Santelli has to sell something and now it is the idea that there is actually money going somewhere. The Fed stuff is replacing missing cash from the system to hide the insolvency of the big banks. The government bailout is going to be a swap of marketable securities for unmarketable securities and for interest bearing equity positions. The banks are taking on liabilities in this situation and really not getting interest bearing assets in return. Banks don't have a cash account and one of the reasons t-bill are so low in yield is that all this money is circling the drain back into t-bills, which are in short supply.
The other thing they are missing is that the economy hasn't slowed to the point we are going to see it slow. The government hasn't admitted to a recession, yet the public has been screaming for a year now. I read in Bloomberg that SPX earnings have declined 27% from last year on the 147 companies that have reported so far, but the CNBC crew was advertising -10%. Wait until we see 8% to 10% unemployment. The Fed is pushing on a string.
They are now saying the Fed started agressive action in early October. Which October? The Fed has been agressive for a year, letting commodity inflation rage. There is revisionist history going on over and over again. The Fed has really not had to wage a fight against inflation for 20 years now, only the rise of China creating inflation through excessive flow of dollars to lower production cost areas. One could say the dollar and the US inflation rate has benefitted from this action, but it was the dollars that put the jobs and demand in place in Asia.
There is an absurdity being revealed, whether you listen to one of the CNBC idiots or Warren Buffet. Buffet has been waiting on a time like this, except he buys into the Socialist idea that the central bank can do anything. Well, I don't see anyone cancelling debts because they can't make their own books balance if they cancel them and if that becomes the norm, then there isn't any use being in business because all money becomes an IOU nothing because no one is going to pay.
The CNBC crew, the idiot Dennis Kneale, brought up the revised 110-age (used to be 100-age) model for being in the market. I don't know too many people rich enough to have half their assets in an asset class at age 60 that goes nowhere but sideways down for 10 years and promises to do the same for the next 10 years. People don't live to 110 except on rare occasions, so rare that hardly anyone on this board has ever personally known a person that did. Second, the price idea, which is where Buffet is piling in doesn't support a long term market return. Stocks are cheap when the dividend for the market is around 5%, not 2.8% or 3.7%, which is the stated returns on the SPX and Dow, inflated by a credit bubble.
Going forward, lets see who is stupid enough to plunge into debt, which is about the only way all this smoke (replacing lost funds with IOU's to the Central bank and government isn't printing money) or how willing the banks are to lend more money to those that couldn't pay the interest on it for 3 weeks? I believe we are going to see an amazing backwards roll in the emerging markets. I have been making this argument for a long time, but they try to spin it out as a disconnect. It is clear there isn't a disconnect, that the debt bubble isn't a US subprime problem, but a global speculative credit bubble. The losses on US subprime were minimal in light of the total debt structure in the world and is a CNBC coined excuse for the entire worldwide investment banking scheme. We are going to find the corporate takeover bubble is going to dwarf the subprime mess.
Now they are talking about the gasoline decline boost. If the price of gasoline had the effect Dennis and company pretended it did, the economy would have collapsed in 2005 when we first saw $3 gasoline. My contention is that gasoline was going on the credit card and we are now in need of more borrowing to keep the credit bubble inflated. Also, every penny of decline comes out of GDP, as it is measured as production at some point. Every $1 is $82 million per day, which means $10 is $820 million. It isn't necessarily money that is going to be spent and it will have devastating consequences in countries that depend on oil production. I expect a massive downturn here in the DFW area if this phenomenon continues as the largest oil field in the country is being developed here by XTO, Devon, Chesepeak and others. I believe these companies could very well go broke in a deep recession, as the cost of producing this gas is only marginally below current prices.
The price of gasoline is actually below the price of oil when you do the 42 times gas price. The energy argument is one the bulls can't win because a rebound means we move back to $144 or higher and if we don't, we are probably going to get cheaper gas prices, it will be because we have a depression.
The deflation argument is centered around what is going on. Oil is declining because of a drop in demand, not because to dollar got more valuable. But, the dollar got more valuable because the market can't supply the cheap extra dollars it was providing in the past. Forget the Fed funds rate, as that is either income or expense for a bank and a wash for the banking system. The impact is going to be if the economy demands more or less money to operate. There is a difference between that idea and what is going on with the banking system, which is central bank and government injections, not for lending but to stop total collapse. The gasoline example is one comparison. For the consumer that doesn't have a credit card, the spendable income is going to go up, but the guy who is living around credit will merely not put extra cost on his card. All people are going to attempt to lay in some kind of cash cushion, something many wouldn't have thought about a few years ago.
Now Dennis is calling a bottom of the California housing crisis. He has no clue how long this will take to reconstruct. Neither do the stock bulls, who look at the credit bubble reflated 2002 market and how it got even in 5 years. The bubble that made the 1990's market and picked up the 2002 market has burst. A couple of people on this housing nonsense are telling the truth after 2 years of studying this mess. More than anything in the US, the amount of home equity left is as deflationary an indicator as anything.
The other inflationary power in the world is the emerging markets, the BRIC countries. They are the canaries in the coalmine, as most of them have been on spending binges. China has been literally built into a modern economy in 20 years, most of it happening in the past 10 years. Almost half the people in the world live in China and India and a slight move upward or downward in per capita demand for anything in these 2 countries has a massive world effect. Consumer demand for automobiles in these 2 countries has been the demand push for oil, as much as anything. But there is another demand push, capital expansion. If the demand for goods shrinks in a recession, I am afraid the capital goods industry rolls so far backwards (read Von Mises business cycle) that major chunks of the economy just goes idle.
Look at how strong the battle has been against something they say isn't likely, deflation. It isn't likely, but we watched it occur in the second largest economy in the world while the rest of the world was actually pumping up a bubble. How could Japan go in the tank while the rest of the world was pushing the game upward? This happened in Japan while the rest of the world was having an inflation party. What happens now that the demand for the world, the US, undergoes a massive economic restructuring and financial re-organization?
What is true for the US is also going on for Europe and will be going on in the emerging markets as well. I believe Brazil and China are massive bubbles and Russia and India really have such poor and socialist supported economic models that they have huge black holes to fall into. China claims to be growing at a significant pace, but I suspect it is expansion that will not be utilized. When it runs its course, the demand for commodities worldwide are going to fall into collapse and the resulting hit on world demand for everything is going to be mindboggling.
The CNBC guys are again talking about the bottom being in based on the speed of the decline. One guy says wait and the other guy says plunge, but neither is really arguing we go lower. Erin Burnett brings up the decline and they all measure this market against 1974 and 2002. I don't believe any of them can honestly compare this market with those 2 markets, though 2002 has a few simularities. The market in 1973 was paying a 3% dividend on the SPX and by the bottom, the market was paying enough yield to make a bottom. Also, the financial system hadn't collapsed. The financial system has collapsed across the board and what is left that hasn't collapsed is going to collapse, mainly in the discussed emerging markets. What is actually a series of props, is being sold as stimulous and printing money. Deleveraging is being done with no recogition that leverage isn't coming back and that deleveraging means destruction of credit.
We are off about 45%, give or take a few percentage points. This looks like a buying opportunity, but in real markets, the SPX would pay 3% at peak. It pays about 2.8% after this decline, so we are above peak, not below it. The financial situation supports the idea of dividend cut instead of dividend increases, with declines of 50% before this bear is done, not out of the question. It hasn't occurred to most companies and consumers yet that they are going to need to conserve capital and cash, as has been shown by the busted industries. It amazes me that banks are still paying dividends while panhandling money under smoke screens from the government and Warren Buffett at high rates. They won't be paying anything by this time next year and bank dividends are a huge part of what is paid on the market. Also, the stock buybacks are going to end, as they find out it is harder to raise capital than it is to spend it.
The point I am moving to is that the market is probably going to fall 80% or more before we find a tradable bottom. This market isn't a 1974 or a 2002 market, but a Japan market or a 1930 market. This is the difference between a slowdown and a bursted bubble and this is a worldwide bursted bubble. Remember, the disconnect story was still playing 3 months ago and some of it is still playing for China now. The downturn in Europe and the burst bubble is worse than the US and the bubble permeates all areas. My point is that the investor that has ridden this market down and gets out now is going to lose the 45% or so. The guy that takes the plunge here could lose 60% to 70% based on other bubble models, namely Japan and the great depression.
I believe Wall Street has been trained to depend on the allmighty Fed. It amazes me that they threw rocks at Japan, but in reality we aren't doing anything different other than the pre-emptive bank bailout. One problem is the traders are too young to have lived through a real bear market in everything. Remember, though the 2000-2002 market was hard on tech, housing and commodities actually did pretty well during that period of time and there were carry trades to be had that were like stealing money. Today all this stuff is unwinding and the Fed can't cut to zero.
The idea of how the banking system works has been confused. The Fed is a liquidity provider and a lender of last resort, not a loan maker. In theory, the Fed could buy treasuries and leave the money in the system, but it is more likely in a tough market that the banks would take the money and buy treasuries, thus putting it back into the Fed. Fed liabilities don't make for lending and we are about to find this out. They keep the banking system liquid, but not necessarily solvent.
The banking system has literally been allowed to operate in a position of insolvency. The Treasury smoke screen that has allowed so many insolvent banks to get capital injections in the form of government 5% preferred stocks is almost criminal. Injections from the Fed and capital injections hardly make for a lending boom. Especially when the limits of the last boom have been permanently pulled in, no subprime and soon no high risk credit cards. What is also missing is the previously mentioned home equity, which will threaten the credit card, mortgage, real estate and other consumer related industries. Its effects will be felt from mainstreet to Bejing.