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Must Read: UBS' Andy Lees On Why The US Economy Is, All Else Equal, Doomed

Tyler Durden's picture


"With all the mess going on at the moment, I thought it was worth while stepping back a little and trying to look at the bigger picture." So begins Andy Lees' latest must read letter to clients whch explains succinctly virtually the entire story of where we were, how we got to where are now, how the current trajectory is unsustainable, why due to decades of capital misallocation anything that the Fed does now is essentially irrelevant, why our untenable debt pile does nothing but perpetuate an unsustainable ponzi scheme which will result in an unseen explosion in the true cost of capital: gold, and why the bond market will eventually, and inevitably, force an epic repricing in the cost of non-gold capital absent the arrival of the deux ex machina of real, actionable innovation that the Fed, and all global central planners, keep hoping for. Because the longer we keep plugging away with that worthless substitute, financial innovation, which is anything but, the greater the final collapse. Andy's conclusion: "Until the debt is cleared and capital starts to be properly allocated, economic growth per unit of additional debt will continue to sour. Until we get some real breakthrough technology, requiring large amounts of capital to both innovate and then roll out, we have no chance of supporting the economy." Too bad than that this absolutely spot on observation reflects precisely the opposite of what the Fed is pursuing. Which is why, all else equal, and it will be unless the Fed is finally eliminated from existence, America, and the entire western way of life, is doomed... But don't take our word for it. Here is Andy.

Why are we here: simple - years of central planning resulting in the greatest experiment in capital misallocation in history.

We are in this mess because of excessive leverage and excessive consumption, financed by excessively cheap real capital – (not just Bernanke & Greenspan but further back to the end of the gold standard, and in fact even before that as it was this misallocation of capital that forced us off the gold standard in the first place). If capital had been allocated productively, then by definition debt would fall as a percentage of GDP. Total debt may rise, but efficient allocation of capital would always mean the economy would grow faster than the debt as it means you are making a positive rather than negative real return on that capital.


Whichever way you look at it, capital has been massively misallocated for years.

Corporate profits... or massive debt-funded ponzi scheme?

How can that be when corporates report massive profits? The profits are based on paying their workers a salary that meant they could only buy the goods they made by borrowing; in other words, a massive unsustainable ponzi scheme that could only ever end up with default.  Without the household debt accumulation, there would be no market to sell their products to, and without paying the workers sufficient, the debt would always have to default.


This required a massive increase in financial innovation to keep the illusion of corporate profitability alive – (household debt was a way of delaying putting the true costs through the corporate P&L account and recognising the costs). Financial sector innovation is itself another form of capital misallocation, taxing people away from real innovation – (to keep the illusion alive, an ever greater percentage of economic output had to be allocated to this illusion machine) - helping add to the resource constraint we are in today.

If financial innovation, which we have so much of is not needed, what is the right kind? And why is it so sorely missing.

A lot of what are described as efficiency gains have been just the removal of levels of safety and the removal of innovation in the system. Innovation and ongoing operations are always and inevitably in conflict, with the most readily apparent conflict between short and long term priorities. A second handicap to innovation is the way efficiency is achieved by breaking down things into small repeatable tasks. This specialisation and repeatability is a company’s greatest strength, but it is also its greatest weakness. Innovation is neither repeatable nor predictable. It is non-routine and uncertain. (Book: The Other Side of Innovation).

The culprit: none other than the great moderation, and, now, ZIRP4EVA:

Low real interest rates support excessive consumption, taking money away from innovation and balance sheets. When the US started suffering from its peak oil in 1970, rather than innovation it turned to globalisation to tax the broader global resource balance sheet, just as Britain and Europe had done 100 years earlier through colonialism, and recently accelerated that with the WTO. Globalisation has always been about accessing resources.

Which bring us to topic #1 here, and everywhere else where economics is involved: cash flows.

This has been a factor mobilisation story on unprecedented proportions, but appears to have reached its conclusion as resource constraint has meant the “cash flow” to grease the wheels has started to become more expensive and constrained. Profit without productivity can only carry on for a finite period; we are now clearly consuming down our balance sheet or putting it through the P&L account.


So we are left with a massive amount of debt, a massive amount of capital and labour that is unprofitable in the world we face, and a balance sheet of insufficient resources to keep the illusion alive. The only thing that will get us out of this in the long run is innovation which will expand the balance sheet, expand the pie and create the jobs that people want.


How do we get rid of the debt? Are we in a debt trap whereby any interest rate hike will kill the recovery? Clearly it is going to be incredibly difficult, but low real rates are the cause of the problem, not the solution. I don’t personally see a  zero rate trap, but we need to allocate capital far more productively than we are doing.

The cost of money itself is hugely important. How negative were real rates? When people talk of borrowing from the future, surely the same logic applies to the cost of capital. If we have had low or negative rates that supported excessive consumption, we now need to have high real rates to direct capital back to innovation and gradually repair the balance sheet. The real cost of capital has to go up. No matter how much fighting the Fed and Treasury do, the real cost of capital will rise. The bond markets have to be allowed to clear some of the debt and thereby remove some of this misallocation of capital.

It's not "debt trap", it is "Fed trap"

Does that mean we are trapped in a position whereby the Fed cannot raise rates? Quite frankly it doesn’t really matter what the Fed does; real rates have to go up, are going up and will go up. The more the Fed and the government misallocate capital, the more the real cost of capital will have to rise higher to compensate. The only thing that will get real rates down is either a massive new discovery of incredibly cheap fossil fuels or the innovation that delivers cheap fusion. Otherwise it is a case of the cost of capital rising and causing demand destruction. 


Getting the central banks monetary policy inline with the real cost of capital in the market must be the first step to rectifying the misallocation of capital. One obvious thing would be for economists to stop ignoring CPI of food and energy as irrelevant as it is the fastest growing part of the economy. By ignoring it, they are turning what should be a smooth and relatively painless transfer of capital into an occasional out-of control collapse and transfer. Getting both a proper monetary and fiscal policy framework in place, based off genuine data rather than smoke and mirrors and fiddles must be the first priority. 

Which brings us to where we are now: a massive, unsustainable ponzi scheme:

Whilst politicians and investors acknowledge that excessive leverage created the asset and debt bubble, they do everything they can to prevent a rational deleveraging or efficient allocation of capital. For the moment the best measure of the cost of capital is gold. For years gold fell as fiat money was printed and this unsustainable ponzi scheme established, however as that ponzi scheme now unravels, gold must go up. The scale of both the ponzi scheme collapse and gold appreciation will be huge.


The problem is total credit market debt is still increasing. 


As Fitch recently highlighted, Chinese on & off balance sheet debt has expanded by nearly 40% GDP in each of the last 3 years. In other words, the misallocation of capital is continuing making the ultimate problem that much worse. China is now getting almost no growth per unit of additional debt. 


With each additional unit of debt, we are digging ourselves a deeper hole to get ourselves out of. Surely it is better to at least slow the digging? If we can allocate capital productively at the margin – (we know where we need to start making real returns) – then once we can start making a positive return on that marginal debt, then it becomes easier to support the residual debt we have.

If Andy is right, the framework of the next great class class conflict is set: it will be between the productive private economy and the "unproductive economy." Yes: Marxist tensions are about to make a repeat appearance:

Private sector annuity rates will be tumbling and yet the unproductive public sector are still being given great pensions. We are taxing the productive private economy to give to the unproductive economy. This has to end. The idea of a European fiscal union fills me with dread as that would be locking this unproductive transfer into stone. Rather than keep kicking the can down the road, lets own up to our excesses and start putting the economy back on track. Don’t reward the rioters in London with yet another handout; force them to pay for the damage they have caused and the police time they have consumed.

Is Greenspan to blame for this dead end? Yes... but only so far. One can just as readily blame the traditional duel between short and long-termism, or what is known better as "it will be the other administration's/generation's issue." In other words, Washington is just as guilty as Wall Street, and that infamous private bank.

Why have we misallocated capital for so long? We can blame it on democracy, but bigger than democracy is the culture that forces politicians to favour the immediate status quo over the longer term good of the country. That culture then presumably comes down to poor understanding which comes back to low levels of education. We need to address these route courses.

His conclusion:

The real cost of capital has to rise. That will happen through default in one way or another. Debt has to be cleared. Multiple contraction is inevitable.


Financial sector innovation has to be squeezed by engineering and scientific innovation. Until the debt is cleared and capital starts to be properly allocated, economic growth per unit of additional debt will continue to sour.


Energy is the cash flow in this story. Until we get some real breakthrough technology, requiring large amounts of capital to both innovate and then roll out, we have no chance of supporting the economy.

Nothing can be added to this.


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Tue, 08/09/2011 - 18:02 | 1544216 Citxmech
Citxmech's picture

That was the one thing missing from the article:  The impossibility of "sustainable growth" regardless of what enonomic system we're under, and how to manage decreasing net energy returns on our energy investments (the next, and last, "growth industry").

Tue, 08/09/2011 - 18:21 | 1544289 Mec-sick-o
Mec-sick-o's picture

I guess that "flash crash" is part of nature also.  We will have a human population flash crash.

We will risk going the way of the Dodo, or Dinosaurs, if we don't prepare for sustainability rather than growth.

Tue, 08/09/2011 - 18:45 | 1544394 Dick Fitz
Dick Fitz's picture

Compare the energy converted to usability in a gasoline engine 100 years ago, 50 years ago, 20years ago and today. We are nowhere near the limit of usable extraction from gasoline. Malthus was wrong, and you are too!

Tue, 08/09/2011 - 19:31 | 1544570 gratefultraveller
gratefultraveller's picture

As Pareto showed, in the beginning of a process you have a huge return on a small investment, the further down the road you go, the more the ratio is inverted. Meaning that the input (financial, engineering) required to improve mileage of a car (for example) is growing more and more for ever smaller results the closer you get to the (hypothetical) perfect end result.

We as a society are in this end phase (from an energetic point of view), and this UBS guy is saying that without financial/engineering investment into the development of game changing technologies in the energy sector AND their marketing for affordable prices on a massive scale we are screwed.

But because the energy sector is aware of it's dominant key position they have no interest to change this, and they are paying the politians to make sure the status quo is mainteined. Why else would Jeffrey Immelt be in the key position in the government he is in?

Tue, 08/09/2011 - 21:35 | 1544897 Ident 7777 economy
Ident 7777 economy's picture


"We as a society are in this end phase (from an energetic point of view), and this UBS guy is saying that without financial/engineering investment into the development of game changing technologies in the energy sector AND their marketing for affordable prices on a massive scale we are screwed."


 B I N G O!

Tue, 08/09/2011 - 22:30 | 1545024 Seer
Seer's picture

Ass-kicking time...

We're in an end-phase because we're over-consuming on a finite planet.  Technologies are no more than ideas and equations, they are MEANINGLESS w/o physical resources.  Jevons Paradox lays waste to the notion of efficiencies cure our ills.

You can go back to smoking hopium now...

Wed, 08/10/2011 - 00:18 | 1545152 Libertarians fo...
Libertarians for Prosperity's picture

Regarding the improvements of the gasoline engine....

I think this is the part of the conversation where Trav777 arrives and says the growth of power extracted from a gasoline engine has begun to plateau, whereas energy requirements to sustain the fiat money system are growing geometrically.  While the extraction of power from a gasoline engine has improved over time, it is not improving/growing at a rate equal to the compound interest function of our debt-money system, and this will eventually cause our debt-money paradigm to collapse on itself. Neither technology improvements, nor the power extracted from engines, nor the rate of extraction of oil are growing commensurate with the compound interest function of our debt-money.  This imbalance will have a day of reckoning which will make the crisis of 2008/9 pale in comparison. 

Take a look at a chart of US debt from 1971 and explain where the energy growth will come from to sustain that slope.

All credit given to Trav7777 for bringing this topic to light at ZH. 


Tue, 08/09/2011 - 17:51 | 1544173 reader2010
reader2010's picture

Money will be made in/from BRIC,  and they really don't care about the developed world now.

Tue, 08/09/2011 - 18:26 | 1544310 Tuco Benedicto ...
Tuco Benedicto Pacifico Juan Maria Ramirez's picture

No country on earth will be insulated from the pending doom!

Tuco Benedicto Pacifico Juan Maria Ramirez

Tue, 08/09/2011 - 19:49 | 1544628 ElvisDog
ElvisDog's picture

India and China will be locked in an epic struggle to feed and provide for their massive populations in a world of scarcer and more expensive energy. Russia has a chance because it has a stable and fairly low population if it can fight off China and India who will be looking for lebensraum. Brazil might do okay if they can keep the lid on the enormous wealth inequity that exists in their country.

Tue, 08/09/2011 - 21:13 | 1544839 Seer
Seer's picture

Canada is also a bit less tainted.  But... as Jared Diamond demonstrated in his book Collapse, civilizations can fail via the loss of a key trading partner.

Tue, 08/09/2011 - 22:41 | 1545041 Seer
Seer's picture

That's some great sarcasm, or it's about as asinine a statement as one could possibly generate!

Who the fuck will the BRICs sell to, developing nations (outside of BRIC who are collapsing)?

Brazil is a mystery to me.  A lot like India except that have a bit of natural resources (oil, though more of it will be directed inward to continue to fuel internal growth [until, like everywhere else, it stops]).

Russia is dependent on oil exports, the precipitous drop in oil prices kind of makes them look a little less shiny.

India?  I've NEVER understood what India had other than people for staffing call desks and temporary staffing overseas (remittances).  Natural resources?  Hm...

Lastly, China.  Easy enough to dispel China, their empty cities built from poorly allocated resources, their increasing appetite for imported energy and their over-bought position on US Treasuries.

Maybe the politicians in these countries don't really care (as is the case will all elite serving their elite controllers), but the PEOPLE DO!  And this raises the remaining issue of internal instability.  Good fucking luck!

Tue, 08/09/2011 - 17:53 | 1544180 falun bong
falun bong's picture

" puts the lotion in the basket....IT PUTS THE LOTION IN THE BASKET!!!..."

The guys holding the string are gonna have to yell louder to get the results they want.


Time to tie a chicken bone to the string and pull the dog down

Tue, 08/09/2011 - 22:50 | 1544181 HL Shancken
HL Shancken's picture

On Friday morning, October 25, after Charlton had gone to the office, Adele MacVeigh [wife of junior Morgan banker] settled down to read the Times. When she had finished, she felt a sense of wifely pride. The newspaper reports confirmed what Charlton had told her: Things were going to be all right.

Hutton-Miller [broker] sensed a similar mood of optimism when he returned to Wall Street after a short rest in a nearby hotel. Despite his clean shirt and collar, his appearance was somewhat spoiled by the stubble on his chin; he had forgotten to pack his razor and there were long queues outside the barber shops.

Michael Levine examined, and rejected as impractical, several ideas for cashing in on the sudden tonsorial need. It was a sideline the ingenious self-made millionaire was unable to exploit. Yet during the night some of his messengers had successfully delivered booze and supplies in the district, easily avoiding patrolling policemen. Their employer was, nevertheless, relieved to see that the police presence had been reduced by daylight; it was another sign the crisis was over.

Levine fell asleep in his office, totally ignoring the ringing telephones.

Since early morning, they had also been busy in the surrounding brokerage houses. Customers, some as far away as Alaska and California, having spent a sleepless night figuring out their financial position, were coming back into the market with a vengeance.

Pat Bologna saw there were again lines forming outside the customers' rooms. Rumors ran rife among them as before, but today the shoeblack detected one difference: The people were in much better humor. The first jokes began to do the rounds; there were gags about brokers buying stock in gas companies and bankers investing in those manufacturing red ink.

Sustained cheers greeted Thomas Lamont and the other Morgan partners when they arrived at 23 Wall. They appeared embarrassed by their sudden popularity.

Charles Mitchell took it as his due. Dogged by his faithful chauffeur toting his valise, the banker strode down Wall Street radiating confidence and good cheer.

By nine-thirty the crowd had formed an avenue outside the Stock Exchange entrance, down which the last of the brokers hurried.

One of the many newsmen present saw the traders as "newly seasoned combat troops going back up the line, knowing that some of them could be wiped out, but all determined to survive. It's the mentality which wins wars--and overcomes financial panics."

William Crawford detected a similar fierce determination when he opened the market at ten.

Minutes later the tension gave way to visible relief as the first prices for many stocks showed immediate, if modest, gains. They set the standard for the day's trading....

...Workers emerged from the Exchange with the feeling that the crisis had been successfully weathered.

The Day the Bubble Burst
Gordon Thomas and Max Morgan-Witts

Tue, 08/09/2011 - 17:53 | 1544182 fredquimby
fredquimby's picture

Andy, All we need is FREEGOLD (A la FOFOA) and a Resouced Based Economy (a la Venus Project).


Tue, 08/09/2011 - 17:53 | 1544185 mhjhnsn
mhjhnsn's picture

I think he's mostly right but too opptimistic if he assumes there is a store of capital waiting to be invested if the right real innovation comes along.

Our capital is all trapped in houses no one needs and student loans for college degrees that serve no economic purpose, and any economic surplus the economy creates gets sucked down the ratholes of deleveraging all that debt, of over-regulation and wasteful government programs, and going overseas for imported oil and (mostly) Chinese consumer products.  Unwinding the debt would threaten the banking system; unwinding the government, well, dream on; and unwinding imported oil and consumer goods...??? Yeah, that'll happen.

Any new innovative technology would have to have predictable rates of return sufficient to overcome all of that headwind in order to find financing.  Lotsa luck with that.

Tue, 08/09/2011 - 18:29 | 1544320 Kat
Kat's picture

I'm happy to buy oil from overseas.  Just as I am happy to buy t-shirts and other things made in China. 

That is no more a waste of my money than buying groceries from Whole Foods instead of growing my own vegetables.  I'm wealthier for it. 



Tue, 08/09/2011 - 20:20 | 1544709 karzai_luver
karzai_luver's picture

slave to it but you can't admit that.

Your wealth is dust.

Tue, 08/09/2011 - 21:17 | 1544849 Seer
Seer's picture

Until no more...

And the return on your "investment" is?

Tue, 08/09/2011 - 17:54 | 1544189 Joe Sixpack
Joe Sixpack's picture

The key thing now is banks are more likely to "invest" in casinos, whore houses, and illicit drugs- because they get an instantaneous return rather than new technologies (think fusion, solar, clean coal, medical breakthroughs, new materials, fuel cells, etc.). I think this is the relevant message. Oh, yea, and BUY GOLD!

Tue, 08/09/2011 - 18:24 | 1544294 Dave Thomas
Dave Thomas's picture

Hey Joe, how come you or Gallio won't approve my requests to join GSUS.


I use toss away e-mails, yeah so?



Tue, 08/09/2011 - 20:34 | 1544738 Joe Sixpack
Joe Sixpack's picture

Send me an email.

Tue, 08/09/2011 - 18:24 | 1544298 Tuco Benedicto ...
Tuco Benedicto Pacifico Juan Maria Ramirez's picture

I guess you missed the story whereby Wachovia/Wells Fargo got caught laundering $376,000,000,000.00 in drug money from Latin America.  But casinos and whore houses would be out of the question!:)


Tue, 08/09/2011 - 21:22 | 1544866 Seer
Seer's picture

But, it's the drugs that are illegal... (unless you work for the CIA)

Tue, 08/09/2011 - 18:43 | 1544386 Caviar Emptor
Caviar Emptor's picture

The key thing now is banks are more likely to "invest" in casinos, whore houses, and illicit drugs- because they get an instantaneous return rather than new technologies 

Ha: that was the idea behind Reaganomics: quick burn. Like how new loopholes encouraged private equity to takeover, gut and offshore American manufacturing. (Back then they disparagingly referred to manufacturing as "Smokestack Industry" ewwww! and in the '90s it was "Old economy" ewwww!). Of course now that the quick profit has been turned for the PE guys, the country is left holding its pud with nothing to do but "consume" . 

They couldn't have planned the transfer of America's wealth overseas any better. Ingenuity!

Tue, 08/09/2011 - 19:06 | 1544485 disabledvet
disabledvet's picture

A chain of whore houses. Interesting. Do u have a prospectus? I'm all filled up with the casino and drug biz.

Tue, 08/09/2011 - 22:56 | 1544190 HL Shancken
HL Shancken's picture

On Saturday, before the market opened, newspaper readers received further words of comfort from many leading financial figures in the country.

Charles Schwab, chairman of Bethlehem Steel, friend of Henry Ford and client of [astrologer] Evangeline Adams, said he saw no reason in principle why prosperity should not continue "indefinitely."

James Farrell, president of U.S. Steel, concurred.

Alfred sloan, chairman of General Motors, reportedly declared Thursday's crash was "healthy," a diagnosis that startled not only GM shareholders who had seen their stock drop but also Charles Stewart Mott [GM board member, Flint banker whose staff embezzled more than $3.5 million to play the market, which they lost, and which he paid back out of his personal funds immediately upon learning of the crime.], who, for the past two days, had remained virtually full-time at his office.

Walter Teagle, president of Standard Oil, announced: "There has been no fundamental change in the petroleum industry."

Samuel Vauclain of Baldwin Locomotive believed that America was back on track, on time and steaming along at full speed.

Even Doc Giannini [Bank of America] was ready with a word of comfort--to add to the thousands already dispensed by his fellow luminaries. But Doc, in contrast with other bankers, was quietly revising downward the estimates of the lending value of stocks.

And out-of-town banks and corporations continued to call back their deposits from Wall Street. New York Banks were plugging the gaping hole left by these "summer financiers." So far, $1 billion had been used for this purpose.

John J. Raskob [builder of the Empire State Building] saw this bank support as a bold stroke. The banks were ensuring there would be no shortage of money for investors, that stocks would not have to be dumped because their owners could not borrow money at any price to keep them.

Raskob, like many other bulls, also drew comfort from call money being freely available this Saturday at an attractive 6 percent.

The two-hour trading period, in spite of this, was reported "uneventful," average prices falling very slightly.

The Day the Bubble Burst
Gordon Thomas and Max Morgan-Witts
pg 377

Tue, 08/09/2011 - 17:54 | 1544192 HL Shancken
HL Shancken's picture

Monday, October 28, dawned in a swirl of optimism which enveloped many people in the financial district. Thousands of newcomers--rubbernecks, some with money to invest--converged on the area. Many were drawn by reports that "a mountain" of buy orders had accumulated in brokers' offices over the weekend.

Mike Meehan did not share this enthusiasm. He was nervous. Radio had slumped badly from those halcyon days of six months before when it had been over 100; on Thursday it dropped to only 44, but had recovered since then and was now just under 60.

The astute Meehan was concerned about another aspect, one that had no direct link with Radio but could have a strong indirect bearing on the performance of the stock. It was the erroneous, and growing conviction among the speculating public that the purpose of Lamont's bankers' pool was to push up prices. Meehan knew this was not so. The bankers' fund was intended only to stabilize the market--to "stop the bottom falling out entirely"--and to prepare the way for an orderly liquidation if that should be necessary.

Meehan did not know how long the bankers intended to provide money to buy the stock; he did know that when they stopped, it would be dangerous. He could only do what he had done since Thursday, "attempt to maintain an orderly and fair market in radio."

The Day the Bubble Burst
Gordon Thomas and Max Morgan-Witts
pg 378

Tue, 08/09/2011 - 17:56 | 1544195 chubbar
chubbar's picture

Thank you Capt Obvious. You are finally getting around to explaining/commenting about issues well known to most of the ZH community for years.

IMO you will see this as a recurring meme, smart/respected folks finally admitting or feeling free to talk about this subject as if it just happened. They speak now of subjects they didn't dare raise a year or two ago.

As this repression is lifted expect a quickening of ramifications. It will be an interesting 4q.

Tue, 08/09/2011 - 17:56 | 1544196 HL Shancken
HL Shancken's picture

William Crawford hardly had time to step from his podium before trouble erupted.

At Post Two U.S. Steel opened at $202.25, a full $1.25 off its closing price Saturday.

At Post Seventeen there was a greater dip as International Tel and Tel started $3 down on Saturday's price.

The biggest drop of all in these opening moments was at Post Six: General Electric fell $7.50.

The ticker started to lag behind. Everywhere the panic of "Black Thursday" seemed destined to be repeated.

By 10:30 Steel had crashed through the mythical 200 barrier; other blue chips followed in a wave of selling which successively knocked prices down from one level to another.

By 1 P.M. the ticker was ninety minutes late.

The news agency tapes were up to the minute: Within seconds of each other, AP and UPI reported that Charles Mitchell [National City Bank] had entered 23 Wall.

The rumor was born and nurtured that Mitchell was placing his bank's vast reserves behind a new move to stop the rot, reminiscent of the day in late March when he had bucked the Federal Reserve and saved the bull market virtually single-handedly. But this time the shoe was on the other foot; it is almost certain that Mitchell went there to borrow the $12 million he wanted to support his own bank stock. He spent less than twenty minutes inside J.P. Morgan and Company. He walked out smiling--Morgan's would loan him $10 million this week.

The market steadied when news of Mitchell's smile reached the trading floor.

Soon after, a broker acting for Morgan's began bidding for Steel. It quickly rose from 193.5 to 198. The broker was not Whitney, and his effort did not have the effect Whitney's had had on Thursday. Steel soon slipped back to 190.

As the afternoon wore on, the selling became even more urgent. In the final hour, nearly 3 million shares changed hands-- a figure that in other, calmer times would have been a good day.

When Crawford sounded the closing gong, 9,212,800 shares had been traded. It was less than on Black Thursday. But the fall in prices was more severe; The Times general average of stocks was down 29 points. This was the largest drop in prices during any day in the entire history of the New York Stock Exchange.

All told, securities had fallen in value an estimated $14 billion.

The Day the Bubble Burst
Gordon Thomas and Max Morgan-Witts
pp 379-80

Tue, 08/09/2011 - 17:59 | 1544206 buzzsaw99
buzzsaw99's picture

Wrong headed reasoning, wrong conclusions.

Tue, 08/09/2011 - 17:59 | 1544208 THE DORK OF CORK
THE DORK OF CORK's picture

Yes but what about the zombie problem in the UK ?

Tue, 08/09/2011 - 19:11 | 1544500 disabledvet
disabledvet's picture

Unfotunately thnx to Michael Jackson our zombies dance over here. Quite well i might add.

Tue, 08/09/2011 - 18:00 | 1544210 platoslast
platoslast's picture

Some things to consider...campaign finance reform, term limits...maybe if these poor bastards weren't required to pander to special interest and did not make a career out of being a politician, they might get this back on track...over a generation or two. Lacking any serious changes to these two most basic issues, we have no hope at all. Off to Costa Rica.

Wed, 08/10/2011 - 01:38 | 1545274 Cathartes Aura
Cathartes Aura's picture

how 'bout if you have dual passports / citizenship - you don't get the gig.  no feeding at the AIPAC troughs.

Tue, 08/09/2011 - 18:01 | 1544212 HL Shancken
HL Shancken's picture

Traveling into Wall Street, Pat Bologna was assailed on all sides by market talk. He was astonished to hear how good-natured were his fellow passengers. Bologna put it down to the surprisingly optimistic tone of the morning papers; apart from the Times, most of the papers predicted that the situation would today be retrieved by "banking support." Bologna felt the subway train was "like the Titanic," with his fellow passengers putting on the same brave face as those on the great liner had reportedly done as she was sinking.

One of the subway passengers, a night manager in a Manhattan hotel, had a captive audience for his tale about a wealthy Midwest industrialist who had checked in the night before. The guest was a regular, with a standing order for a magnum of champagne and a call girl. As soon as he'd settled into his suite, the champagne was delivered--but the girl failed to materialize. The man rang up the night manager, who promised to send up a girl. Moments later there as a knock on the suite door--and, when he opened it, the guest was confronted by a beautiful blonde. The impatient industrialist yanked her inside and told her to undress. The girl icily told him she was his broker's secretary. She handed the dumbfounded man a margin call for $400,000 and departed. Minutes later, the desolate guest checked out, his sexual appetite, like his fortune, suddenly diminished.

The Day the Bubble Burst
Gordon Thomas and Max Morgan-Witts
pg 384

Tue, 08/09/2011 - 18:01 | 1544215 TwoShortPlanks
TwoShortPlanks's picture

THE UNITED STATES FEDERAL ZIMMER SUPPORT SYSTEM: The Central 'Market Maker', AND, 'Market Manipulator' has replaced the Free Market not just with Central Planning, but with a Market and Economy which cannot stand on it's two feet anymore without the support of the Fed Zimmer Frame.
Just the knowledge that the Fed is there to kiss the elbows and knees of the economy and market should they fall and scuff, is without doubt the most pathetic thing I have ever seen.
This level of dependence impacts upon the psyche of businesses in that the entire US Economy is now utterly dependent upon the Fed's Zimmer...and if you don't believe me, well, watch the news, it will be all about will the Fed do this, or, will the Fed do that, or, is the Fed ready to dump trillions of dollars underneath us if we fall because I couldn't possibly take another step without protection and a solid promis to catch my fall.
It is at this time I am convinced that collapse is near.

Tue, 08/09/2011 - 18:07 | 1544217 falak pema
falak pema's picture

I love the technophrasing of this post : misallocation of capital. Its like "collateral damage" or "irrational exuberance" or "exorbitant privilege"; all diplomatically put circumlocutory terms which mean "we the elected and our oligarchical masters are into thuggery in a massive way for reasons of state, that you must support as true patriots". Cheats, liars and scoundrels, uber-elite dregs of the earth, you hide your hubristic collective rape pulsations, your egocentric gene, hereditary impulse, in the terminology of fatal destiny syndrome of nation states under siege... "Its our collective destiny to suffer this, stiff upper lips fellas and take your medicine, tough times ahead, nothing we can do about it, it the price to pay for 'king and country'..."  Thats fine in 'auld lang syne' but not in a modern republic. All this hog wash to wash away basic corrupt human greed in private sector economia  gone mad...I don't buy it. What we need to restore people's confidence is a complete accountability of those who brought us into this mess; open book examination of 'offshore shadow banking and all derivative plays clearly accounted for and all illegal money hoardings in off shore accounts exposed for all transnational corporates and uber personal accounts. That the people's money be used to ensure the people's rape is a travesty of the republic that is intolerable. Bring the chickens home to roost and let the drums beat the people's wrath, in state of law implemented not by corrupt judges but by true representatives of republic. And don't say its not people's money as without the republic these shills would not have the leverage that "reserve currency" and "masters of the world economy" gave them thanks to that 'great generation' that sacrificed all for freedom; not for imperial corruption at a scale never before encountered.

Tue, 08/09/2011 - 19:14 | 1544516 disabledvet
disabledvet's picture

They didn't mean it. The dog ate their homework. They were late for class! They're SORRY! They LOVE US!

Tue, 08/09/2011 - 18:57 | 1544219 Mr Lennon Hendrix
Mr Lennon Hendrix's picture
UBS' Andy Lees On Why The US Economy Is, All Else Equal, Doomed

Before I read it let me guess....

...because UBS took all of its money and left it to die in a ditch.

Am I right?  Am I right?

Tue, 08/09/2011 - 18:03 | 1544220 fishface
fishface's picture

Maybe I'm stupid, but I don't get his conclusion...

How can cheap energy be the solution to it all...

Then he says the technology needs large amounts of cash,

which means it isn't cheap


I'm gonna read it the meantime, if someone can explain it better...feel free

Tue, 08/09/2011 - 18:39 | 1544368 Kat
Kat's picture

IMO, he's severely oversimplifying with regard to energy.  He faces the same problems all people with simple solutions to complex problems face - he knows way less than he needs to know to have "the answer", but that fact eludes him.

Whatever the cost of energy is, I think the market (if it is left alone and people are allowed to innovate) will find a solution.  I don't know what it is, but I know that imaginative people given the freedom to create things others will buy will always find it, provided they are given the freedom to do so.

WRT technology, it takes a lot of capital investment up front to develop new technologies.  After they are developed, drive is to reduce costs and to expand market penetration.  The only way to make a lot of money is to make the product affordable for everyone.  So, the technology becomes very cheap for the end user and can drive down the user's costs, but it takes a lot of capital to develop.



Tue, 08/09/2011 - 19:01 | 1544469 fishface
fishface's picture

Thanks Kat, that helped

I wasn't reading between the lines

Tue, 08/09/2011 - 20:25 | 1544716 karzai_luver
karzai_luver's picture

define cheap.................


you measure cheap as I am sure the other traders measure cheap.


When you can run your car on "issues" you be sure and get back to me with your treatise on energy.


Tue, 08/09/2011 - 20:33 | 1544735 Pay Day Today
Pay Day Today's picture

I'm afraid the idea that cold fusion or some other amazing tech breakthrough is going to solve our energy price/energy depletion crisis is known as "magical thinking".

Any such breakthrough is not going to happen and be rolled out in time to prevent radical reductions in energy available per dollar capita of population.

Hard times ahead.


(btw can't believe you are still thinking of "making a lot of money" from some energy breakthrough when western civilisation is fundamentally at risk).

Tue, 08/09/2011 - 21:46 | 1544929 Ident 7777 economy
Ident 7777 economy's picture

Hard times ahead.

- - - - - - - - - - - - - - - - - -

Solid-state vs tubes - myth

Single-room computers - rumor

Hand-held battery operated calculators - nonsense

Desk-top computer running Visicalc - dreaming

Laptop running Win 7, internet AND games - OUT OF YOUR F'N MIND


What's next ...



Tue, 08/09/2011 - 22:48 | 1545057 Seer
Seer's picture

Yeah, and moon landings!

Oh, and flying cars!

None of what you mention is in the category of Food, Shelter or Water.  Not fundamental; which means- it's NOT important in the true world.  NOTE: the MAJORITY of humans on this planet have never even made a phone call!

Keep believing that technology CREATES stuff, robot.

Tue, 08/09/2011 - 19:00 | 1544399 roccman
roccman's picture

anyone that thinks 7 billion are gonna live without oil or coal is smoking crack.


green is good for your hunting cabin refrig or to charge your cell phone

Tue, 08/09/2011 - 20:27 | 1544721 karzai_luver
karzai_luver's picture

anyone that thinks 7billion are "living" on oil or coal is blind.



Tue, 08/09/2011 - 21:18 | 1544853 sagerxx
sagerxx's picture

Second that.

Tue, 08/09/2011 - 22:50 | 1545060 Seer
Seer's picture

He/she/it only cares that he/she/it has oil or coal, but he/she/it cannot admit that.  Such is always the case for crack addicts...

Wed, 08/10/2011 - 01:06 | 1545247 Mad Cow
Mad Cow's picture

What kind of walking shoes do you use? Do the tread get good mileage?

Tue, 08/09/2011 - 18:04 | 1544224 Man Bear Pig
Man Bear Pig's picture

Is there a link? I'd like to send it to collegues

Tue, 08/09/2011 - 18:04 | 1544225 HL Shancken
HL Shancken's picture

In the past five days--except for brief forays to some showgirl's apartment--Livermore had barely left the office. The sequence of events that had caused countless thousands of "minnows" to be ruined and billions of dollars lost excited him more than anything, or anybody, could. He relished having to call into play his unsurpassed market skills.

Livermore had been driven at times to the very edge of disaster; on each occasion, using brilliant financial ringcraft, he had fought his way out of trouble. When others predicted prices would rise, he kept his nerve and remained on the short side of the market: Prices fell, and Livermore collected. On other occasions he had been long, buying through a large number of brokers, to avoid arousing suspicion, blocks of shares in anticipation of a rally. He had been more often right than wrong, and managed to maintain his financial equilibrium while lesser operators had seen their fortunes virtually vanish.

The Day the Bubble Burst
Gordon Thomas and Max Morgan-Witts
pg 385

Tue, 08/09/2011 - 18:04 | 1544229 chunga
chunga's picture

"Endless money forms the sinews of war."

- Cicero -

Tue, 08/09/2011 - 19:04 | 1544464 PaperBear
PaperBear's picture

Why did Nixon in 1971 end the convertibility of dollars held by foreigners into gold ?

Because the USA had misallocated capital fighting the Vietnam war.

Oh and killed 48,000 americans and who knows how many vietnamese.
Tue, 08/09/2011 - 18:06 | 1544235 Mark_BC
Mark_BC's picture

"If Andy is right, the framework of the next great class class conflict is set: it will be between the productive private economy and the "unproductive economy." Yes: Marxist tensions are about to make a repeat appearance:"

This is just totally wrong and more Austrian-thought-experiment-psycho-babble. It's not that the private sector is productive and the government isn't. If real wealth comes from the natural world, then anything that protects and enhances the natural world's ability to provide that wealth is what is "productive". There are some things that the private sector is better at doing and others that only the government can do efficiently. They are both needed.

The private sector is taxed nowhere near enough. It is pure fantasy that the government overspends.

Tue, 08/09/2011 - 18:19 | 1544280 Tuco Benedicto ...
Tuco Benedicto Pacifico Juan Maria Ramirez's picture

Ha, ha, ha, ha sock puppet!     negative to infinity!       Let's badmouth Austrian economics now that Keynesians have done so well!  Government does nothing efficiently except steal! 

Tuco Benedicto Pacifico Juan Maria Ramirez

Tue, 08/09/2011 - 18:34 | 1544342 gina distrusts gov
gina distrusts gov's picture

You ore correct when the thieves run the government as they do now

Tue, 08/09/2011 - 19:06 | 1544483 Mark_BC
Mark_BC's picture

Keynesian thought experiments are even worse. Why do economists need imaginary charts and thought experiments to support their theories? What's wrong with real world experiments and principles? Is the problem that the real world principles would actually tend to contradict the economists' imaginary theories?

Tue, 08/09/2011 - 20:35 | 1544743 Pay Day Today
Pay Day Today's picture

If the US had any real Keynesians left the gubbmunt would directly employ 5-10m people in the real economy, WPA style. But it doesn't. So don't blame the Keynesians, they are all long dead - the real ones that is.

Tue, 08/09/2011 - 19:19 | 1544535 disabledvet
disabledvet's picture

Umean like Turkey's and Deer and shit?

Tue, 08/09/2011 - 21:53 | 1544947 Calmyourself
Calmyourself's picture

OK Mark, we are going to have to quarantine you that is industrial strength stupid your displaying..  The government is not an efficient spender of any capital, roads bridges whatever it is inefficient.  Wow, you may have taken a wrong turn to get here...

Tue, 08/09/2011 - 23:01 | 1545079 Seer
Seer's picture

It's a case of "doing god's work!"  It's a "noble" cause in which case if we only get govt to help do it then it'll work out OK!

It's always the same, a plea for subsidies.  Now then, I would agree with folks that there's a problem surmounting the existing elements.  For example, the railway system, how in the heck could you compete with something that was handed thousands upon thousands of acres of free land?  Nothing like having a head-start like This!

I detest subsidies.  On the other hand, I do not believe that dropping all existing subsidies would magically create a fair playing field, not when we're talking about empires that are so entrenched (like the railway).  Subsidies, will, IMHO, all go away, but by the time that this happens there won't be the ability to replace the existing "inefficient" systems, this is what I believe that Mark_BC is trying to get at, though he fails to see that his directive just creates a new monster.  And then there's the issue of dressing the pig up hoping to make it look attractive: cleaning up the existing transportation paradigm doesn't resolve the fundamental issues of this paradigm.

Tue, 08/09/2011 - 23:37 | 1545143 Bartanist
Bartanist's picture

Sorry, just not seeing any evidence to support your contention.

Do you have any evidence to support you statements?

Tue, 08/09/2011 - 18:08 | 1544241 HL Shancken
HL Shancken's picture

Crawford's eyes swept the Exchange. Instinctively, he glanced toward the visitors' gallery. It was empty; it had not been reopened since its closure midday on Thursday. The superintendent was relieved reporters were unable to peer down on the bedlam already developing on the floor. Veteran traders, clerks and page boys were running wildly around the perimeter before darting into the jostling mass in the center. The floor was littered with discarded pieces of paper.

And even as Crawford raised his gavel, the din from below increased to a "baying roar." The sound of the gong was lost.

"Twenty thousand at the market!"
"Thirty thousand at the market!"
"Fifty thousand! Sell at the market!"

General Oliver Bridgeman, U.S. Steel's battle-scarred specialist, flinched at the hammer blows. Steel plunged through yesterday's ruinous close of $186 a share with girderlike force.

The rest of the market tumbled with it, sucked swiftly down by the uncontrollable crowd besieging Post Two.

During the first three minutes of trading 650,000 Steel shares were dumped on the market. At the end of those three minutes, few buyers were interested in the stock at $179. It seemed a lifetime since Whitney had bid $205.

Steel's collapse created ugly panic. Men swore, shoved, and mauled, clawing at Bridgeman, forcing him to take refuge inside Post Two.

A messenger struggling through the crowd suddenly found himself yanked by his hair off his feet. The man who held him kept screaming he had been ruined. He would not let the boy go. The terrified youth at last broke free, leaving the man holding tufts of his hair. Crying in pain, the messenger fled the exchange. His hair never regrew.

Behind, he left a scene of increasing pandemonium. As huge blocks of shares continued to be dumped at all seventeen trading posts, 1,000 brokers and a support army of 2,000 page boys, clerks, telephonists, operators of pneumatic message tubes, and official recorders could sense this was going to be the "day of the millionaires slaughter."

The Day the Bubble Burst
Gordon Thomas and Max Morgan-Witts
pg 388

Tue, 08/09/2011 - 18:09 | 1544245 poydras
poydras's picture

Devaluation and financial repression is the almost certain US path.  The 50% decline in purchasing power between 1970 and 1980 is a guide.  A 75% decline in purchasing power should resolve the debt levels.

The issue beyond devaluation are the significant inefficiencies including government, medical, military, unfunded entitlements, etc.  The readjustments are likely to be painful for most having to adjust to a lower living standard.

The macroeconomic realities have yet to be comprehended and the politicians are so far avoiding the issues.  Various considerations aside, the path at this point is to realize steady devaluation providing time for economic readjustment.

The question of the decade is can they pull it off.  The answer is maybe.  Perhaps the main variable is whether the US trading partners continue to provide vendor financing and accept a devalued reserve currency.  We do know that the 50% devaluation in the '70s was accepted.  A lack of robust, practical currency alternatives is supportive.

Tue, 08/09/2011 - 18:09 | 1544246 johnjb32
johnjb32's picture

Check out Collapsenet. They have been providing great coverage to add to Zero Hedge's great insight:

Tue, 08/09/2011 - 18:10 | 1544249 reader2010
reader2010's picture

"Owners of capital will stimulate the working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism.

 - Das Kapital, 1867

Tue, 08/09/2011 - 18:26 | 1544309 Pay Day Today
Pay Day Today's picture

You can't quote that! That's...that's...MARXISM!!!  :D

Tue, 08/09/2011 - 18:42 | 1544383 fishface
fishface's picture

no no the quote is great, written more then 140 years ago and voila...almost there

just the conclusion isn't, it can lead to any form of government

I would think it's more likely fascism or a dictatorship

Tue, 08/09/2011 - 19:04 | 1544479 gwar5
gwar5's picture

Oooh, that's good, me like!

That's what should have happened in 2008, nationalization of the TBTF banks; but, to then have them broken up, restructured, and resold on the free market. The FRBNY would not have missed them, and neither would we.

BTW, Marx was no fool, he never worked a day in his life. He mooched off of Engels, who mooched off his parents. Marx was the Kim Kardashian of his day. 

Tue, 08/09/2011 - 21:32 | 1544891 Seer
Seer's picture

"That's what should have happened in 2008, nationalization of the TBTF banks; but, to then have them broken up, restructured, and resold on the free market."

Wasn't this what Sweden did?

Tue, 08/09/2011 - 19:23 | 1544542 disabledvet
disabledvet's picture

Ooops. Honest Mr. Wilson! I started out as a Capitalist!

Tue, 08/09/2011 - 19:36 | 1544590 ReactionToClose...
ReactionToClosedMinds's picture

and Joseph Schumpeter dissected KMarx ... completely & totally  .... and while denying that he did so ... Schumpeter essentially prophesized that socialism would come to dominate capitalism .... because that is what the bureaucrats and elites could best control and manage for the 'common good' the 'common' folk bought the insipid deluded media/intellectual propaganda that is was to their 'benefit'.

And Schumpeter clearly disdained the 'progressive' legislation that led to the Federal Reserve System .... but that was not his focus in Capitalism, Socialism and Democracy.

And all anyone knows about Schumpeter today is 'creative destruction' positives fo capitalism ....... but that is only a sub-tier conceptual point he makes.  Capitalism did more in 3-5  generations to raise more out of poverty, extend their lives, accelerate technical innovation, bettter management practices , etc.,  than any other economic system .... ever  ..... but it could not politically sustain itself.

But as the London rioters essentially said ......  I want more  ..... I want 'yours'

Tue, 08/09/2011 - 20:32 | 1544732 Nate H
Nate H's picture

you are right - capitalism did that - but the conditions (energy source and sink) are no longer available to continue that path...anyways what we have now isn't true capitalism - it is a barbell of socialism and turbo-capitalism

Tue, 08/09/2011 - 18:11 | 1544251 Alexander Supertramp
Alexander Supertramp's picture

Yawn.  As if ANYone at the shadow institution of UBS (the operative letters in that acronym being the last two) deserves to be seriously read.  As Buffett once said, "a prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting."  


Tue, 08/09/2011 - 20:57 | 1544799 Nate H
Nate H's picture

I would much rather read Andy than Buffet any day. Have you seen Buffets top 100 books of all time? They are all about investing and economics - not ONE about history, energy, ecology, natural resources or the real drivers of (investing and economics)

Tue, 08/09/2011 - 18:12 | 1544255 TheGoodDoctor
TheGoodDoctor's picture

Can I ask a question? Where did the search function go? I have to keep up with CPL when he posts! C'mon bring back the search function! Please!

Tue, 08/09/2011 - 18:20 | 1544284 chunga
chunga's picture

CPL is on a mission.

Tue, 08/09/2011 - 18:29 | 1544322 El Viejo
El Viejo's picture

Use CTRL-F and Enter text to find on current page.

Tue, 08/09/2011 - 20:16 | 1544698 TheGoodDoctor
TheGoodDoctor's picture

The search function for Zero Hedge the web site.

Tue, 08/09/2011 - 18:14 | 1544260 HL Shancken
HL Shancken's picture

A few feet away, at Post Twelve, Crawford could see Mike Meehan's mouth moving, but he could not hear what the broker was saying because of the noise.

Radio had fallen dizzily. In the first frantic moments of trading, its value had depreciated $10.25 a share. The stock was selling now for $30.

At the far end of the hall, at Post Seventeen, men were literally charging into the crowd in an effort to get to the specialist in International Telephone and Telegraph, whose stock had fallen $17 and showed no sign of stopping....

...At Post Twelve--Ed Schnell's Alamo--the defenses were breached as sell orders for Radio poured into the post. It seemed to Schnell, "the heavens had opened up, and the stock was being pounded, down, down, right down to $26."...

...Many of the brokers who had seen Steel smashed to smithereens moved across to Post Twelve, there to witness the onslaught against that equally sacred stock, the pride of the House of Morgan, Allegheny. It was a knockout blow. Allegheny had been one of the investment trusts that optimists claimed would give the market strength.

At Post Six, a fight broke out as a scramble developed to sell American Can. Two clerks, possibly rendered momentarily senseless by the noise, lashed out at each other. The specialist in General Electric swiftly separated them, and returned to the fray. His stock had dropped at the rate of a dollar every ten seconds during the first six minutes of trading.

Post Fifteen--the home of some of the most prestigious stocks--found Westinghouse wilting under the bombardment. It dropped $2 a minute between the time the market opened and $10:15 A.M. At its present rate of decline it would be worthless by noon. Another of the post's stocks, Timken Roller Bearing, was skeetering toward oblivion even sooner, driven there by a 25,000-sell order which lopped $19.75 off its value.

William Crawford, pushing ruthlessly to get to the edge of the floor, reached Post Four in time to hear a strangled shout to sell 50,000 shares of General Motors, again "at the market." The order was executed for a drop of $2.25 below its previous price.

The Day the Bubble Burst
Gordon Thomas and Max Morgan-Witts
pp 389-90

Tue, 08/09/2011 - 18:14 | 1544263 roccman
roccman's picture

Another "economist" that completely misses the elephant in the room...




oh well

Tue, 08/09/2011 - 19:07 | 1544486 falun bong
falun bong's picture

agree, oil is the "elephant"....but the "rhino" is WAR

Nobody noticing that 5-6 discretionary wars have gotten kinda expensive. Have a look at why every prior currency empire/regime has collapsed in the past: unfunded wars requiring excess borrowing & printing.

Why not give the Pentagon the GPS coordinates for Cleveland and have them build a few bridges over here for a change...

Tue, 08/09/2011 - 19:12 | 1544503 heatbarrier
heatbarrier's picture

True. True.  But what oil are we talking about?

Reminds me of the "Two monks roll up the screen" Zen koan.

One monk looses, one gains . But which one looses and which one gains.

Tue, 08/09/2011 - 18:15 | 1544267 HL Shancken
HL Shancken's picture

Now Crawford heard a new sound. High and wailing, the words were indistinguishable at first, their source somewhere inside that same mob around Post Four, where Anaconda Copper was toppling even faster than Southern Pacific--the railroad stock whose collapse had led the 1907 panic.

Then Crawford saw him; middle-aged, collarless, a rent in his jacket--"he looked more like a Bowery bum than a broker." The man struck out blindly from the melee, moaning, "I'm sold out! Sold out! Out!"

Before Crawford could reach him, the broker was swept along in the huge overspill surging around Post Eight, where shares in Montgomery Ward were "falling quicker than cans off a supermarket shelf."

The superintendent reached the comparative safety of the New Street side of the Exchange. One of the guides who normally would have been on duty in the visitors' gallery pointed toward a Translux screen. The figures sliding across continued to tell a story of total disaster.

Blue Ridge, yet another investment trust, was on the floor. It had opened at $10. Now it was $3. Not long ago it had traded at $24; there was confident talk then it would go higher.

A sale of 50,000 shares of United Corporation saw the stock slither drunkenly from its opening price of $26 to $19.30.

Crawford knew Blue Ridge and United had been favorites among small investors.

The "dream stocks"--Paramount, Fox, and Warner Bros.--were also taking a trouncing.

Ed Schnell felt as if he had been working for hours. His throat ached, his hands were grubby from handling so much paper. And all the time sell orders streamed to Post Twelve; he began to fear every share ever issue in Radio was going to be dumped.

At the adjoining Post Eleven--where the Bouviers could not stop American Smelting from melting away as fast as Kennecot Copper--suddenly, for no discernible reason, the crowd turned their fury against Woolworth shares. The chain-store stock had held firm since the opening; now, against a great, sustained roar of "sell, sell, sell," it too gave way.

The Day the Bubble Burst
Gordon Thomas and Max Morgan-Witts

Tue, 08/09/2011 - 18:17 | 1544274 HL Shancken
HL Shancken's picture

Dotted around the trading floor were some forty governors of the Stock Exchange. On heavy selling days in the past, it was said they had sometimes joined forces to create the basis for a rally by using the tens of millions of dollars they controlled to force some stability into the situation.

In today's selling maelstrom they were flotsam; out of touch with each other, separated by groups of near-demented men, the governors could do nothing to stem the ferocious waves of liquidation.

Richard Whitney was also on the floor. Pushed and shoved, like everyone else, the acting president was being almost totally ignored.

His appearance had at first raised the hope he had arrived to again make the saving gesture by bidding for a big block of U.S. Steel. But Whitney made no such move, and it was assumed the bankers' consortium had been disbanded. It had not, but the injection of funds it sent into the market for the purchase of shares was insufficient to make any noticeable difference. Whitney could only stand to the side and watch as the institution for which he was temporarily responsible transformed itself into a madhouse.

Superintendent Crawford eased himself down to the vicinity of Post Sixteen. There, Warner Bros' zigzag downward was being overhauled by the plunge in Safeway Stores and Simmons--the mattress company stock which had taken Winston Churchill's fancy.

A man, a complete stranger to Crawford, broke out of the crowd and lunged at another stranger--who sidestepped. The man careened on out of the main entrance into Wall Street, "screaming like a lunatic."

Shaken, feeling he was in the presence of "hunted things"--a phrase Whitney would also use later--William Crawford backed toward the staircase leading down to the basement.

He looked at his watch.

It was ten-thirty.

In all, 3,259,800 shares had been sold for a combined loss of over $2 billion in just thirty minutes.

The Day the Bubble Burst
Gordon Thomas and Max Morgan-Witts

Tue, 08/09/2011 - 18:24 | 1544296 magpie
magpie's picture

"hunted things" - sounds like Lovecraft.

Tue, 08/09/2011 - 18:18 | 1544277 Nate H
Nate H's picture

Andy Lees one of the few strategists who really gets the wide angle picture. (Richard Koo another).


In the intro Tyler left out the key part of Andy's conclusion

"Energy is the cash flow in this story"


Tue, 08/09/2011 - 18:52 | 1544415 roccman
roccman's picture

and anyone paying attention knows net per capita energy has been declining for the last 3 decades.

anyone paying attention knows we peaked in oil production in 2006 (ish)

anyone paying attention knows the human project eats oil

anyone paying attention knows without cheap unlimited debt servicing...end of story

anyone paying attention knows "green" is 1) a scam and 2) not scalable

but then again - who the fuck is paying attention?

apparently no one

Tue, 08/09/2011 - 19:08 | 1544492 Nate H
Nate H's picture

'green' isn't a scam - but I agree it isn't scalable, and has been supported (as has perceived net energy) by this debt orgy. If we went back to what we could afford - $30-$40 oil - how much oil production would be truncated and how much wind/solar projects etc would be mothballed?

Tue, 08/09/2011 - 19:27 | 1544550 roccman
roccman's picture

charging more money per barrel (or less) has zero to do with production

how many barrels it takes to get a barrel out of the ground is the math most don't consider - and the quality of that oil is to be factored into that math - the deeper you go - the harder it is to refine - EROEI - the only thing that matters (and rates of production)

electric utilities don't want solar and at .12/kwh - it is not economical without joe lunch bucket paying 300% more for "green".

Tue, 08/09/2011 - 21:38 | 1544899 Seer
Seer's picture

Scalability has to do with what paradigm* you're operating under.  Ah, but nothing can scale indefinitely.

* Our current paradigm is collapsing.  Trying to revive it (with crap like EVs) is futile.

Tue, 08/09/2011 - 18:18 | 1544278 Pay Day Today
Pay Day Today's picture

Does anyone happen to have a download link to this UBS letter? Would love to get a .pdf of it.

Tue, 08/09/2011 - 20:10 | 1544681 gratefultraveller
gratefultraveller's picture

Click on "printer friendly version" at the bottom of the article, you will get a page that you can either copy and paste into a text editor, or save as an htm text file.

Tue, 08/09/2011 - 18:24 | 1544297 Scoted
Scoted's picture

Mid-2013 and the prospect of QE3. What does the fuiture hold?




Will we ever get out of this lull?

Tue, 08/09/2011 - 21:55 | 1544949 Seer
Seer's picture

Were you asking if we'd ever fall off the top when we were in the middle of the bubble?

Figure that you'll look at these as the "good old days."  Next floor down...

Tue, 08/09/2011 - 18:26 | 1544307 sasebo
sasebo's picture

It's all about misallocation of capital. Has Krugman or any other Keynesian mentioned it? NO. Have the Austrians mentioned it? They blamed the crash on misallocation of capital.

Tue, 08/09/2011 - 18:34 | 1544346 Pay Day Today
Pay Day Today's picture

Was there some problem with relocating capital, GDP and jobs to China? The Keynesians understood that was a real problem. The corporate sponsored neo-classical economists didn't though.

Tue, 08/09/2011 - 18:42 | 1544381 Kat
Kat's picture

The Keynesians think this is a problem because they don't understand economics (being Keynesians and all). Mercantilism is a debunked economic policy that impoverishes the average person and enriches the politically connected elites.

That you average peopel don't understand this is disturbing.

BTW, if you read Krugman's academic work rather than the drivel he writes in his NYT column for the consumption of the unwashed masses, you'll find that he is not a Mercantilist.  In his NYT column he is. How easily the masses are fooled.

Tue, 08/09/2011 - 20:39 | 1544750 karzai_luver
karzai_luver's picture


you  are wealthy , right?

You are of the elite, right?


go suck kruggles and we will take care of both you elite cocksuckers soon.


enjoy your wholefoods and your chinese rice.


Wed, 08/10/2011 - 07:19 | 1545515 ZeroPower
ZeroPower's picture

Ah, a jealous peasant. Big surprise. I wonder if the tables were flipped how much you would fancy these 'elite cocksuckers'.

Tue, 08/09/2011 - 23:21 | 1545114 Bartanist
Bartanist's picture

Value is created from labor. Rock to ore to metal to girders to buldings (you get the picture).

It is an irony that those who create the value get less in return than the value they have created because they are taxed and pay interest and those that create no value get more than they create because they are the ones who tax and receive interest.

As the author more eloquently suggests, we in America create insufficient value to justify the amount of money/interest/taxes that we create and as a result we are depleting our balance sheet instead of growing it (unlike China). Too many parasites and not enough value creators. Ultimately it will be sorted out. Hopefully we have not ruined too many generations.

Wed, 08/10/2011 - 02:31 | 1545331 Tuffmug
Tuffmug's picture

The thing Keynesians understand best is how to spend other peoples money and even money that people don't even have yet!

Tue, 08/09/2011 - 18:29 | 1544324 InconvenientCou...
InconvenientCounterParty's picture

Marxism would be a real bummer for me and the pile of unproductive assets I've built up in this life.

I vote for liberty!!! Give me liberty or give me death! or at least enough hate to poison the well.

Tue, 08/09/2011 - 23:10 | 1545097 Bartanist
Bartanist's picture

Out of left field, but some day it might mean something to someone.

Some of the knowledge that has been lost tells us that we as human beings are an overlay of a non-material soul and a material body with the ability to REASON or "spirit" joining the two, to sort out the apparent conflicts. In the material body we take on the all human frailties and it is in death that we must relinquish them or be tied to this world. It is Reason and Wisdom gained from Reason that not only gives us the ability to understand things, but undestand why these thing are and their implications. By using reason we are able to give up the earthly things and move on.

The teachings say that when we die, the main failure of people is that they have not reasoned the distinction between the soul and the physical body's presence and as a result bind themselves to their physical presence and material possessions on earth... and maybe that is why it is easier to fit a camel through the eye of a needle than for a rich man to find heaven (or in a more practical sense, the universal "god" consciousness).

Just say'in ...

Tue, 08/09/2011 - 18:30 | 1544325 HL Shancken
HL Shancken's picture

In New York the ticker kept running long after Crawford's closing gong at 3 P.M. Every falling share it recorded helped sound the death knell of the New Era.

America, the richest nation in the world, indeed the richest nation in all history--its 125 million people possessed more real wealth and real income, per person and in total, than the people of any other country--was now paying the price for accepting too many get-rich-quick schemes, the damaging duels fought between bulls and bears, pool operations and manipulations, buying on overly-slim margins securities of low and even fraudulent quality. The indecisive and sometimes misleading leadership from the business and political world had contributed to the nationwide stampede to unload.

At 5:32 P.M. the final quotation clicked across the tickers of a numbed nation. The tape's operator signed off: TOTAL SALES TODAY 16,383,700. GOOD NIGHT.

Those millions of sales represented a loss in share value on the New York Exchange alone of some $10 billion. That was twice the amount of currency in circulation in the entire country at the time.

Eventually, the total lost in the financial pandemic would be put at a staggering $50 billion--all stemming from a virus that proved fatal on October 29, 1929; the day the bubble burst.

The Day the Bubble Burst
Gordon Thomas and Max Morgan-Witts
pg 399

Tue, 08/09/2011 - 19:27 | 1544554 disabledvet
disabledvet's picture

JESUS H TAP DANCIN'-give it UP will ya!

Tue, 08/09/2011 - 20:16 | 1544697 HL Shancken
HL Shancken's picture

What is the nature of your disability?

Tue, 08/09/2011 - 21:59 | 1544955 Calmyourself
Calmyourself's picture

Thank you, but why not post a link to this so I can read it in its entirety with out interruption.

Tue, 08/09/2011 - 22:12 | 1544988 HL Shancken
HL Shancken's picture

Because I typed it out myself from the actual book, which isn't available online.

Tue, 08/09/2011 - 22:14 | 1544994 Calmyourself
Calmyourself's picture

In that case, thank you.  It was instructive, if a little scary.

Tue, 08/09/2011 - 22:27 | 1545016 HL Shancken
HL Shancken's picture

You're welcome, all of you. The book does a great job of describing the feel of life during the late 1920's as well as what went on in Wall Street and banking during that time. It's billed as a "social history" of the crash and the authors and their large research staff interviewed some who were there in 1929 and many of their children and descendants. The book was published in 1979.

Tue, 08/09/2011 - 23:08 | 1545092 Seer
Seer's picture

One of my favorite stories of hubris from back then was the newsletter from Harvard's economics department proclaiming that all was going to be fine... that was their last publication (for obvious reasons).  Ah, the best and the brightest!

Tue, 08/09/2011 - 22:05 | 1544963 disabledvet
disabledvet's picture

I used to be able to post here. But then they disabled me due to a "Christmas day massacre" of a certain group of people. I came back "disabled vet." "The rest" as they say "is history." And i'm that other guy, too. (an actual disabled vet.) Too many jumps out of airplanes and shit. Ahh, the good old killin days. It made me laugh when I came up with the name actually. "Double entrendes' are my weapon of choice these days. I'm really a tree hugger now. I am!!

Tue, 08/09/2011 - 21:30 | 1544886 sagerxx
sagerxx's picture

Thanks for this HL. Most instructive. VIVA!

Tue, 08/09/2011 - 21:59 | 1544956 TwelfthVulture
TwelfthVulture's picture

Thanks Shanken!  One of the best posts I've read here.  Even if it's not original.  Very entertaining.  Very timely,  Very relevant.

Wed, 08/10/2011 - 00:21 | 1545213 kekekekekekeke
kekekekekekeke's picture

I read everything- thank you!

Tue, 08/09/2011 - 18:31 | 1544333 linrom
linrom's picture

How can that be when corporates report massive profits? The profits are based on paying their workers a salary that meant they could only buy the goods they made by borrowing; in other words, a massive unsustainable ponzi scheme that could only ever end up with default.  Without the household debt accumulation, there would be no market to sell their products to, and without paying the workers sufficient, the debt would always have to default.


After reading ZH for two years, finally FIRST post by someone who understands real economics.

Tue, 08/09/2011 - 18:44 | 1544392 gwar5
gwar5's picture


Tue, 08/09/2011 - 20:04 | 1544664 Tuffmug
Tuffmug's picture

If you think this is real economics I suggest you throw away the marxist textbooks you were brainwashed with and try a little Adam Smith.

Tue, 08/09/2011 - 18:40 | 1544378 BeetJuice
BeetJuice's picture

"If capital had been allocated productively, then by definition debt would fall as a percentage of GDP. Total debt may rise, but efficient allocation of capital would always mean the economy would grow faster than the debt as it means you are making a positive rather than negative real return on that capital."

Well, total debt IS falling as a percentage of GDP, when all private and public debt is combined. Does this mean capital is being allocated efficienctly?

Tue, 08/09/2011 - 22:47 | 1545053 Bartanist
Bartanist's picture

IMO, no because GDP as it currently stands is a useless measure for political purposes. It does not measure the amount fo value created by a nation. In the US, it mostly measures churn, while all the time we are depleting our balance sheet.

Tue, 08/09/2011 - 18:47 | 1544403 chump666
chump666's picture

great article.  

on the last session close,suckers rally into a bull trap.  

Tue, 08/09/2011 - 18:51 | 1544425 Stax Edwards
Stax Edwards's picture

Posted on other thread also.  Good stuff.  Finally some anger on MSM

Tue, 08/09/2011 - 18:52 | 1544430 gwar5
gwar5's picture


This is why marxism never sleeps.

Once the meme creeps into the political melieu that free markets must be redistributive to be "fair", the misallocation begins, which hurts the poor and middle class most of all through the Sysiphean treadmill of deficit spending to try to keep the promises.  


Tue, 08/09/2011 - 19:16 | 1544506 Heroic Couplet
Heroic Couplet's picture

10 slides that show "what we have after the repeal of Glass Steagall." Side by side. 10 slides that show "if Glass-Steagall had been left in place" No secondary derivative markets. No CDOs. No casino.

Tue, 08/09/2011 - 18:57 | 1544451 heatbarrier
heatbarrier's picture

That article just reminded of Sucker Punch.  The movie.

Tue, 08/09/2011 - 19:00 | 1544465 Ratscam
Ratscam's picture

my favorite but please Andy, become a tad more Austrian school.
we live a dream informing people and that,s what ZH is all about.
one big instant brainstorm game

Tue, 08/09/2011 - 19:12 | 1544505 Croesus
Tue, 08/09/2011 - 19:15 | 1544519 dvp
dvp's picture

Let me summarize an article filled with the usual euphemisms with which only the initiated are familiar.  Since at least the 1970s, the United States has been substituting production of tangibles with "production" of intangibles--material objects with immaterial objects.  Constitutive of the former are physical consumables; constitutive of the latter are conceptual imaginables (all that "financial innovation" stuff).  Concurrently, efficiency in the production of tangibles has decreased demand for labor.  Similarly, production of intangibles has little demand for labor.  With decreased demand for labor, wages have declined.  With decline in wages, consumptive demand has declined.  Inorder to sustain the demand which provides a consumptive base for tangible production, debt (borrowing) has substituted for wages.  Over 30+ years, private debt has risen to such an extent, consumptive demand is declining.  With this decline, production of tangibles has declined for lack of demand.  Substituting is increased production of intangibles. Exchange of intangibles having little economic friction, contribution to GDP can increase at an indefinite rate.  This occurs as the standard of living of the overall population declines.  Class separation increasing, the political system becomes controlled by the wealthy, accelerating their wealth, and corresponding class separation.  Engendered is either a return to feudalism, or a French revolution.  As to which, only time will tell.

My missive being long in its own right, it is still far shorter than the even more winded article.

Tue, 08/09/2011 - 20:21 | 1544711 Spastica Rex
Spastica Rex's picture

Really stacato writing style, but well said.

Tue, 08/09/2011 - 22:03 | 1544966 Calmyourself
Calmyourself's picture

Nicely done, dress it up in a smart suit and you have a quick primer.  Exchange some words, "real" for tangible,  "promises or fake products" for intangible

Good quick way to get the word out

Tue, 08/09/2011 - 22:06 | 1544973 Seer
Seer's picture

"Since at least the 1970s, the United States has been substituting production of tangibles with "production" of intangibles--material objects with immaterial objects. "

Really?  You mean that all those shopping malls, downtown build-ups, McMansions and housing developments, SUVs etc, these are immaterial?

I must be missing your interp of "immaterial."  I could agree if stated as "crap."

Further, I would argue that the overwhelming majority of stuff that people think is productive output is silly, especially when held up to the light of fundamental requirements (food, shelter and water): really, Google? iPads? etc. etc....

This has everything to do with human nature and little to do with textbook shit (economic theory, which only ever exists, just as religion does, on paper or in someone's head, failing when it meets the real overly-dynamic world): this doesn't mean that I don't believe that Austrian economics isn't a better theory, it's just that whenever power gets concentrated, either via govt or entities that have concentrated capital, this kind of blowout is going to occur...

Tue, 08/09/2011 - 23:51 | 1545172 dvp
dvp's picture

Struggling to not be pejorative, by "immaterial," I mean "financial instruments."  These are not "crap," these are fairy castles in the sky, imaginary entities whose creators have been dubbed brilliant, kinda' like "rocket scientists."  As for "Austrian economics," or any other "economics," they all miss the boat.  Being imaginary, "financial instruments" are unconstrained by entropy; they can "grow" infinitely.  All that is necessary is to imagine more of them.  This sounds hyperbolic, but isn't.  Effectively, the FED creates money in exactly this way.  Money itself being imaginary, the FED "loans" it to the Government, which "spends" it (on wars, and financial firm bailouts, and such), and people are ecstatic to have this imaginary thing called "money."  So it is, the economy rests upon perception.  If human beings, not inhuman corporations whatever the Supreme Court claims, stop believing in fairy castles in the sky, why, the fairy castles do not come crashing down, rather they simply disappear, poof!  Thus so with the trillions of "dollars" "lost" with the 2008 crash, quickly made up by bailouts and "quantitative easing."  A damn good representation of the imaginative character of an economy is presented by Georges Sorel in Reflections on Violence, whose "violence" is for a populace to simply stop accepting money and other "financial instruments."

Tue, 08/09/2011 - 19:16 | 1544521 heatbarrier
heatbarrier's picture

Is there anything that Fisher didn't get right in 1933?  Only one thing, the "reflation" part, the rest is correct.  So, what should we do? That's the real question.

Tue, 08/09/2011 - 19:19 | 1544531 FunkyOldGeezer
FunkyOldGeezer's picture

Tue, 08/09/2011 - 19:27 | 1544547 gwar5
gwar5's picture

Just a heads up... I just sold a house and wanted an instrument to receive cash settlement for my part, was cash deal from buyer.

Plan A: I called ahead to see if the trust account of the lawyer's regional bank would have the cash to pay out the settlement check.  They said it would take a week to get that amount of cash -- < $100K.

Plan B: Therefore, I told the lawyer I'd accept from him, at closing, multiple checks drawn on his trust account (under $10K each) and he agreed. But still, I had to go through 5 bank branches before one of them said they had enough cash on hand to redeem just one of the checks -- about $8000. 

I went to the nearest branch and they were dry, so I had them call around, hence 5 branches. Ultimately, I had to drive thirty miles to get to a branch that could give me cash for just one check of $8000.

They all asked me why I wanted cash, and I said this is why.


Tue, 08/09/2011 - 19:32 | 1544574 disabledvet
disabledvet's picture

This what? I mean y would a bank need more than 8 grand on hand?

Tue, 08/09/2011 - 20:15 | 1544648 gwar5
gwar5's picture

THIS....  meaning banks don't seem to have significant cash on hand, and it's not even crunch time.

Anything under $10K should still be a nonevent. These people were falling all over themselves. To avoid frustration I ended up callinng the lawyer and made him call the operations manager, but it was like pulling teeth.  No names mentioned, of course, but who knew Sun Trust was really just a church for monotheistic pagan worship?

Take home message: if you haven't prepared with cash on hand, better getcha some.  Geesh.


Tue, 08/09/2011 - 20:46 | 1544765 karzai_luver
karzai_luver's picture

did they pay you in fives?



the comments on the banking system are laughable.


Tue, 08/09/2011 - 22:07 | 1544976 disabledvet
disabledvet's picture

they started with the change drawer and worked their way up! Apparenlty they were short 4 dollars and 34 cents. SHOCKING!

Tue, 08/09/2011 - 21:34 | 1544895 sagerxx
sagerxx's picture

Lordy DV, either you are being sarcastic or you're being a douche. Help us out, either use /sarc or /douche. My thanks in advance...

Tue, 08/09/2011 - 19:45 | 1544617 Yes We Can. But...
Yes We Can. But Lets Not.'s picture


Tue, 08/09/2011 - 19:49 | 1544629 TideFighter
TideFighter's picture


OK, as a former 25-year banker, I'm going to tell you what a F'kin retard you are. Your first presentation for cash (and 10k IS NOT the number now) gets recorded. As you go branch to branch, you creat "hits" on their dbases as someone perhaps kiting a check. The dbase NEVER gets updated, so for the rest of your natural life, your name, whenever you cash a check, will pop an alert. With facial recognition, some banks get an alert when you walk in the door! I'm surprised you actually post on ZH, I thought most morons stayed away.

Tue, 08/09/2011 - 20:48 | 1544778 karzai_luver
karzai_luver's picture

roll tide , sorry I didn't see your post.


Yes, some of these people must only come out once a year or so.

Just becuase they know some biz they are sure they are a fukin genuis.


Tue, 08/09/2011 - 22:06 | 1544974 TwelfthVulture
TwelfthVulture's picture

Oh, there are more of them here than you can imagine.  They actually think that "THEY" will get them if they present a check for cash in an amount of say, $100K, but then they open 20 accounts at 20 different banks around town and try to spread the 100k in 5K increments because that way they will avoid detection.  Lots of these posts.  Do you remember the guy that said you could go to the county clerk (or some such), claim yourself as a sovereign entity, transfer all your debts to the sovereign and then just discharge them out of hand?  It's a shame the 'junk' button is missing.  I would get like a 100 junks within an hour of posting this.

Tue, 08/09/2011 - 22:09 | 1544985 disabledvet
disabledvet's picture

they have facial recognition at the bank now! OH SHIT! Will they give my money if i'm wearing a motorcycle helmet then? How about their money? Will they give that too?

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