  Two days prior the 2008 Russian-Georgian war, this pipeline was bombed and remained shut down for 19 days.  The impact on the oil price in 2008 was muted due to the massive double-top and subsequent price collapse (Hubbert is rolling in his grave).  We assume a similar non-effect would occur again,  unless this were to escalate into a regional conflict.

Geogia BTC Pipeline


Georgia War Oil Prices 2008





b.  Ex-ISI Chief Says Purpose of New Afghan Intelligence Agency RAMA Is ‘to destabilize Pakistan’

Pakistan Map

The map is to help the Americans.  Europeans may skip.

Pakistan is a key to watch.  The situation on the ground is becoming increasinly unstable due to a confluence of negative forces.  This is why we bring the following to your attention -- an excellent interview with Lt. Gen. Hamid Gul published 12 days ago in the Foreign Policy Journal.


Pakistan Spooks Hamid Gul

The former head of Pakistani ISI from 1987 to 1989 -- Lt. Gen. Hamid Gul (on far left in above picture)-- has made the claim that the newly created Afghan Intelligence Agency 'RAMA' has the officially-sanctioned purpose of destabilizing neighboring Pakistan.   A bold claim indeed.


Pakistan Deep Water Port

Pakistan Deep Water Port.   US wants it.  China wants it.  

For those familiar with the "Great Game" once played in Central Asia by the British Empire, the current game for future control of Caspian oil and gas reserves may not be much of a surprise. Perhaps our friends in the oil and gas industry can share their perspectives on Central Asia.  Pakistan has a deep water port on the Arabian Sea -- and connects via Afghanistan to the Central Asian oil fields. In some policy planning circles we may see more of "the ends justifies the means" types of thinking which characterized past US administrations.  Additionally, Pakistan is a nuclear power which is of course a wildcard . . .  Shall we bet?   The U.S. is "all-in" on pocket 2s.

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Project Mayhem's picture

Just an additonal note -- word on the street is FDIC report is coming out Thursday -- this would be 57 days after end of Q1 , rather than the usual 55 days.    The suspense is killing me.

michael olsen's picture

I would like to thank all those involved in anyway to this site and all who post.Everyday I cant wait to read this site.This stuff feeds my head and keeps me going in the right direction.I only wish that I could put my thoughts together and convey my message as well as everyone here.

When this thing finally breaks,I hope were all in the best position not to get sucked down with the blind sheep.Hey that mogumbo guru guy was right,buy gold and silver.Hey this investing stuff is easy.

                                                            Michael Olsen

                                                            Rye ,New York



Bruce Krasting's picture

Re Fed OTC activity. What jumped out at me was the amount of otc stuff on interest rates. What the hell is that? In 07 they have $700b It jumps up to over 4 Trillion. This is two years of our funding requirement. It is nearly half the debt that is in the public hands. Given that only 40% of the debt is longer than 2 years it means they wrote contracts on most of what is out there?

The Fed can't do this size business with Goldman or Merrill. Can they? It has to be CB stuff. Whatever it is, it is too big not to have a more complete explanation. Thanks to ZH (and others) we might just get an explanation on this one. Can't wait!

Anonymous's picture

The explanaion is simple. ZH is wrong. these are not the feds positions

Project Mayhem's picture

Tyler says only the Fed has the authority to hold securities on behalf of the US public.

Anonymous's picture

Perhaps as custodian, which is why the Fed produces the report you cite which shows US holding of the instruments, not holdings where FRB is a counterparty.

What are you playing at? The report does NOT provide the fact you need to support your key allegation.

Bruce Krasting's picture

Great post. Scared the shit out of me.

I was struck with the Capital Flees America part. My read of the Graph is that the red line peak to trough is +/- $700b. Big number.

If this much money is leaving the table how come the dollar, bonds and stocks are all doing so well? At the end of the day this is a flow of funds story.

It looks like the foreign CBs put a gun to the Fed/Treasury and said: "Take us out of Agency MBS. If you don't we will not play ball with you any longer". Nice. America still has the upper hand in global economics. Not.

Uros Slokar's picture

Being such a novice at the whole finance "game", this site has proven to be nothing short of a revelation. Stories like this are what keep me coming back. To everyone in the Zero Hedge universe, kudos. Don't stop fighting against the man. Sorry, have to run, the GS spy outside my window in the 5000$ suit is listening as I type. haha

Anonymous's picture

Hi PM - I just emailed you again - in case you have a chance to check your gmail account today. Thanks!

Ich bin ein whatever's picture

PM, that was wonderful work.

I fully appreciate the amount of time it took for you to put that together for us.

You won't find anything that comes near this in the mainstream media.

Anonymous's picture

A piece of beautiful work, indeed. How much time do we have?

straightershooter's picture

Pakistan? Who cares?

Israel could attack Iran tomorrow.

Project Mayhem's picture

This is true -- but notice Pakistan borders Iran.  Iran is implictly backed by Russia.  Russia also influences large parts of central Asia (remember, the U.S. was kicked out of Uzbekistan by actions of the FSB)  Anyway if Israel attacks Iran, they will need to use air bases in Georgia.  This would no doubt ignite a regional war.  


On the other hand, there is lots of disinformation around so it is hard to analyze what is going on regarding Iran, so I try to avoid speculating on this topic unless there is new concrete information (We have heard about imminent attack on Iran for years now!)

HankPaulson's picture



Brilliant. Well done!

My cognitive dissonance's picture


I've always read and enjoyed your comments but you really out did yourself this time. Excellent!

I look forward to reading more.

MurryRothbard's picture

Love the work PM, you're an artist

AnonymousMonetarist's picture

I see no paraffin in Ben's explosions.

alien-IQ's picture

Damn that was good.

Anonymous's picture

Re Item 1b (FDIC DIF)....


Note that, of the $39 billion decrease in the DIF "balance", $27.875 billion (70%) is due to an increase in Contingent Liabilities. Actual cash may be negative, but expect that some of the Q2 losses were "met" by decreasing the contingent liability reserve.

Further, there is $8.9 billion ($5.6 one-time + $3.3 regular) in Q1 assessments. These are charges incurred by banks as of 6/30, and payable to FDIC by 9/30.

Project Mayhem's picture

Thanks.  The input is appreciated, as I think I may be over my head -- haha.   I'll be interested to read people's reactions to the FDIC report tomorrow.

Anonymous's picture

TD you are geopolitical economic comedian mensches after our own heart. Herewith some penchant truculent observational paeans:

Part I: Last Week

1. Banks with zero carry on their Treasuries and Mortgages led this artificial rally throughout and anyone foolish enough to jump in now is testing the greater fool hypothesis to the limits. The fundamental problem seems to be the 10% or 5% net capital leverage does not give them much of a cushion against higher interest rates. Wouldn't it be interesting to see the Fed bankrupt playing out their rigged insider big five financial trading scheme?

2. Kudos for the sleuthing. Herein lies a problem for those of US accustomed to using COT figures to our profit. With US Banks still holding some $200 T of OTC derivatives versus the $600 T worldwide, hundreds of times their net capital, and not marked to market, how are we to get bona fide transparent market information signals? $85 B in OTC Equity derivatives certainly not enough to pump the March lows 50%, but that was left to the big five banksters who are now doing the monopoly media mating dance to bring retail sacrificial lambs into the knacker. $1.169 T not enough to hedge rising interest rates either, so we think bankster net capital faces a second more terminal crisis that BB, LS, TG and BO may not survive economically or politically speaking, judging from the town halls. (Get those KBR swine flu camps ready!).

3. Capital flight, the ultimate illustration of Gresham's Law that bad money drives out good. Sir Harry Schultz in June HSL reported Overseas Embassies were unofficially leaking news of instructions to convert massive quantities of dollars into local currencies to maintain operations for quite some time. We are students of Nathan Rothschild's famous head fake after the Sunday Battle of Waterloo, where, forearmed with news from carrier pigeons, he stepped up to the LSE Bourse to publicly sell, while his private proxies bought everything sold in the panic triggered by people without his news assuming Britain had lost to Napoleon. And we are interested in the apocryphal Reagan Wanta Forex story of trillions of dollars made at the ruble's expense, as we were with multiple stories including Tom Clancy of passenger jets flying into DC buildings before the actual events, accompanied by official denials. We think the more interesting scenario is, to borrow an overused CNBC LK phrase, King Dollar, triumphing as US financial markets collapse or go on holiday, and there is just not enough physical gold, silver and copper available to buy. (We already saw this when dealers ran out of Silver Eagles, which went to 100% premiums.) While COT figures long the dollar here now confirm this, we worried about larger opaque OTC derivatives on the other side of the trade, until we realized they are meaningless when TILT GAME OVER lights appear on the Fed financial pinball machine.

Part II: This Week

1. International Finance

a. Hindenburg Omen Market

Last Monday we got a Hindenburg Sell omen with more than 90% of the volume down.
Last Friday we got a Hindenburg Buy omen with more than 90% of the volume up.
The result is that ordinary market mortals are confused. It is not uncommon to get conflicting Hindenburg signals before a major market move. And while the skeptics say lightning strikes and market crashes don’t happen two Falls in a row, we point to 1930 and other historical instances spelled out on our free market tome The Gift, begging to differ. However, in this tealeaf reading technical analysis age of charts, we still fortunately have fundamental analysis, which is still valid though misused. While alleged fundamentalist WEB writes editorials for the NYT about Buying American, and Buying Now, after the market is up 50%, and Economic Council, Fed and Treasury Chairs and their media enablers repeatedly wax on enthusiastically about green shoots, mustard seeds and recovery around the corner, the little child in us observes the Emperor’s Clothes and points out even Subprime besmirched S&P Ratings had the market selling at 127 times trailing earnings the most recent quarter versus P/Es of 7 at 1932, 1941, 1974 and 1980 lows. And more recently, this market sold north of 150 times actual earnings. People who don’t have their life savings portfolio where their mouth is will say markets look ahead. The tired old trader in US shouts, Show US the real earnings ahead!
b. FDIC Depletion

Yes, the FDIC is out of reserves and accessing $500 B in credit lines, and yes, this will not fund enough moral hazard to bail out every broken bank upside down now in consumer and corporate loans, credit cards and mortgages. Big banks may eventually fall upside down in Corporates, Municipals and Treasury Bond IOUs as interest rates rise to reflect real risk and scarcity of cash capital. By now, everyone in all Congresses and Courts may understand Federal and State Governments are upside down with future mandated unfounded obligations for profligate warfare and welfare spending taxing and impoverishing the disappearing middle class, as well as broken Medicare Social Security Trust ponzi schemes. Who pays to call out the National Guard or armed Military to violate posse comitatus when there are no money, property or security values left? Evian Gonzales, Kent State, Katrina, Murrah Building, Nine Eleven, Ruby Ridge, TWA 800. Who profited?
Government shills got away bankrupting America two generations by making bigger and bigger debts and promises they and overburdened taxpayers and workers could not pay or fulfill. (Think Boxer the Horse in Animal Farm going to the glue factory.) Now GS agents face Town hall meetings with an aroused electorate who suffer government fools no longer. The economic shell game may be over well before the 2010 elections. K, RR and LS protégé TG’s only clue is IMF foreclosures with higher taxes and destroyed economies. Good luck American brain and capital drain. Keep cash in hand as the last one out turns out the lights.

c. Treasury Borrowing.

$207 B may be chump change for a $12 T Treasury Market. We think the $5 T annualized summer borrowing rate is not. By fall, we expect much higher Treasury rates to reflect increased supply and reduced demand, even with an economy in free fall, temporarily suspended in strobe light sound bites by government guards. Someone will pay for these bash bailouts and clunker spending programs. Wonder if HP sold his GS tax free T Bonds yet?

2. International GeoEconomicPolitics, the giant game of Risk.

a. Georgia Abkhazia Blockade.

While yesterday’s news was the Iran nuclear invasion called off by Israel and the US, it is always the apparent boardroom energy game surprise that moves markets most. After NATO and the US were apparently surprised triggering the Russian Invasion of Georgia last summer, we suspect Georgia is better armed and supported this time, maybe with a US sub or two and aircraft carrier attack group. Although at least two or three can play at this game, since Red October, we have been better at it than Russia and Iran, albeit China is catching up. (Little has changed since Persian gold assassinated King Philip and motivated Alexander to become The Great.) While last summer’s war games in Georgia did not much move oil collapsing from $149 highs, with oil having moved up from $35 to $75, we may be in for boom oil like before the Afghanistan, Persian Gulf and Iraq Wars, which were, after all, about energy access with pipelines to the West. ie, 8/8/8 may become a bigger 9/9/9.

b. ISI ex sees Afghan War as a Pretext to Invade Pakistan

While it is hard for non-intel folk and intel folk alike to speak correctly or publicly about cloak and dagger or to confirm Charlie Wilson’s War views of miserable covert activities which may have created the Muslim Brotherhood and Al Qaeda, we may be forgiven for entertaining some curious divergent non-confirmations in the pursuit of profits. What in Pakistan is worth the Messiah President’s plummeting polls to crank up the war on Afghanistan with troops as well as expensive predator drones? Could it be a bad economy at home and more last-gasp neoKeynesisan warfare welfare spending that bankrupted US? Could it be resurgent Islamic fundamentalism that toppled the USA bought General M? Could it be the Taliban coming within spitting distance of American or Chinese Korean Russian nuclear weapon technology transfer with the help of sympathetic radical fundamental (the two are redundant) Muslim Pakistanis? Or could it be an elaborate intel op which Martyred Oxford Educated BB to leave her corruption co-opted husband in charge and more amenable to Western Energy intrigue? We leave that to a future Clive Cussler or Tom Clancy action espionage novel. Right now, we see the Greatest Depression recipe for polkadot deflation with higher costs of living despite contracting and defaulting credit, economy and money supply. Big corporate government may be just about to have its own Waterloo trade. The chart of gold versus commodities is deflating:

Danger Will Robinson. Donuts to dollars?

Cindy_Dies_In_The_End's picture

Hey Project:


Ya know I think you're sexy right?  ;)



Epic awesome commentary. Geez with the pictures some of my slower friends might actually read and understand this.


Thanks for your efforts.

Project Mayhem's picture

Thanks.  Though you haven't even seen me , lol.  For all you know I could be from somewhere in New Jersey.  Project Mayhem is WAY into the whole Guido style. 


Ah yes, pictures always make things more fun.  Robottrader knows what I'm talking about.


No problem -- the effort was worth it.  Cheers, and thanks to Marla and Tyler for giving me the opportunity to post.

Project Mayhem's picture

It's the reverse side of the Treasury Building.   I bled the color from the roses much like Treasury has bled the wealth from this country. ;)

Anonymous's picture

Thank you Mr. Mayhem-- You, as they say, are very good. Between the destabilization and gas fumes it's hard to know where to hold my handkerchief...

Anonymous's picture

Great article by Eric Margolis: a must read on the "Great Game" and WTF are we there for.

Quittin' time in Afghanistan
Afghanistan | War
by Eric Margolis | August 23, 2009 - 10:22am

article tools: email | print | read more Eric Margolis
An election held under the guns of a foreign occupation army cannot be called legitimate or democratic.

This week's stage-managed vote in Afghanistan for candidates chosen by western powers is unlikely to bring either peace or tranquility to this wretched nation that has suffered 30 years of war.

The Taliban and its nationalist allies rejected the vote as a fraud designed to validate continued foreign occupation and open the way for western oil and gas pipelines.

The Taliban, which speaks for many of Afghanistan's majority Pashtun, said it would only join a national election when U.S. and NATO troops withdraw.

After all the pre-election hoopla and agitprop in Afghanistan, we come out the same door we went in. The amiable U.S.-installed leader, Hamid Karzai, may remain in office, powerless.

Yet Washington is demanding its figurehead achieve things he simply cannot do. Meanwhile, Karzai's regime is engulfed by corruption and drug dealing.

Real power remains with strongmen from the Tajik and Uzbek minorities and local, drug-dealing tribal warlords who are paid by Washington to pretend to support Karzai. Behind the Tajiks and Uzbeks stand their patrons, Russia, India and Iran.

Afghanistan's Pashtun tribes, which make up 55% of the population, are largely excluded from power. They were the West's closest allies and foot soldiers ("freedom fighters") during the 1980s war against the Soviets.

The Taliban arose during the chaotic civil war of the early 1990s as a rural, mostly Pashtun religious movement to stop the wide-scale rape of women, impose order, and fight the drug-dealing Afghan Communists. The so-called "terrorist Taliban" received U.S. funding until four months before 9/11. Washington cut off aid after the Taliban made the fatal error of giving a major pipeline deal to an Argentine rather than U.S. oil firm for which Hamid Karzai once reportedly worked as a consultant.

Oil pipeline

The current war in Afghanistan is not about democracy, women's rights, education or nation building. Al-Qaida, the other excuse, barely exists. Its handful of members long ago decamped to Pakistan. The war really is about oil pipeline routes and western domination of the energy-rich Caspian Basin.

Afghanistan is a three-legged ethnic stool. Take away the Pashtun leg and stability is impossible.

There will be neither peace nor stability in Afghanistan until all ethnic groups are enfranchised. The West must cease backing minority Tajiks and Uzbeks against majority Pashtun -- who deserve their rightful share of power and spoils.

The solution to this unnecessary war is not more phoney elections but a comprehensive peace agreement among ethnic factions that largely restores the status quo before the 1970 Soviet invasion. That means a weak central government in Kabul (Karzai is ideal for this job) and a high degree of autonomy for self-governing Pashtun, Tajik, Uzbek and Hazara regions.

Government should revert to the old "loya jirga" system of tribal sit downs, where decisions are made by consensus, often after lengthy haggling. That is the way of the Afghans and of traditional Islamic society.

All foreign soldiers must withdraw. Create a diplomatic "cordon sanitaire" around Afghanistan's borders, returning it to its traditional role as a neutral buffer state.

The powers now stirring the Afghan pot -- the U.S., NATO, India, Iran, Russia, the Communist Central Asian states -- must cease meddling. They have become part of the Afghan problem. Afghans must be allowed to slowly resolve their differences the traditional Afghan way, even if it initially means blood. That's unavoidable.

The only way to end the epidemic of drug trading is to shut border crossings to Pakistan and the Central Asian states. But those nation's high officials, corrupted by drug money, will resist.

We can't solve Afghanistan's social or political problems by waging a cruel and apparently endless war. A senior British general just warned his troops might have to stay for another 40 years. (He later retracted).

The western powers, Canada included, have added to the bloody mess in Afghanistan. Time to go home.

crzyhun's picture

The big picture helps to make granular decisions.

I have said here and elswhere before, the market shifted, like a ripple in the force field, in March, 09. This is confirmation of my theory.

Thanks for the work. More again?

Project Mayhem's picture

Yes there will be more .  I will try for at least one good article a week.

Ned Zeppelin's picture

I hope this is appropriate, but I have read Jim Kunstler's blog for a while, and find him to be another truthsayer who has been marginalized as yet another unAmerican naysayer - his column today, worthy of its own entry on ZH IMHO:  

Financial Crisis Called Off

          Whew, what a relief!  Everybody from Ben Bernanke and a Who's Who of banking poobahs schmoozing it up in the heady vapors of Jackson Hole, Wyoming, to the dull scribes at The New York Times, toiling in their MC Escher hall of mirrors, to poor dim James Surowiecki over at The New Yorker, to - wonder of wonders! - the Green Shoots claque at the cable networks, to the assorted quants, grinds, nerds, pimps, factotums, catamites, and cretins in every office from the Bureau of Labor Statistics to the International Monetary Fund - every man-Jack and woman-Jill around the levers of power and opinion weighed in last week with glad tidings that the world's capital finance system survived what turned out to be a mere protracted bout of heartburn and has been reborn as the Miracle Bull economy. Our worries over.  If you believe their bullshit.  Which I don't.

            All this goes to show is how completely the people in charge of things in the USA have lost their minds.  They seem to think this mass exercise in pretend will resurrect the great march to the WalMarts, to the new car showrooms, and the cul-de-sac model houses, reignite another round of furious sprawl-building, salad-shooter importing, and no-doc liar-lending, not to mention the pawning off of innovative, securitized stinking-carp debt paper onto credulous pension funds in foreign lands where due diligence has never been heard of, renew the leveraged buying-out of zippy-looking businesses by smoothies who have no idea how to run them (and no real intention of doing it, anyway), resuscitate the construction of additional strip malls, new office park "capacity" and Big Box "power centers," restart the trade in granite countertops and home theaters, and pack the turnstiles of Walt Disney world - all this while turning Afghanistan into a neighborhood that Beaver Cleaver would be proud to call home.

            By the way - and please pardon the rather sharp digression - but does anybody know if they buried Michael Jackson yet?  It's only been a couple of months. And, if not, is that the stench now wafting across the purple mountains' majesty from sea-to-shining sea? Isn't it a little indecent to keep the poor fellow waiting?  Or is a really surprising comeback secretly planned, with product tie-ins and all?

            America loves the word "recovery" as only a catastrophically sick society can. "In recovery" is the new universal mantra of loser individuals and loser nations.  Everybody in the USA is in recovery.  Even Michael Jackson (he may have given up on somatic activity but, on the plus side, as the Rotarians love to say, he's quit using drugs for once and for all, and the magazines have stopped publishing photos of him taken after 1990, when he turned himself into something out of the Hammer Films catalog).

            To sum it all up, the US economy is in recovery.  Paul Krugman says that we'll soon realize that Gross Domestic Product (GDP) is growing.  He actually said that on the Sunday TV chat circuit. Not to put too fine a point on it, but I would really like to know what you mean by that Paul, you fatuous wanker.  Do you mean that the Atlanta homebuilders are going to open up a new suburban frontier down in Twiggs County so that commuters can enjoy driving Chrysler Crossfires a hundred and sixty miles a day to new jobs as flash traders in the Peachtree Plaza?  Do you mean that the Home Equity Fairy is going to wade into the sea of foreclosure and save twenty million mortgage holders currently sojourning in the fathomless depths with the anglerfish?  Do you mean that all the bales of deliquescing, toxic "assets" hidden in the vaults of Citibank, JP Morgan, Bank of America, et al, (not to mention on the books of every pension fund in the USA, and not a few elsewhere) will magically turn into Little Debbie Snack Cakes on Labor Day weekend?  Do you mean that American Express and Master Card are about to declare a Jubilee on accounts in default everywhere?  Do you mean that General Motors will produce a car that a.) anyone really wants to buy and b.) that the company can sell at a profit?  Are you saying we get a do-over, going back to, say, 1981?  Did we win some cosmic lottery that hasn't been announced yet?  What's growing in this country besides unemployment, bankruptcy, repossession, liquidation, gun ownership, and suicidal despair?  In short, are you out of your mind, Paul Krugman?

            The key to the current madness, of course, is this expectation, this wish, really, that all the rackets, games, dodges, scams, and workarounds that American banking, business, and government devised over the past thirty years - to cover up the dismal fact that we produce so little of real value­ these days - will just magically return to full throttle, like a machine that has spent a few weeks in the repair shop. This is not going to happen, of course.  It is permanently and irredeemably broken - this Rube Goldberg contraption of swindles all based on the idea that it's possible to get something for nothing. And more to the point, we're really doing nothing to reconstruct our economy along lines that are consistent with the realities of energy, geopolitics, or resource scarcity.  So far, our notions about a "green" economy amount to little more than blowing green smoke up our collective ass.  We think we're going to build "green" skyscrapers! We're too dumb to see what a contradiction in terms this is. The architects are completely uninterested in the one thing that really is "green" - traditional urban design - and most particularly the walkable neighborhood.  That's just too conventional, not special enough, lacking in star power, not enough of a statement, boring, tedious, so not cutting edge! We blather about high speed rail, but you can't even get from Cleveland to Cincinnati on a regular train - and what's more amazing, nobody is really interested in making this happen.  All we really care about is finding some miracle method to keep all the cars running.

            What we've been seeing is nothing more than a massive pump-and-dump operation in the stock markets, most of it executed by programmed robot traders, with the trading nut provided by taxpayers current and future.  These shenanigans add up to new risks and fragilities so extreme that the next time a grain of sand catches in the exquisite machinery they will sink the USA as a viable enterprise.  We will end up discrediting not just capitalism, but also the idea of capital per se, that is, of deployable acquired wealth.  As this occurs, of course, events on-the-ground will give new meaning to the term "reality television."

mcgowanmc's picture

Of fat tails and leptokurtosis:

"If markets are not efficient, if they are not a random walk, then they are interdependent (as opposed to independent). What does interdependent mean? It means the market has a memory – that one day’s prices affect the next day's: that if the market sees a big down day, the probability is actually increased that the next day will be down (and vice versa). It means that one week’s prices affect the next week's, that one year’s prices affects the next year’s and so on. The market remembers."

Scott Reamer  Mar 02, 2005

Two months before oil peaked.

"We emphasize the importance of understanding dragon-kings as being often associated with a neighborhood of what can be called equivalently a phase transition, a bifurcation, a catastrophe (in the sense of René Thom), or a tipping point. The presence of a phase transition is crucial to learn how to diagnose in advance the symptoms associated with a coming dragon-king. Several examples of predictions using the derived log-periodic power law method are discussed, including material failure predictions and the forecasts of the end of financial bubbles."


Project Mayhem's picture

Thanks.  .  .  I like this area of mathematics. . .   Phase transition in nonlinear dynamical systems is one of the most beautiful things in this universe...  I'm not sure if it still applies to finance, due to what seems to be manipulation --  but it still applies to cardiac rhythms, fluid turbulence, brain electronics, etc.  What's so interesting is how periods of stability appear in otherwise unstable systems.

Close up of Bifurcation Fractal : Quadratic Iterator

*Note how there are periods of stability within chaos!  Wonderful!


I'm not so good at applying this to financial markets -- Martin Armstrong is a better read for that sort of thing.  Personally, I have tried to apply chaos theory to credit markets, using a technique I pirated from image processing.   Basically, the one powerful method of analyzing time-dependent data is to remove the time component of any set, and plot the data purely in phase space.  I did this oncefor LIBOR.  I'm pretty sure I got a strange attractor. 


Strange Attractors


Here were my results:


Credit Spreads and Strange Attractors

During an attempt to apply chaos theory to the credit markets, I noticed something remarkable. LIBOR spreads graphed in phase space appear to exhibit attractive behavior of unknown topology.

I am uncertain if this behavior is unique to the data series (noise), or whether these are actual basins of attraction in a nonlinear dynamical system. If this model continues to hold using higher resolution data, then framing the state of credit systems within attractive basins may provide a way to assess their functional stability in phase space."


Did Project Mayhem get a strange attractor?  You be the judge!   ---^



Anyway despite the fact that strange attractors in apparently exist in LIBOR phase space, I think the biological applications are far more pleasant to look at!

An EEG trace from the olfactory system of the brain of a rat, during an epileptic seizure. The trajectory of a point moving through this space in time traces the subspace that is occupied by a strange attractor. We have colored it red when the fourth variable is negative and blue-white when it is positive. The Hausdorff dimension is reduced to 2.52, and the structure of the strange attractor appears to be that of a 2-torus.


From:  Chaos and Neurodynamics


mcgowanmc's picture

Let's start here:

"I'm not sure if it still applies to finance, due to what seems to be manipulation"

Chaos theory applies.  Even more so in that you can "see" the manipulation

as a, what's the word, outlier to the schematic. TPTB try for the avoidance of the "solution" (their insolvency), but the "act of avoidance throws the strange attractor out of sync.

As well the act of avoidance pulls the "problem" closer to the vortex, which is intent on "solving" the problem.  Am I making myself clear?

The bottom line. The problem should be solved ASAP. For the most peaceful outcome. Because there is a timewall where the solution will be presented even if the characters in the problem don't realize it. Eventual delay by the characters in question will only pull them into the vortex. Violent ending assured.  But the problem will be solved.

More on request. Mandelbrot, Cotton prices,

and the computer drawing of a curved line. ;}

And thanxx for your reply Mayhem.  Well met.

Project Mayhem's picture

You write: "TPTB try for the avoidance of the "solution" (their insolvency), but the "act of avoidance throws the strange attractor out of sync."

By this, do you mean that a given phase space orbit falls into a different basin of attraction due to market manipulation?  Or do you mean something else? 


You write, "As well the act of avoidance pulls the "problem" closer to the vortex"

What vortex?  Is this a math concept , or just a metaphor for where the system becomes unstable because of the actions of our  authorities?



mcgowanmc's picture

Put "time back in". In your post you stated,

I think, that you took it out for phase change.


given phase space orbit falls into a different basin of attraction due to market manipulation"

exactly.  a new pole.  Three new poles with "time" added back.  Note you see a vortex in every bifurcation. 

"What vortex.  OK.  Now we're there. You're moving from one plane to the next.  The vortex takes you there.  Cosmic, eh ;}

The vortex is a math concept:

 When cascade propagation is limited by the connectivity of the network, a power law distribution of cascade sizes is observed, analogous to the cluster size distribution in standard percolation theory and avalanches in self-organized criticality. But when the network is highly connected, cascade propagation is limited instead by the local stability of the nodes themselves, and the size distribution of cascades is bimodal, implying a more extreme kind of instability that is correspondingly harder to anticipate.

More on request.  Again.  Well met.  James



mcgowanmc's picture
Scalar and vector potentials


The vector potential is related in exactly the same way to the currents. Each little piece of current creates a retarded vector potential that is proportional to current and inversely proportional to distance, and the news about where the current is travels at the speed of light.

You are probably already familiar with the scalar potential: in many situations, it is just the same thing as voltage.

One of my favorite tornadoes has a lightening bolt coming out of it.

Anonymous's picture

Re #2. As was already pointed out in comments to original, the conclusion that the Fed "started getting involved in derivatives" in March 2009 is DIRECTLY CONTRADICTED by the published chart. Column 11 is "total of 12,13,14". Thus, it is simply the detail in columns 12-14 that is missing for prior years.

Can someone (anyone??) enlighten me on this ?

Interesting that high % of comments posted to original article after this was noted relate to Tyler Durden's identity. I thought this blog was focused on content rather than personality ...

Project Mayhem's picture

I think you are correct.  Thanks.

There are questions, however.  Why was the detail missing for prior years? Tyler says it is "a new item without a doubt."  Did they just decide to start publishing this extra data in March 2009?   Why?  Are the Fed involved in OTC credit derivatives at all?  What types?  Are these CDS?  What is the credit exposure?  What is this "other" category? Are there any details on these OTC contracts?  Who are the counterparties?  There are lots of questions and no answers forthcoming.  You are correct that this is not 'new' -- but prior to March 2009 we did not know what comprised these categories.  I will edit to clarify this point.  I also added a chart of the data so people can see for themselves what the numbers are doing.


Anonymous's picture

Before moving on to those questions, please answer this question.

Does the TIC report you cite describe the FED Reserve Banks holdings? I think not, and if not, oops, this is a non story, or at least not the story you're working.

If I'm wrong then never mind, please continue.

Project Mayhem's picture

Yes this TIC report describes FRB holdings.

Anonymous's picture

Ignore my most recent query.

You are mistaken, the report is the aggregated report of contracts with foreign residents held by TIC filers, not the Feds position

link to treasury report

Come on boys, didn't you get Marla's note that you're playing in the big leagues now.

It's Monday night (Tuesday morning), Tyler published this on Fri. As of Monday night (per your response) you still hadn't verified the critical "fact" supporting your theory.

So,put your guns away and learn to google, or you're not going to have a role to play in this 'revolution' for very long

Mayhem indeed

mcgowanmc's picture

That is the vortex.  There are no counterparties.

Anonymous's picture

True dat - these are all the losers

Anonymous's picture


I love it. Why can't the crap-ass media give us this kind of stuff. Thanks for putting this together.

ratava's picture

The U.S. is "all-in" on pocket 2s.

Let uncle B deal the cards, I bet he could inflate the 51% a bit.

Neo of Zion's picture

more like a 2-7 not suited. Quite unlikely 2-2-7 flops on the table...

taraxias's picture

Great stuff, Mayhem.

peoplesdemocraticsocialistrepublicofmaryland's picture

Good job Mayhem.  Thx!

Anonymous's picture

So perhaps the Fed said go forth and take risk, we got yer asses covered? Putting on my Mr. Spock helment that seems most logical

- Steak