I’ve been away, writing A Secret History of The American Crash. If all goes well, I expect to release it on February 28, 2014
This first excerpt contains a bit from Chapter 2, describing the stock market crash of 2014, and life in Los Angeles in 2020.
If you like this first excerpt—or hate it—then say so in the comments section below.
Update: Two things: One, here is a second excerpt from the Secret History, “The Bombing of Gachsaran Oil Fields”; and two, here is the Facebook page for the novel I set up, with all sorts of cool doodads. Go visit it!
Los Angeles: Bryce
A lifelong Angeleno, Bryce* is a 47 year-old, tall, rangy blonde-haired fellow with a friendly smile beneath a well-groomed moustache, and guarded blue eyes that have seen a lot.
We are bicycling along Melrose Avenue in the spring of 2020. We are heading east, looking for a café to chat. Hundreds, perhaps thousands of other bikes and pedicabs are bustling along the busy street in both directions. Stores are open on both sides of the avenue, pedestrians walking along the sidewalks. The sun is shining bright and warm, the air smells of the sea, and everywhere is the incessant jingle of thousands of bicycle bells.
West Los Angeles, it’s clear, is a thriving city.
“It’s right up ahead, on Highland Avenue,” he tells me, as we approach The Wall. Even as we cross North Fairfax—twenty blocks away from it—it is clearly visible directly ahead of us: An enormous dusky brown austere structure towering over the other buildings, without a mark of graffiti on the side facing us. It is wide at the base, slowly tapering towards the top, with round watchtowers every 250 yards or so.
As we get to Highland Avenue, up close, The LA Wall is even more massive and frightening than in the pictures I’ve seen: A reinforced concrete wall averaging 150 feet in height, as tall as a fifteen storey building, perfectly smooth, slicing lengthwise right through the middle of Highland Avenue in a north-south direction.
“Ain’t it somethin’?” asks Bryce jocularly.
It certainly is. The Wall separates Los Angeles’ Westside from the rest of the city.
Bryce points north. “It runs from the Hollywood Freeway north, all the way south to Venice Boulevard,” he says, turning to point. “At Venice, The Wall turns south-west to La Cienega, where it continues south, coming parallel to the 405 freeway. Then at Imperial, it goes west, just south of the airport, all the way into the sea. Everyone east and south of The Wall cannot get in.”
Four years since its completion, not one person from the east or south has managed to breach The Wall.
“It kept out all the zippits [i.e., mobile indigent],” says Bryce, “and all the problems that the zippits brought with them: Lawlessness, d-grave [i.e., shigells gravis, antibiotic-resistant dysentery], race violence, class violence, random acts of terrorism—all of it. The prosperity we’re experiencing is because of The Wall. I know it’s the conventional wisdom, but it also happens to be true. The Wall has given the Westside the peace and safety to prosper once again.”
West Los Angeles is one of the five richest enclaves in the United States. Along with Manhattan, Miami Beach, the Peninsula in San Francisco, and Washington, D.C., West Los Angeles has regular access to potable water, electricity, municipal services (such as police, fire, garbage removal and urban repairs) and mobile telephony.
In fact, life in West Los Angeles seems little changed from ten years ago, except of course for the lack of gasoline-powered automobiles. Today, hundreds of thousands of bicycles and pedicabs flow through what was once the most car-friendly city in the world. West Los Angeles’ bike-sharing system is the largest on the planet. Apart from gasoline-powered military vehicles, the few automobiles that do cruise the streets of the Westside are all electric. “But with China shutting us out [of international trade],” explains Bryce, “those EV’s [electric vehicles] are beginning to disappear too. The rare-earth elements needed for their batteries are just not available anymore.”
We start biking south, parallel to The Wall to our left, as we begin to chat.
After graduating from the University of Southern California, Bryce became a certified investment advisor. Up until 2015, he used to work for Merrill Lynch in their Beverly Hills offices. “My office was not too far from my condo. I actually used to walk to work, for the exercise,” he says. “I was a confirmed bachelor. There were just too many beautiful boys in LA to settle down!” he adds with a laugh.
Then Bryce glances at me as we slowly bike in parallel. “I can be open about who I am in West LA,” he says. “In the East Coast, I’d get frowns. In the FC, I’d get shot.”
When I nod, he adds, “Things sure have changed, huh.”
I don’t know what to say to that.
We find a small organic café with outdoor seating. So we stop, get off our bikes, and sit down for our formal interview. I assure him that my recorder is non-compliant, and that his testimony will not be listened to by any government agent.
“Good,” he says. “I already have two NNC’s [Notices of Non-Compliance]. A third one and I’m in deep doo-doo with my Sector Commander.”
My clients were mostly retirees with investable assets in the mid-seven-figures—okay, that doesn’t mean anything now, granted, but what I mean to say is, these folks were fairly well-off at the time [mid-2014]; the equivalent today of between five and ten billion americans. Not mega-rich, no, but rich enough that they could afford a nice lifestyle without worrying too much.
The entertainment industry [is where most of my clients came from]; a very few actors [on my client list], but a lot of retired cinematographers, film editors, sound designers. They were the kind of people whose careers had often been feast-or-famine, which was good, because as investors, they didn’t panic at the first sign of market turmoil. Their professional lives had had so many ups and downs, as investors, they trusted me when I said that whatever was going on in the stock market would pass. Because it did—it had. Usually.
2008 had been horrible, what with the Global Financial Crisis and the sub-prime mess. Everything crashed [in 2008], and was in the doldrums in 2009, stocks, bonds, everything. But in 2010 things started turning around, and by 2011, ‘12, ‘13, early 2014, everything was booming along: Record highs on the NASDAQ and Dow Jones [stock price indices]. All the ground lost in 2008 had been more than made up.
Investing in those days wasn’t about buying some stock or bond and happily getting a steady dividend payment or coupon payment. The yield on investments was nothing—less than 6%, and after taxes, less than 3%.
So in that environment, you made money by asset appreciation. You bought a bond or stock at say 100, and you let it go up to 120, when you sold it, then bought something else for 100, and watched that go up in price. That 20 of profit? That’s what a lot of my clients were counting on to live. That was their “yield”.
And the best thing about it was, since it was considered a capital gain, it was taxed lower—a lot lower [than ordinary income]. So buying and selling stock was more advantageous from a tax-perspective than buying-and-holding and getting a decent yield from the dividend. And of course my bosses loved it when my clients bought and sold stock: A commission for the firm every time a stock was traded [by a client].
This was how we all had every incentive to ignore the yield on an investment—the stock’s dividend, the bond’s coupon—and only pay attention to how fast the asset rose in price.
That’s not investing. That’s speculating. That’s pump-and-dump. That’s buying something in the hopes it’ll go up—not buying something with the expectation that it’ll give you a good, safe, steady return on investment over the years.
That’s why asset prices were so high: That’s why companies like twitter had absurd valuations, even though they were literally not making any money. That’s why the art market was going crazy—a Norman Rockwell painting had gone for $42 million, a triptych of Francis Bacon painting had gone for $150 million. [In fact it sold in November 2013 for $142 million, the equivalent today of some ₳183 billion. —Ed.] Asset prices were crazy—asset prices were in a bubble—because of this speculative mania.
But I didn’t realize it, then—nobody did. To me, to everyone, it was just normal investing: Buy low, sell high—and it always went higher.
But it wasn’t real. No wait, it’s not that it wasn’t real—it’s that it couldn’t last. It was like a game of musical chairs—only there were fifty million investors, and only one single chair.
When the music stopped, it would get ugly—and it did!
Don’t you just hate it when you realize what’s really going on after the fact? When it’s too late? [Laughs ruefully.] I was right there with all the other lemmings, I want to kick myself now, but at the time, I believed just like everybody else that QE was just the Fed buying Treasury bonds on the open market, ho-hum. It sounds so smooth, now doesn’t it? “The Fed’s Treasury bond buying program.” Just trying to keep interest rates down so that the economy would restart, move along folks, nothing to see here.
The whole system was rigged: The Fed created money out of thin air, and used it to buy bonds on the open market. This kept interest rates low, so money chased returns by speculating in the stock markets. That’s how all the stocks were hitting these record highs. Even the low capital gains taxes: It encouraged people to speculate, ‘cause you were paying less taxes on your winnings from buying and selling [investable assets].
I bought into it hook line and sinker, and whenever I’d hear these people on Max Keiser, Washington’s Blog, Barry Ritholtz, Zero Hedge and so on, the people on the alt-fin-press [alternative financial media], all of them saying that QE was bad, that it would crash the dollar into hyperinflation, I dismissed them. The Tinfoil Hat Brigade. Asshatters, to me.
When the Israelis bombed the Iranian oil fields [see Chapter 1] and oil prices shot up—that’s when the music stopped.
But like a fool, I wasn’t worried. First of all, it was the Fourth of July [when Israel bombed Iran]. Nothing happens in the markets during July or August. I’m talking the equities markets, and the bond markets, where my clients had their money invested. No surprise, the only thing moving during the summer was energy. Oil, natural gas, coal, they all shot up. Some industrial commodities too, especially copper. And gold and silver, but not that much. I remember clearly that gold was up around $1,600 an ounce, which was much lower than the $1,900 peak of 2011.
But equities and bonds were standing pat. Everything seemed to be . . . okay. Y’know? July, August—oil prices went down from [$420] to around $320, $300 a barrel, so there was a feeling like oil might go back down like in 2007, where it’d shot up then come back down. Some commentators were even saying that higher oil prices were good, because it’d be a shot of inflation that would help reflate the economy and get it going again. You gotta remember, equities and bonds were going like gangbusters during 2010 through 2013 and into 2014, but the overall American economy was sort of apathetic. Just grinding along. Officially, unemployment was around 7%, but that was because the employment participation rate was down to something like 63% [of the working-age population]. The real [unemployment] number was closer to 10% or 11%. The Fed’s QE [program] had goosed equities and bonds, but not the economy itself. Core inflation [excluding food and fuel prices] [before mid-2014] was nothing, something like 3%.
But then September, right after Labor Day, you had these people basically raiding supermarkets—middle-class people, just emptying supermarkets like a hurricane was on its way. And those gas lines: Lines of cars literally miles long [at gas stations]. Then people fighting each other? Over gasoline? Those gas station shootings in Kentucky and Massachusetts? [see earlier Chapter 2]
It seemed so out-of-the-blue, it was on the news at first, ‘cause it was so weird. Killing people? Over food and gas? But it wasn’t affecting me. Wait, no, that’s not it, because it was affecting me: I’d noticed how groceries were all of a sudden a lot more expensive? And gasoline too? But I didn’t care that much, because food and gasoline weren’t that big a part of my budget. I didn’t drive that much, probably the only person in LA who walked to work. I ate out in restaurants almost every day, which in Beverly Hills were overpriced anyway, hello. And you don’t need heating oil when you got the famous Southern California weather. Not to put too fine a point on it, but I was well-off enough that food prices and energy prices going up didn’t really matter to me.
The quadrupling of the price of oil, that seemed severe, maybe even a market overreaction, but then I remembered 2007. In 2007, oil rose drastically, from $50 to $145 a barrel, almost tripling in less than six months, before fading back and finally falling under $40 a barrel in 2009. Nobody ever knew why it happened [in 2007], there wasn’t any bombing or anything it just sort of happened, and then it passed.
Then back in the ‘70’s, I don’t remember it myself, but my parents had always talked about gas lines during the 1970’s. But it had passed too, I knew that much.
So as I watched TV and saw all these lines for gas and groceries, I thought to myself, “We’re going through the same thing, like in the seventies, like in 2007. But it’ll come back down soon enough, it’ll work itself out, and then business as usual.” I even thought that it might be a good thing, a little inflation; restart the economy and all. After all, wasn’t that what the Fed wanted with QE? A little inflation to get everything moving again? So I wasn’t worried.
The Dow Jones [stock index] was at about 17,200, 17,300, upticking as usual during the summer [of 2014], NASDAQ the same at just under 4,500. Treasury bonds were rock solid, yields on the 10-year around 2.75%, nothing going on. The VIX [uncertainty index] was rock steady too.
Oil was up, severely, but gold and silver and platinum—the precious metals—weren’t doing very well. Again, weird. They seemed like those dangerous animals that have been sedated, you know? Like a tiger that’s stoned so they can remove its wisdom teeth. They were just sitting there, gold around $1,500 to $1,600, silver around $30, just drifting.
So I told my clients, “All’s good—relax.”
And they believed me.
But copper. I should have been paying attention to Dr. Copper. Copper was at $3.50 the pound at the start of the summer, and it just kept on rising until it was at $4.50 by Labor Day [of 2014]. That’s three months, it was up almost 30%.
I was like, WTF? They’ve always said that copper’s the only commodity with a Ph.D. in economics. I knew the economic data, after all it was my job: Even though house prices were up, new housing in the U.S. was stuck, and the big China real estate boom was dead, so the natural consumers of copper—construction—weren’t buying.
Yet copper was powering along, rising just about every day. It didn’t make any sense, and I had no idea why.
Then in very late August, agricultural commodities shot up—wheat, corn, soy—just blew up.
That’s when equities began to fall.
I remember it like yesterday: On Monday September 15, I woke up at 5:30 just like always, to check New York before showering and going to work—and at the opening bell, the Dow Jones was down 300 points. And it just kept on falling. And on the other side, commodities were all going up: Copper, wheat, corn, soy.
This wasn’t a total surprise. The first couple of weeks after Labor Day, the NASDAQ especially had been . . . weird. Facebook slipped from 65 to 45, then plateaued at 50. Apple had slipped 8%, down to 560. It was like . . . like a drunk guy making his way across ice, y’know? He’s slipping and almost falling, and you just know he’s going to take a bad tumble any minute now. It was only a matter of time.
That time came on September 15.
My clients were awake too, that morning—they were all screaming at me to sell. And these were people who like I said were pretty patient investors. But in 2008, when I’d told them to wait, that everything would come back up, I’d been right—but it had taken almost two years for prices [in equities] to recover. My clients now thought the same thing would happen—a fall and then a recovery—but they weren’t willing to wait two years. As one of them said, “If I sell now, even if it’s at a loss, when I buy back in, it’ll be a lot lower, so I’ll still make money when it comes back up.”
Who was I to argue.
Of course. I put my orders in from my bedroom, I was still in my skivvies while I was watching all this going on on my computer. Especially after those people panic-buying at the supermarkets and gas stations.
That day, September 15 , the Dow Jones fell from 17,230 to 16,008—the largest single-day point drop in history, though percentage-wise, it wasn’t even in the Top 20. But that number, repeated on the talks shows—“Dow drops twelve-hundred points in one day! Dow drops twelve-hundred points in a single day!”—that put the fear of God in everyone.
No, precious metals were going down, which didn’t make any sense. I didn’t understand why they were going down, the Cross Committee hadn’t revealed how the networkers had manipulated gold and silver prices.
So I didn’t buy anything with that cash; my clients’ cash and my own personal cash. As an investment advisor, I always followed my own advice, I never told clients one thing while doing another. I sold out too, and parked everything in what I thought was safest place: Treasury bonds.
No no no no no, you don’t understand: Everybody was doing it. Everybody was getting into Treasury bonds during the equities sell-off.
They call it “Black September” for good reason: Every day [that month], it was like a war of nerves. Some days, the Dow and the NASDAQ just hung in there, some days they even rose a little bit. But then, like on September 25, uh-oh, here we go again—sell off, everybody selling absolutely everything.
By mid-October, the Dow was down to 11,000. From 17,300 to 11,000 in six weeks.
But that catastrophe—frightening as it was—wasn’t what was keeping me awake at nights. What kept me awake at nights were Treasury bonds.
They should have been at record highs, across the yield curve: They should have been on the moon—but they weren’t. The yield curve was severely inverted, as you’d expect after a big equities sell-off—but the 10-year’s yield was at 4.25%, the 30-year at 3.50%. Everybody—at least everybody I knew—was getting out of equities and going into the safety of Treasury bonds, especially long bonds—that’s where everyone thought they’d be safe.
But Treasury bonds were tanking. Every day, in the middle of the biggest equities sell-off ever—even as the yield curve remained inverted, just like it should—Treasuries were falling—
No, not falling: Crashing. All through that fall and into the winter, that inverted yield curve kept rising.
[Shakes his head.]
Meanwhile commodities . . . who-o-o-o-a-a-a: Copper $6.50, gold $2,000, silver $45! Not just metals and precious metals, oil? Back up over $450, while agricultural commodities were all making record highs, with no end in sight.
But here came the event horizon in this death spiral: The January Gold Rush.
During October, November, December, everybody [was] rotating out of equities and bonds, and into commodities—any commodity.
But gold was just sitting there at $2,000, sometimes up to $2,200, but rapidly backing down. Silver the same, going up to $60, maybe even $65 an ounce, then backing off to $50 or $55. Prices in supermarkets and at gas stations were going out of sight—people understood that we were in a panic, so they were quickly getting out of equities and Treasuries [bonds] and going into commodities. But precious metals were not breaking out like you’d expect.
But then it happened: In January 2015, Sykes Gold—one of the big retail precious metals brokers, one of the top-five—was intervened by the Justice Department. Skykes’ customers’ accounts were frozen, just like MF Global back in the day.
It turned out customers had started asking to take physical delivery [of their precious metals]—and Sykes didn’t have enough gold. Not just gold in stock, gold period. All the quote-“gold” it had been selling was actually just gold certificates backed by nothing but their word.
That caused the January  Gold Rush: All of a sudden, everybody wanted physical delivery of their gold. Not only gold, but every precious metal—and then every commodity. They wanted actual, physical delivery—didn’t matter if it was gold, silver, wheat, oil, even natural gas—everybody wanted actual, physical delivery of their commodity. Because nobody trusted anybody anymore. A complete breakdown in trust in the system.
Of course, that’s when the age-old dirty-little-secret of the commodities markets—all the commodities markets—came out with a bang: Brokers had sold more commodities [to customers] than actually existed.
That’s when prices really took off: Gold to $5,000 an ounce, silver to $175, $200, copper way up to $12 a pound.
And oil? A cool $1,000 a barrel.
That’s when hyperinflation started for real. That’s when America started to crash.
When we finish our interview, and after I have thanked him, Bryce says out of the blue, “Would you like to see the view from the top of The Wall?”
Bryce has a relationship with his Sector Commander, so he arranges for me to visit The Wall. (Bryce promises me he will not mention why we know each other. But as the Sector Commander has to register me in order to grant me permission to climb up The Wall, I realize what Bryce has done: Just as he has incriminated himself with me as a potential Information Terrorist, he has now registered me with his SecCom. If I betray him, he has the ability to betray me as an editor of the Secret History. I realize this maneuver only after the fact.)
That evening, as the sun is setting at our backs, Bryce and I are atop one of the circular watchtowers embedded in The LA Wall. We look to the east.
Unlike on its west side, where it is wide at the base and then tapers towards the top, The Wall is straight down on the eastside, and perfectly smooth; impossible to climb. There is a no-man’s-land fifty yards wide cleared out before The Wall on the eastside, and then empty and destroyed buildings spreading out in all directions beyond; many of those buildings are burned out and pockmarked by bullet holes. In the distance, the ruin of Los Angeles’ downtown is eerie and frightening. Glass buildings have windows broken as jaggedly as broken teeth. Sporadic fires burn from the direction of South Central Los Angeles, downtown, East Los Angeles.
Everything east of The Wall is a complete and utter wasteland as far as the eye can see. Even with high-powered binoculars: Everything is gray and dead, without a single intact windowpane. But even so, there are some people making their way through the desolation. How people can survive in such a wasteland is a mystery.
In the no-man’s-land at our feet, there are a few corpses lying about, in various stages of decomposition. Not many, perhaps four or five immediately beneath our watchtower. The corpses lie there, unclaimed, rotting. Near one corpse, that of a woman of indeterminate race (her decaying skin on her face is a shrunken gray, her eyesockets empty black holes), there is a foursome of dead coyotes lying around her, their brains blown out, their thin bodies decomposing along with the woman’s corpse. I don’t need to ask to realize that the automated machine-guns on the watchtower picked off the coyotes. Whether they shot the coyotes automatically, or to prevent them from devouring the corpse of the dead woman, it’s impossible to say.
Though 150 feet tall, The LA Wall no longer seems particularly massive or secure. On the contrary, standing on the watchtower, looking at the death and destruction for endless miles from The Wall, it seem puny and insubstantial against this rot—barely enough to keep this desolation at bay.
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