Unlawful Economic Stupidity

By: The Mogambo Guru | Thu, Aug 23, 2007
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"As evidence of that surprising 'economic laws don't apply here' statement...almost $500 trillion in financial derivatives exist...and the number of derivatives 'is increasing at the rate of 40 percent per annum.'"

If you grow tired of always saying, "That Mogambo! What an idiot!" and you want another example...here is one for you, fresh from the lips of David Viniar of Goldman Sachs Group Inc. (NYSE:GS).

He says that the markets are producing "25-standard deviation events, several days in a row." Hahaha! 25 standard deviations! Hahahaha!! Hell, three standard deviations contains 99.99999% of all probable events, and here this doofus is talking about 25 standard deviations! Not 26 (which is too high!) or 24 (which is too low!), but 25! Hahaha!

Justice Litle, Editor of the Consilient Investor, derives a "Quant's Law" from an entry for "Goodwin's Law" via Wikipedia as "Whenever a quantitative fund manager makes reference to a '100 year storm (or flood),' a '10,000 year event,' or an 'X standard deviation occurrence,' where X is any double-digit number, the probability of devastating financial loss approaches one." Hahaha!

As Benny Hill would look into the camera and say, "It's been proved!"

And keeping with the humorous side, he also adds a "Corollary to Quant's Law" which is that, "In the financial markets, '10,000 year events' generally occur every 5 to 7 years." Again, "Hahaha!"

JMR George P. looked it up, and reports that at Sachs, he is not employed as a "clueless weenie", but as a "Chief Financial Officer, Head of the Operations, Technology & Finance Division, Executive Vice President and Managing Director", who apparently has Total Annual Compensation of $21,119,219, as of Fiscal Year 2006, plus "Other Long-term Compensation" at $11,561,816.

So, this answers the question, "What kind of person do you get for $32 million a year who can lose everything you have saved and invested because he thinks that the bell curve is permanent, that events happen only with prescribed probability according to standard equations, that the whole concept of Black Swan is a load of hooey, and he is willing to bet all your money on his stupid opinion that what history shows is so obviously wrong over the long term that you have to laugh 'Hahaha!'?"!

And it also answers the question of Antal Fekete at the Gold Standard University, who asks, "Here is a question for the discriminating observer. How is it that interest-rate derivatives do not obey the Law of Supply and Demand? The more there are of them, the more they are in demand."

As evidence of that surprising "economic laws don't apply here" statement, he merely has to note that almost $500 trillion in financial derivatives exist ("In comparison," he writes "the U.S. GNP is a paltry 13 trillion") and the number of derivatives "is increasing at the rate of 40 percent per annum. At that rate volume doubles about every other year."

And how big is the derivatives market now? Jim Willie of the Hat Trick Letter says, "The scope of the CDO bond fraud is gigantic. In 2002, $84 billion in CDO bonds were issued. In all of 2006, $503 billion were issued. The parade has not ended! In 1Q2007, an incredible $251 billion were issued, on track for a cool $1,000 billion annually." Heading for a trillion bucks a year!

I know that true Junior Mogambo Rangers are gagging on their own vomit and blood at the thought of that much of an increase in debt, because they know that catastrophe looms as a result. So I will immediately change the subject to "how big will the fallout be?" now that this CDO thing is reversing?

It was at this point that I had planned to premier the new musical-comedy version of my famous "Inflationary Flames of Hell" tirade, which I was pretty excited about, as it contained the delightful aria "Inflation means that you will die a painful economic death with the screams of your children in your ears."

But there was some problem with the musician's union accepting a postdated check on an out-of-state bank that nobody ever heard of, and Bill Bonner at DailyReckoning.com got tired of waiting for the labor negotiations to work out, and says that "how big" is estimated by the dictum, "The force of a correction is equal and opposite to the deception that proceeded it."

Equal and opposite reaction? For a second there I thought of Isaac Newton and flashed back to high school physics class, and it suddenly makes sense! But before I could ponder the ramifications, Mr. Bonner continued that an idea of the sheer magnitude of "how much" may be gleaned from the fact that "Never before in the history of the world have so many people believed so many things that couldn't be true. Now, they owe more money to more people than ever before. And it could take a long, painful correction...or worse...to straighten things out."

Mr. Willie says the same thing, and that "The detonation of the CDO & MBS bond market is a truly powerful and devastating process. It will burn bigger and brighter and longer and more powerfully than any bond debacle in modern history."

Naturally, I grow impatient, rise to my feet and demand to know, "Who needs this qualitative crap? How much in quantitative dollars and cents? Do you understand dollars and cents, or are you going to persist in indeterminate generalities? Because if you are, then I got some indeterminate generalities of my own, like how I generally don't pull out a handgun and start blasting the hell out of the place when people waste my freaking time with this kind of crap when all what I want is facts, facts, facts which may enable me to make some money. Lots of money. And pronto!"

Mr. Willie, knowing exactly what kind of lunatic he is dealing with, immediately complies with my demand for facts and says, "Expect the $1.4 trillion in subprime mortgage bonds to almost all suffer total loss", and that we should expect "deep losses" from "the majority of CDO bonds."

At which point I, the Ever Foolishly Pessimistic And Paranoid Mogambo (EFPAPM), say it will even be worse, much worse than that, as Chaos Theory proves that all things are connected to all things, and things are going down, down, down, as matches my frightened, paranoid mood ("We're freaking doomed!"), thus explaining why you were specifically instructed to sit with your hands on the table at all times, so that I can see them, and to not make any sudden moves that might startle me and my trembling trigger finger.

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The Mogambo Guru

Author: The Mogambo Guru

Richard Daughty, the angriest guy in economics
The Mogambo Guru

The Mogambo Guru

Richard Daughty (Mogambo Guru) is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher of the Mogambo Guru economic newsletter, an avocational exercise to better heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning, and other fine publications.

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