Archives: 2007 August

Wall Street has to love Federal Reserve Chairman Ben Bernanke. With a serious liquidity crisis developing Helicopter Ben showered the markets with money.  Perhaps the investment bank and hedge fund managers won’t have to sell their yachts after all. At least not yet.

As for the almost immediate result of a huge cash injection? The stock market put in an impressive performance for the week, closing well about the closely watched technical resistance level of 13,300.

Bernanke earned his “helicopter” nickname as a result of a speech he made in 2002. Helicopter Ben said that if interest rates fell to zero in a weak economy, if need be he would drop money from helicopters into the banking system to keep it going. This was in reference to the price deflation plaguing Japan at the time, which sparked concerns that slowing inflation in the US could lead to the same situation.

In response to the liquidity crisis sparked by the meltdown of the sub prime housing loan lending market, the Federal Reserve and the European Central Bank have collectively added at least $350 billion of temporary reserves into the banking system. They didn’t use the helicopters favoring more traditional ways of providing liquidity.

You might wonder what the relationship is between Black Swans and the stock market? Now is a good time to find out as it appears that an entire flock of Black Swans have already flown in.

In Nassim Nicholas Taleb’s definition, a black swan is a large-impact, hard-to-predict, and rare event beyond the realm of normal expectations. Many scientific discoveries for him are black swans—”undirected” and unpredicted. An event often referred to as a “black swan” is the September 11, 2001 attacks.

Another example is one which actually involved a series of black swan events. This being the meltdown of Long Term Capital Management which started with the Asian financial crisis of 1997. This event appears to be closely related to the challenges faced by the hedge fund industry today.  

The term black swan comes from the ancient Western conception that all swans were white in color. In that context, a black swan was a metaphor for something that could not exist. The 17th Century discovery of black swans in Australia metamorphosed the term to connote that the perceived impossibility actually came to pass.

Ben Barnanke lost his nerve. You can’t really blame the Federal Reserve Bank Chairman. It was a harrowing week on Wall Street and on the world’s financial markets.

After initially saying that the problems in the sub prime housing loan lending market would be “contained” and not cause any real problems for the economy Barnanke and the Fed FMOC made the following statement on Friday as they cut the Federal Reserve’s discount rate 0.5 percentage points to 5.75 percent. It’s the first time the Fed has been involved in an “emergency” rate reduction since 2001.

“Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth,” the FOMC said in a statement released in Washington. “The downside risks have increased appreciably.”

This news was enough to cause a broad based rally on Wall Street Friday with the Dow closing about 233 points higher. The Fed discount rate cut, while largely symbolic, was an attempt by the central bank to “promote the restoration of orderly conditions in financial markets,” the Fed said in a statement.

How large and how significant is an underground economy to the US? Is there a large amount of underground economic activity that fuels stronger than expected retail sales and other official government economic figures?

Retail sales were today reported as being up by 0.03% in July, higher than the 0.02% number that was expected. In the early going this was proving to be helpful to stock prices on Wall Street.

With turmoil being the order of the day in the housing industry and sub prime lending market, the price of grocery items like milk, fresh vegetables, and meats soaring, gasoline prices ready to move even higher as the hurricane season develops, well paying manufacturing jobs moving to Asia, and incomes for the middle class stagnate for the past twenty years, one has to wonder if the American people are the most overly optimistic or perhaps the most foolish people on earth.

Or could it be a largely unspoken underground economy factor at work?

The Athabasca Oil Sands are a major deposit of oil-rich bitumen located in northern Alberta, Canada, just North of Fort McMurray.

The oil that can be extracted from the oil sands is a major hope for the US to reduce its dependence on oil imports from the Middle East. Canada is already the largest exporter of oil to America, with oil imported from Canada exceeding the exports of Saudi Arabia. With ongoing violence continuing in the Mid East Canada is seen as a much more stable supplier and an even greater percentage of oil imported into the US from what is seen as a stable source is very welcome.

These oil sands consist of a mixture of crude bitumen , silica sand, clay minerals, and water. The Athabasca deposit is the largest of three oil sands deposits in Alberta, along with the Peace River and Cold Lake deposits. Together, these oil sand deposits cover about 141 000 sq km of sparsely populated boreal forest and muskeg (peat bogs).

The Athabasca oil sands are named after the Athabasca River which cuts through the center of the deposit. Traces of the heavy oil are readily observed on the river banks.  The oil sands were first seen by Europeans in 1788 although they hardly realized the significance of their find.