Monday, February 23, 2009

Not Capitulation, DEFLATION

It is not the bottom Fred. There isn't any capitulation because there isn't any money. It doesn't occur to you guys that there isn't any money on the sidelines. At least not the expanding amount of money that is needed to inflate asset bubbles. We ripped a hole in the last bottom today. The problem is that the players are all in and those that stayed in are now watching their surplus retirement go away. I tried to talk some guys into selling out when it rebounded in October, telling them it was going to be their last chance. Look at the history of depression markets and deflation markets. [b]THE HALFWAY POINT BECOMES THE TOP FOR AROUND 20 YEARS[b]. Take a look if you don't believe me. 1937, the Dow made the 50% point then it sunk back into the abyss. You have to remember that FDR had the mechanism at his disposal of devaluing gold by decree then and the changing of the money. We are beyond the last change unless you want to consider wholesale printing without the acquisition of assets, which would totally deflate the system through the abandonment of the dollar around the world. Once money becomes worth less than the ink on some of the bills, it ceases to be a money supply. You can't defeat deflation in this manner, only destroy what is left of the economy. But, back to the market. We didn't get back to the 1/2 way point until the 1950's after that. If you look at Japan, it is now at a new low. It hit the 1/2 way point a couple of times in the mid and late 1990's. The second time actually caused a Super Cycle Bear like Robert Prechter to consider the Japan bear over while the US bear was beginning. At least that is what I recall reading. In any case, we are at a low after 19 years and it is 1/3 the 1/2 way point almost. You are looking at the top here.

It doesn't occur to anyone in bull land that the entire market of the past 20 years was one inflationary fiasco, built on an almost impossible level of debt, created in a time when the banking system was based totally on debt and the reserve currency of the world had created such a money supply that the entire world could participate. This game was up in 2000. In 2000, the US stock market hit a valuation of roughly 200% of GDP. Never had a US market reached over 80% of GDP. The US market was almost priced high enough to encompass what the entire world market should have been worth. But, we had bubbles in China and Europe as well. The housing bubble was the only thing that put the extra 7 years on that boom. As much as some people would like to blame the 2000's housing bubble, it saved us from collapse then. In fact, it was the actions of FNM and FRE in the 1990's that created the entire game, issuing high powered money in sums never imagined before. Go back and check if you don't believe me because I have been reading about this game for 9 years now and nothing about this is a surprise to me. FNM and FRE created this mess and you see the politicians all the time try to sweep this away. The US government is 20% of GDP and we had a stock market increase a full 100% against GDP in the 1990's. This meant the US government took in an entire years extra income out of the bubble. That is why it appeared we were going to have surpluses as far as the eye could see, because they projected the trend to continue and trends like this can't continue.

The problem is debt and the only solution is more debt. The reason Japan hasn't ever recovered is because their government debt merely replaced their private debt and the assets deflated all the same, meaning the private side can't inflate on its assets. We are about to see what a real depression is like in Japan as there is now a deflated US bubble as well. There is a lot of play on a China rebound now. There are a lot of Chinese assets that need to be liquidated so they need to interest a few fools into buying some of them. It really doesn't matter that maybe they only unload an excess $50 to $100 billion. That amount of money beats zero and is as much as any corporation in the world is going to earn over the next 5 years, unlike the previous 5. Remember, Citi was the most profitable company in the world in the early part of this decade.

The measurement for this decline is sub 5000 this time. It won't be the last, as this is going to be an extended wave that goes on another year and a half. We are only 16 months into something I believe is going to last around 34 months. And, the more debt they create trying to stop this, the longer this mess is going to last. It is clear that we are going back to gold and silver because people are going to have to find anything they can to exchange between themselves and the paper money is going to consume itself.

The best thing that could happen would be that the government help those that go bust to the point they lose their entire support to survive and liquidate the entire mess. Cash exchanged for assets to liquidate debt no longer exists and the loss is then taken. Not only is the money supply too large as it presents an unextinguishable liability as long as they try to preserve it, standing in the way prevents the wiping out of the bad debt which prevents the economy from beginning anew.

My point is this is an unwiding of what created the bull in the first place. This isn't a lack of confidence, but a mathematical equation reversing itself out of natural limitations. As such, we have a downtrend that will continue. There hasn't been a steady downtrend like this since 1930-1932, which should tell you something. It takes effective credit expansion to push markets upward and we are in the midst of a contraction that no one can do much about. The system is a black hole and it is going to consume every extra dime thrown into it.

Sunday, February 22, 2009

A Trail of Coins in the Fusebox

I wrote this as a comment in response to an article about the market on the Washington Post website. There was a lot of finger pointing at Bush and Obama, so I thought I would put in my 2 cents.

I see a lot of discussion here from a lot of people who are clueless as to what is going on. The US economy has been in a bubble since at least 1994. I would have to point to Volker for keeping rates too high, requiring excessive credit creation to keep the economy from collapsing in the 1980's and creating too much cash in depositors accounts. But, then again, maybe it was Nixon in the 1970's and Johnson in the 1960's. Or Bush in the late 80's, clinton in the 1990's along with Robert GS, citi Rubin and the balancing act of Bush in the 2000's. The 1929 and 1966 markets peaked at around 80% of GDP. The 2000 US stock market peaked at 200% of GDP, a bubble more than 2 times larger than any in US history. It took a lot of Greenspan to patch that bubble and blow a new on in US real estate. Bubbles aren't any fun when you are a politician, as millions lose money when they break, after going through the euphoria of thinking they are going to be rich.

What causes bubble? An imbalance of debtors and creditors and a system that feeds the imbalance until it collapses. Banks create almost all the stuff we call money in this world and they create it by lending it out of thin air. There isn't any real money in banks, only balance sheet debits and credits for which they can get some currency and coins from the treasury or the Fed. Once the debits become impaired, the credits cannot be satisfied and the capital position of banking deteriorates. It is a flaw in the system of banking that bites the economy every 60 to 80 years and politicians take credit and blame for the actions created out of credit expansions and collapses. This is not a Republican or Democratic problem, but a part of nature as old as the invention of money. You can read about it in the book of Genesis and the laws of Moses.

There seems to be a delusion that Bush caused this mess. It was a problem in 2000 and it was probably a brewing problem in 1992 as there was so much new spending power unleashed once the Volker rates of the 1980's were finally lowered to avoid collapse. Robert Rubin too actions to keep a boom going that probably should have been allowed to cool. I recall Greenspan being asked about the stock market in 1998 by a Congressman and his response was things like this usually end badly. There was not a peep out of the press about what he said and the market mavens spun his words to mean something good and the market roared on.

America thinks there is a free lunch. FDR and HST set up a system at the end of WW II called Bretton Woods. In this system the dollar was made the reserve currency, the medium of exchange. Without this arrangement, the US would have collapsed in the 1970's, but other countries were already stuck with the dollars. There was no means of enforcing the balancing of trade, thus what we spent was immediately loaned back to the US system. The result was double money around the world, collateral for foreign money systems and loans to continue US spending. The FNMA and FHLMC systems were securitized and the energized by the US Congress to loan to every risk out there. Do some searches on the net to see the Democratic Party Congressmen shooting down every effort to rein in this excessive lending. I have been reading about the moral hazard posed by FNMA and FHLMC since 2000. Some people believe that if something doesn't fall apart immediately when it is pointed out, that the guy that points it out is crazy, but the ball for this mess has been rolling for a long time and the world has been financed out of US home equity. The inflation of home equity is a done deal in the US. The lending capacity of the American banks is broken and the rest of the world has immediately followed, as it too is addicted to US debt. Obama is going to fail just like Bush appeared to fail. Minskey said the Great Depression was caused by too many coins in the fuse box and starting with Robert Rubin and going forward to Obama and Geithner, we are seeing more put in every day. The wiring is burned up and the economy is going to burn down for awhile. The banks are all broke save a few small ones and as much as it is a short term solution, lending more money is going to make the longer term worse.

Thursday, February 19, 2009

When is it going to sink in again?

This was posted on a website. The date was May 8, 2008.

That we are in a real mess? I think we are about to see a real crisis, the quasi public banks like the Fed, FHLB and the GSE's going into crisis. If you read the agreements behind this auction stuff, the Fed has the right to require repurchase or to sell the stuff any time they get ready. Since the books only have to balanced overnight, this stuff is actually repoed daily. What happens if the bank that has the stuff can't perform and the Fed is suddenly stuck with some illiquid stuff? Well, I would venture the taxpayer gets the bill until the Fed earns enough money to pay back the government. The government, probably in return for the New Deal owns 100% of the profits of the Fed, save the preferred stock dividend. The Federal Home Loan banks are somewhat different and I don't know how they work. It seems though that they might be somewhat like FNMA and FHLMC, except I don't exactly know how. I do know I read recently the one in Chicago and the one in Dallas were discussing a merger, which tells me they aren't exactly public entities any more. I am wondering what happens to the bank that has propped up CFC? I don't think CFC is going away as a problem and it will be bigger than Bear. There are significant problems that have nothing but a band-aid on them. The auction loans are one of them, as they are nothing more than a method of keeping insolvents solvent until hope and time bail them out. They are clearly hoping that bad paper can in fact rise from the grave and walk on water, across the Pacific to some sucker fund in China. Surely the world isn't so stupid as to make more deals for Wall Street junk? One thing that I keep bringing up that they keep bringing someone to the table on CNBC is that credit problems like these cause economic problems and I am not talking about cyclical recessions. FNM needs another $6 billion. How much is Merrill going to need the next go around? When is Goldman going to come clean with the losses out of their $60 billion in level 3 assets? When is Wells Fargo going to come clean with its mortgage losses, as it is next to impossible for me to believe that everyone in that business made across the board bad loans except them? We are just seeing the tip of the iceberg on the prime mortgage front of losses from mortgages. Truth is the good stuff was junk and the junk was basically akin to making loans to heroin junkies. There is a supply problem in housing. Nothing is going to make this go away except a hell of a lot of well to do population. Wetbacks from Mexico aren't going to float the housing market at todays prices or even prices 50% of todays prices. It is clear the consumer credit game isn't going to be the same and corporate profits are fueled with consumer bucks. Consumer spending isn't 70% of the economy, it is all the economy either directly or indirectly. Same for the rest of the world. 5% of the US economy is somewhere around $600 billion depending on whose figures you believe. This is about what is going to be missing out of home equity extraction due to refinance or sale the next few years. It is the entire trade deficit, something that has fed the rest of the world with money to create a boom. But, that money is now owed, not free to circulate and there has to be some new real credit. Credit that was being created by virtue of a myriad of derivatives that no longer can be marketed. These CDO losses I can assure you will be more than subprime mortgages by the time they are done.The boom was perpetuated by subprime financing. The other side of this game is the long term investment projects are in full swing, but at some point it is going to be clear that the money was loaned at too low a rate, according to Mises, and the game is going to fall apart. The game is being played in China, but it is being financed by American consumer credit. It won't be long before they suddenly realize they don't have money to finish what they started and the minerals game comes back to earth. They aren't breaking their necks to keep the American financials afloat because they like losing money, but because they need the fresh money created in the US. There are some statistics that tell us the game is coming back. I don't think the consumer balance sheet and some of the more speculative ventures are going to work. I don't think gasoline is the drag it is said to be, but more the idea that the consumer is out of credit and it is going to be that much more difficult to balance the trade balance. Ditto China and Asia, which could be sending more money to the US in trade, but having to send it to OPEC instead. One thing I read a long time ago was that 80% of GDP was the real valuation line for the entire stock market capitalization and we are still way above that, probably in the 140% range. 3% was the dividend rate that capped markets for the past century, but not now. It is clear that only financial bubbles prop markets at these rates. The bulls like to spout a lot of statistics, but few of them are true. The SPX reached it old top solely because stock buybacks reduce the divisor, while dividends don't. Had they back adjusted for the roughly $200 billion to $300 billion shortfall in dividends for the past 10 years, it would have clearly shrunk. Stock buybacks do little for the holder of stock other than increase his proportion of ownership only so far as the stock remains out of the market. It is what used to be called for tax purposes, a partial liquidation. The Dow is up only by virtue of some by chance almost perfect portfolio management. If we reversed the Dow splits and then allowed for the portfolio changes, we would have a hard time having a real new high in the Dow from 2000. There was 60 points of losses saved in the split of GE alone, not to mention another 100 roughly out of the split of INTC. Prior to the last inclusion of new companies, I think BAC and Chevron (CVT?) were put in place of MO and HON, just to make the index match the split adjusted points of 1/14/00, it took 12,610 to reach a real new high. Had they left these lost points in the index, the Dow would be even another 1000 points lower. Quite interesting, MO put about 500 points on the Dow, then they threw it out before it could be bashed apart. The Nasdaq also shows the bear never really ended, only making 50% of its prior high while the big cap NDX, never got close to 50% of its old high.I think this is a speculators market, which means that not one thing I have written means a damn thing, not even the news going forward. What it does mean is that buy and hold to make money in stocks is dead. There is no doubt until the true valuations are back in stocks in the market in general, holding for long term real gains is not going to work for a good while and faces a highly risky near future. No one with a brain would hold any portfolio of stocks, unless they knew how to rotate around losses.

One of the oldest posts I can find of mine

This is one of my oldest posts I have been able to locate. I believe it was January or February 2001 I started writing online. It was posted on this site:

2/24/01 5:54:40 AM
214 reads 1 reply

My friend, you like most Americans seem to be ignorant of how credit works. Inflation is something that cannot be measured by prices because it happens outside of prices, upon the extention of credit. What price will clear the shelves is always the important price and it generally collapses over time because people run out of credit. Hyper inflation is generally created in a system where there in noncollateralized debt being extended. Eventually the amount of debt against collateral becomes sufficient to begin to consume money rather than produce it. At that time, there either has to be more assets to mortgage and get more money or the ability to service the debt begins to decline, thus impairing the loan against the
property. If a lender begins to sustain losses, they lose the ability make more loans and become financially impaired. If you read closely what Doug Noland prints, you will see that fine line between
inflation and deflation.

The inflation we suffered in the 1970's was as much or more a result of debasing the American dollar than merely printing too much money. A shift in demographics also contributed to a lot of shortages as did spiraling regulation. Plus, the very reason for the debasement of our money was the Great Society, where a tax spiral was created and a lot of the debt was monetized.

There are two things at work right now and not many people understand them. One is what Noland talks about and that is the creation of deposits outside of banks. The problem with this system is there is little control on how far they can spiral these deposits, as long as someone can find the collateral to borrow against and there is paper to support the deposits on the other side of the equation. This system would
work fine, but there are now increasing chances the quality of the paper behind these money market assets will go bad and if they do, there will be a run started on these funds. All the money in this country is in the banks and these money market funds have to draw on this money in some way or another. So
they are supporting a tremendous amount of close to cash deposits with really no money. Have a run on these funds and the value of the paper implodes on itself. Its kind of like the Mississippi bubble where the Mississippi stock collapsed when John Law offered warrants to buy the same stock. The system becomes a vacuum, short term rates go to the moon and the capital base of FNMA implodes on itself. You take
FNMA out of the mortgage market and there is not a mortgage market. Try to borrow funds or sell your house without a FNMA or any system where there is a low down payment necessary. This knocks over every domino and the life savings of the entire country goes up in smoke.

You may think this isn't possible, but it is becoming more probable every day. The problems in Japan revolved around real estate and excessive lending on it. I was in the mortgage business in the 1980's and we would kick what they call a good borrower today out in the streets. The quality of loans today are crap. Despite the higher quality of lending in the 1980's, the market still imploded here. Virtually all equity in homes sold at full financing after 1979 was gone and there were close to 100,000 foreclosures here. It won't take much of an economic slowdown to wipe out almost all the equity in homes in the United States due to this excessive lending. That is why Noland calls it a moral hazard and a problem in the future. The
collateral value will collapse when the financing dries up and the equity, what enables people to move in the first place, is gone.

Then there are the banks. This outside the bank financing has diminished the quality of bank loans. If the banks have their capital impaired in a slowdown, which is likely, they don't make new loans. When money is paid back to a bank, it ceases to exist in anyones account, not even the banks. M-1, which is hardly sufficient to support what is going on now without repeated crisis around the world could potential
and probably will implode as this asset deflation continues. Robert Prechter said it best when he stated we were a credit based society and that the extention of credit was based entirely on the good faith of the parties. The faith of the lender the loan was good and the faith of the borrower that they could pay it back. If you have so little knowledge to think the money market assets in these accounts and the
payments made against loans behind this commercial paper will be made in event of a collapse in M-l then you need to do some studying. People start pulling in their horns when times start getting tight. They sell off assets and pay off debt, thus constricting the money supply. Then a lot of the other debt becomes unservicable and the system implodes. It's part of a bubble deflation.

I heard in Thailand a plane was bought with a Krugerand as was an almost new BMW. Now is that inflation or deflation? You want to sell something of value in a declining market and you will wonder what happened to inflation. The point is, all this paper piled up on top of the banking system is going to implode. People can move their money to the safety of banks, but banks have got to purchase this paper
to give them the money so they can get it out of these accounts and put it in the bank. Banks won't be up to buying these assets in a liquidity squeeze unless they can get favorable terms and borrow from the fed at rates that make the paper worth the risk. The rates the Fed charges are useless if the banks don't make
loans and borrow the funds, collateralized of course, from the Fed. People seem to be under the assumption the Fed just throws out money on the street. If lending and borrowing dry up, the discount rate used by the Fed doesn't matter.

Real estate price in Japan are now 10 cents on the dollar and I have heard estimates they still have another 90% drop in front of them. Their central bank has had rates almost free, yet it hasn't picked up the economy much. Remember, this country thought times were bad when their unemployment rate went up to 4%. Their problem is their asset bubble burst and they cannot get collateral to create more money.
They just flat ran out of collateral in the 1980's. It takes money to provide liquidity to the markets. We are going to find this out quick as this declining stock market starts to suck hard cash out of circulation.

The asset bubble bursts all the way down when it bursts. Most people in the US don't have enough money to live 2 months without a job and they will surely use what credit resources they have left. There will be people with maxed out credit cards and others paying them off monthly and all that will be left in these money market funds are debts with no mathamatical solution. Try to draw your money out of a
nonperforming money market fund and see how far you get. There is sure to be a run on these uninsured accounts and there will be no market to liquidate several trillion dollars in short term assets in these funds. So, when the credit system in a credit based society collapses, there are no spendable funds in widespread circulation, thus no money to buy goods and services and a massive deflation. The wholesystem is built on a flimsy house of cards and a small breeze can now topple it. The inflation you are speaking of is in the past and we may have more in the future, but Greenspan can only fight one tiger at a time and he knows the deflation tiger will win this battle, even if the inflation tiger appears to be winning
right now. He takes an eye off the deflationary threat for one minute and we are dead ducks. But, I don't believe anything less than the government creating money off treasury debt is going to stop this beast. No credit, no money, no sale.

It is all a game of who owes who and who can pay(by mannfm11)

This was copied off the Prudent Bear Chat board and posted on a board in China in August 2007. It appears it is about to disappear and I am saving it here. I remember writing this in some context and it was clearly written before Bear Stearns went broke. it follows.......

First of all, I think you need to get your eyes off subprime.This is a scapegoat and nothing else. It just happens to be the first guy at the theoretical poker table I mentioned above to run out of chips and they didn't bring more. Truth is these are some of the better loans out there, not the worst. They just happen to be the worst of the mortgages, but there is some collateral behind them and something to get in the end, even if it doesn't get close to 100%.

What happens in credit? First of all a paradoxical situation occurs. When a credit line is put into an account, both the bank and the borrower are liable. Lets say the bank gives the borrower $10,000 in his account.The bank owes the borrower and the borrower owes the bank. There really isn't any capital involved here, as it is additional liquidity, not capital. The borrower might have put up collateral and that is the capital, but it can only be liquidated, not turned into the loan. Once the borrower spends the money it enters other accounts. The bank is now liable to some unnamed depositor or may in fact have to cash a check,which he pays by selling securities to the Fed. Again, we have 2 entities liable to the depositor now. But, the bank is not only liable,but is owed an amount even greater than he is liable for. On a daily basis, interest is added to the amount created out of thin air, making the amount due greater than the AMOUNT CREATED. Thus the entitiy that owes the debt is also owed the debt.

What really transpires here on a short term basis and to a greater degree ona long term basis is the banks liabilities begin to look real. So do their assets, meaning this credit begins to take on some kind of net worth identity that it really doesn't possess. It really doesn't exist in sum, but is nothing more than liabilities shown as assets. The asset is the net worth of the bank and the collateral, which at the end of a credit cycle is generally inflated well beyond real value. Thus it eventually comes down to the worth of the lender and at what point is that impacted.

I was once exposed to a legal argument that a bank cannot lend its liabilities. It was backed up with one court case after another stating just that fact.So, in order to be lawful, a bank cannot make a loan in excess of its net worth. It cannot put out to any customer more than it can guarantee. If you look at the diagram I started out with, that the bank starts out as debtor and creditor and continues to hold that spot until the money is repaid, the principal is clear that it must have enough assets of its own to pay to the depositors any losses its lending might sustain. This is the crux of the current problems that are so far beyond what is being talked about here and so far misplaced in something called subprime mortgages that few can see what is about to transpire.

Lets start out with what makes banking work and eventually fail, the no mathematical solution of banking. Banks are generally trying to expand their portfolio for good reason. It is the only way over the long run they get their interest or acquire the default property instead. The older system was more elusive for bankers because people knew what the money was, the gold. But, the current system is really no different than the older system, except 12USC95a,which was adopted by Roosevelt denies the depositor access to his gold or for that matter the currency. This trading with the enemy act, which declared war on the US public standing in the way of banking, is now the basis of what many of us see as a facist arrangement between Wall Street, the Fed and the US government. It is an arrangement that is bound to enslave the people of the US and most likely the people of the entire world, if the reach can be extended.

In any case, this act together with the no mathematical solution, has made bank credit the money of the world today. This is as true in Europe, Japan, China and the third world as it is in the US. Because the banks are lending at interest what is considered money today, the borrower always owes more than can be paid, as one balance grows exponentially and the other just sits there. You can bet on a given day without default that the banking system is owed more money at the end of the day, net than at the start of the day. It doesn't matter how much repayment is done on a given day or how much lending, the fact is an amount multiplied by 1.08 is greater than the same amount multiplied by 1.03. There are other factors here, but this is the main one.

But, what transpires over time is the bank goes from owing this money in a round about manner to the borrower who owes it back to the bank to owing the money to unnamed depositors who received the credit from the borrower. Here is where the problem eventually comes back to bite the banks, the initial holder of the credit and the eventual holder of the credit are not the same people. The other problem is that if the borrower fails to get the deposits away from the eventual holders, they have no ability to pay the bank. Thus, the bank becomes liable on its own or it has to continue the shell game the best it can,hoping when it is time to call the pot, the hand has worked out.

What do the banks have forcollateral? Titles, that is what. Courthouses exist as much for bankingas anything else. We could do very well without county clerks if not for liens. Of course the taxing authorities might have a problem. But,the titles only go so far, in part because in this stage of a credit cycle, the price of titles has been bid up so high by those that still have money on the books that their value is really elusive. But, this escalating collateral value gives additional credit to a system that has to have it and in some fashion, allows for higher prices for all assets. Remember, the bad debts are being rolled now in a game of double or nothing where the dice are supposed to eventually bail out the last bad bet.

Now comes this idea that risk is gone. I keep harping on this in the stock market when some ass brings up the idea of buying stocks. I get this crap that I don't trade, but if I never traded, I wouldn't be here. If I didn't understand something about risk and return I wouldn't be here, but be posting on some bull board some pollyanna news. The idea that risk doesn't exist is behind stocks. We never saw a 3% dividend at any point in 2002. In fact, it barely reached 2%. Never in history had the dividend rate on stocks fallen below 3% without some kind of reprecussive move against the holders value. Here it is in our 12th year of uninterrupted dividend yields under 3%, something that had never been sustained for more than 2 months straight at any time previous. The risk is seen as inflation,so the return on a portfolio of stocks can now be accepted to be under the return on treasuries. Everyone is betting on inflation to destroy the value of bonds and keep raising the price of stocks. They forget that corporations can go broke in hordes.

Then we come up with these financing models. Well, the whole damn world has adopted them.What do they mean? Well, they mean that the smart money has gotten on the same side of the trade everywhere, meaning the dumb money is left to bail them out. The risk they have avoided is now in their corner and they are all huddled together as academic geniuses with vicious creatures locked in the room with them. They hold all the positions, so they now hold all the risk. It was okay when this type game was the exception, but the entire industry has adopted it and the risk that was shifted for a fee is now FULLY OWNED. There has been no one paying the fiddler and we are now seeing people laughing at him, like he don't have a 44 magnum in his case that he is about to brandish and demand payment. The party goers spent all their money on booze and goodies and now the fiddler is going to be paid, probably with Rolexwatches and diamonds.

The losses have been going on. The more deposits created, the more losses in the pile somewhere. The more assets are bid up, the more a few people decide to take their cash and get on the sideline. The more cash that resides on the sidelines, the more the debtors are deprived or should I say in a better sense, denied access to what they need to extinguish the debt. Remember the bank acts as surety and also is the true debtor. What is the bank holding?

Doug (Noland) has done such a fantastic job adding to the knowledge I already possessed and the more I have read of what he writes, the more I find I don't know. I hear things like the carry trade, but the carry trade can be hedged and doesn't need to be unwound. I don't see Doug write much about that. What I see him doing is drawing a picture of this old west style of lending that seems to go on without hesitation. What I do understand is finance and accounting and compound values, which history has proven cannot be sustained (take 1.01 to the 2000th power and seewhat you get and take 1% of that figure. That is how much a penny would have compounded to since the birth of Christ. Ask yourself where it all went?). I also understand that the borrowers and the depositors in a bank are not the same and that the value of collateral is fleeting.

There are some arrogant people here. One was talking about buying a $900K house for $300K when it gets there. There is the delusion that we are the ones that are going to have money left to pick this stuff up. If the populace shifts to gold, bet is the bank credit not only holds upin value, but increases relative to all assets. This is an uncertainty that anyone who has a clue what they are facing knows they don't know.Few realize how big a role the dollar and all this lending has played in liquifying credit around the world and what a collapse in banking and lending in the US would do around the world. I think the action of the past week has already shown the weakest links aren't in the US, but in Europe, where they have their own real estate bubble and subprime mess, not to mention a lot of croney capitalism and funny Eastern Europe deals.

I read it somewhere, but we are about to find out who is broke. I think the names are going to shock the general public and a lot of people on this board. Wall Street is likely to holda lot of casualties and the big 3 US banks are going to have to either hold on by the skin of their teeth, operate in insolvency under secret permission of the government, ala Japan or go broke. The fed fund liabiities of Citicorp as reported by Doug were in the stratasphere.This means they are among the biggest credit crammers and holders of uncollectables. It also means they are going to impact the entire banking system. I think BAC and JPM are both in the tank. These 3 makeup a good part of the American credit machine. Lets see how smart the US is in solving their Japan type problem here and if the politicians have the guts to close their handlers? As far as Wall Street? Who have been the high flyers? GS, Merrill, Bear Stearns? The biggest flyers are probably the ones up to their necks in alligators. I am watching the prices on the Dow, with 20 point fluctuations round trip in maybe 90seconds. These guys have a weak grip on the wheel this time and a panic could wipe some of them out overnight. I played some wild markets in 1998, but I didn't see the 2 or 3 second changes in the Dow quotes I am seeing here. Sure if they were headed into a certain direction like the ramps into the close, there were some big changes, but these 4 to 8 point clicks in no determined direction weren't going on. These guys are attempting to shake this market to their advantage and I think they are wounded. They are talking about these outfits selling at low multiples to forward earnings. The idiots on CNBC are trying to let these guys sell their options, as there may not be earnings, but huge losses. The current picture throughout the banking and financial system can be compared to Enron situation, where what has been hidden in the closet is about to come out. Didn't Enron report fantastic profits right up to the last quarter?

It is all a game of who owes who and who can pay? We are about to deflate and it will take more than the Fed providing funds for us to inflate. Easy credit is about to go out the window and someone on the political scene is going to be blamed for what is about to happen. What is about to happen is a house of cards is about to fall around the world, the boy has his finger in the dike and it is drown or pull it out and drown.

Tuesday, February 10, 2009

Buy the Rumor, Sell to Who?

Today the Dow fell 380 points and the SPX was down over 40, blamed on Congressional testimony by Timothy Geithner and a few other things. This is more of the same that has been going on for some time, really nothing at all. Making money in the market the past 20 years has been too easy.

Buy the rumor, sell the news used to be a real play in the markets. It was a speculator ploy that the news would provide the buyers to sell out and take the profits for the next trade. Now, it is buy the rumor, sell to who because the who's that can buy have already bought. This is contrary to the past and one of the reasons this bear market is going to break more speculators than any in history. Not speculators who got trapped on the top, but speculators that are continually hit on the way down. The bag passers become the bag holders as they acquire stock in an attempt to pass it onto the next guy on the next hot chance.

We have had the greatest set up in history for this bear market, one of the least volitile periods ever between early 2003 and early 2007. There was hardly 2 really bad days in a row during this entire period, which almost doubled the SPX in 5 years. Put together with the prior decade where the market losses were never very permanent and we have a market where many are looking to step in and find a buying level that will be left behind in a few weeks, never to be seen again. The 2000-2002 bear was really one of the worst in history, but the winners appeared to be those that never got out and missed the next 5 years.

There is a misnomer that money gets out and on the sidelines when the market goes down, that it is sold down by money being pulled out. This is far from the truth as the money taken out by the seller is replaced by money paid in by the buyer and the money on the sidelines is the same. Also, the SPX is worth in excess of $8 billion a point, making the loss today around $336 billion in that index alone. This is around the amount of money that was being put into mutual funds around the year 2000 annually, so one years deposits were swallowed in a day. The losses keep piling up and faith in the market gets smaller, as those that stayed in the last time now have a loss to show for their efforts.

I believe the big thing is that companies aren't as cash flush as has been advertised. Pfizer made a takeover bid for Wyeth and the effect was to devastate Pfizer due to the size of the cash deposit needed to do the deal. There was a time this money would have been used to buy back stock, giving liquidity to speculators that were buying rumors and selling news. This money isn't there any more and the effort to get out in front of the news leads to lower prices over and over.

As the bull market continually gave longs dips to add to winning positions, this bear market is doing the same for big money shorts. The buyers buy and then they attempt to sell while bears are adding position. It was a definite that the Obama election was going to rally the market, when upon it being final, the market fell some 2000 points in a little more than 2 weeks. It rallied from there and the rally was supposed to carry over into January and get a boost from the official installation of Obama. Now the next stage is the bank bailout and the stimulous package. A friend of mine had been following a market direction service and getting good results. He told me at the beginning of the year they were calling for a nice rally to last several days. They changed their direction and were right again, but then around January 20th, they called for another rally, saying it would gather steam as news about the package passing and all that went on. I don't believe these guys, because they are using bull market readings to predict the actions of an all time bear market and that won't work. The rally lasted all of 3 days and Janaury finished with the worst loss in history for January. That makes every month down since August, even though they told the entire world that October 10th was bottom. So, October, November, December, January and now February have a good chance of being down after the bottom is in.

Saturday, February 7, 2009

This government reminds me of 1974

The economy is different, but the government actions of the present remind me of the mess that came out of the oil embargo recession of 1973-1975. We are in an entirely different game here than then and the likelyhood of high inflation I believe is less, but the idea that its potential be ignored would be sticking your head in the ground and ignoring the obivious.

There were different pressures in the mid 1970's than there is today and I believe the economy went down for different reasons. In the 1970's we had a confluence of things all come together at once. We had the boomer generation moving into the workforce, the great society exerting its strangle on government expenditures, the debasement of the dollar, the end of the Viet Nam war, commodity cartels and massive world bank and third world nation loans by western banks. These all came together to hit the American economy at once. Plus, there was the Nixon impeachment, the crippling of the executive, which exposed the US as weak at the time.

I don't believe the financial position of the US government was any worse in the mid 1970's than it was going into this current mess. If anything, the trend growth of social expenditures has eased and even to some extent reversed from what it was then. There is more pressure on the government due to an aging boomer generation and its potential impact on Social Security and Medicare, but there is less present threat militarily than there was then, not that it will remain that way.

What happened in 1974 to 1978 left the US economy in shambles, at least on a fiscal basis and it had to be corrected. We had the swing of congress to the left from a more centrist position and the election of Jimmy Carter and government spending went from out of management to out of control. An inflation induced recession was met with an inflation inducing package of government stimulous that resulted in interest rates of over 20% for the prime rate. If the Volker legend is to be believed,it took 10 years to get over the mistakes of the 1970's.

There are simularities to the 1970's here, but there are also differences. What is hard to guage is the influence of the around the world indebtedness of the US. There really isn't any history to reference as to the driver of world demand being a debtor, contrary to thousands of professed expert opinions. This is one of the wildcards, but it is a wildcard that will come into play if the current administration acts as if this new debt is meaningless. This factor cannot be overlooked, but it can't be stared at through magnifying glasses as the only thing to watch either, as some are doing. The role of the dollar is more a role of collateral for trade than it would be if it wasn't the reserve currency and the biggest danger is if commodity producers, namely OPEC decides they are done with the dollar. For many reasons, this is also not likely except on philosophical grounds.

First of all, it is entirely possible that the finance games going on right now become self financing and the US balance of trade actually levels out, thus resulting in new demand for dollars internationally, demand that won't be supplied this time. There have been comparisions with Germany during the depression on a website I like to visit, but I don't believe they apply here. Germany was a defeated power, stripped of its capital with no capacity to finance itself internationally. The US is international finance in a nutshell to some degree and the unit of finance is the dollar. Also, there is not any gold to be swapped this time around, so this is going to be a wait and see situation. It appears the stimulous is going directly to domestic black hole projects, the eternal we need more money businesses of education and health care. The all economy consuming black holes at that. If this money goes back into buying US savings bonds and tax receipts, the cost will be borne domestically. But, this is beside the point.

The real simularities between now and 1974 are the level of emerging market and third world expansion and the bull markets in commodities. If these two games go on from here, we are going to a diminishing value of the US dollar on an international basis. Still, domestically we might see flat prices or even lower prices. The $64 billion component of this condition is if? I believe the international and commodity equations have more to do with dollar demand for foreign products than anything else and the rest of the world is going to need a sizable influx of dollars to continue their expansion. I believe that countries like China use US bonds as central bank collateral to issue their own currencies and thus forgo the expense that the US economy must face to support its own financing. This is foreign to most folks and it may not even be true, but I believe there is a lot more validity in it than most believe. A slow down in dollars means a slow down in the capacity to expand domestic credit for many of these countries on stable paper. This is a deeper subject than one might think.

Here is where today differs from 1974. The parents of boomers had saved money and few were burdened with much consumer debt. The boomers on the other hand not only have been poor savers, but their savings has taken the form of shortcuts like the use of home equity and the projection of absurd returns due to absurd academic studies out of the stock market, which cannot be mathematically true due to the divergence of compound rates. We are looking at trying to whip a dying horse to get up and run again. The horse has taken repeated shots of adrenalin, but his oat bucket has been empty for some time. It is going to be hard to inflate this economy for long or as far as that goes, get it to run for long. The horse needs a long rest and time to store up some food for the next trip.

I believe this study might be why we had the 1970's and the 1930's. The solutions of the 1930's were tried in the 1970's because they were believed to have worked in the 1930's. There was a preception in the 1930's that more inflation would fix the situation, but they deflated for a few years before this was even tried. The real problem was the degree of indebtedness the economy is under and it was naturally cleared out to some extent in the 30's, but it appear they are going to try to keep this debt intact today. This is another subject and soon to be the subject of a scathing post I am going to write, as there is something wrong with Enron and Worldcom stockholders and bondholders losing everything while the Wall street and NY banks along with a few others are accorded a free pass. I am stunned as to what is being done today, after seeing what was done to the Texas banking system in the 1980's, at a time when former Fed officials admit the NY banking system was defunct and insolvent, yet treated as solvent.

In any case, we are in a repeat of the mid 1970's in a lot of ways, but my idea is that the elevator is going in the opposite direction. The hyperinflation argument rides on the idea that dollars are printed without collateral, that the rest of the world monetary system doesn't rest on the dollar in some fashion and that without American demand there are going to be runaway prices for goods worldwide. The dollar had been artificially fixed going into the 1970's and convertable into gold, a change that had to throw the entire exchange game into orbit. This situation is 180 degrees reversed today. If the elevator is going the same direction as the 1970's, then we will see the excessive world demand and inflation, but with it much higher long term interest rates and financing problems for America. I believe it will be a boom America won't participate in, which means that it is highly unlikely to happen.

Wednesday, February 4, 2009

Who was left holding the bag?

As I was watching the tape on the market today, I noticed Bank of America (BAC) was down to a new low. As a little time passed, Fannie Mae (FNM), AIG and Citi (C)came across the tape. Adding in, LEH, BS, FRE and GE, there is easily a trillion dollars in loss in market cap on this small group of stocks. In fact, $1 trillion is most likely a very marginal loss. Citi traded for as high as $57 in December 2006. Interpolating their current price of $3.56 and their market cap of $19.42 billion, Citi alone represents a loss of $291.5 billion. I know the float on Citi was expanded when it was attempting to bail itself out in 2007 and 2008, but this almost $300 billion isn't that far off.

AIG was traded for as much as $100.25 back in 2000. Its current price is $1.03 and its current cap is $2.77 billion. It is easy to figure roughly $265 billion lost here. BAC traded for $55.08 in November 2006. Its current price is $4.77 and its cap value is $23.88 billion. This is another $250 billion loss. So, these 3 financials have shown a drop in cap value of $806 billion, literally the entire TARP or stimulus program being debated right now.

At the peak of the market, back in 2000, MSFT, CSCO, INTC and GE all had cap values in the $600 billion range. To say their value was conservatively around $2.4 trillion combined wouldn't be too far off. INTC traded for $75.83 in August 2000. At its current $14 price, its value is $77.86 billion. It is clear that INTC has bought a lot of its stock back, as this implies a $344 billion loss and a $421 billion top price. I recall the quadrupling of INTC stock between late 1998 and mid 2000 in the blow up of the tech bubble and now we are well below the 1998 price. Pretty sorry performance for a must own stock isn't it?

My point of all of this is someone owed these stocks all the way down. It is quite likely much of this stock was owned by different people than owned it for much of the gains on the way up, thus were left holding the bag. It is clear now that the way you own stocks is you have to find what the next game is and get on it as soon as possible and short the last game. Shorting is dangerous, but it isn't as dangerous as being long the high rollers of the last bull.

If this philosophy is true, then the stocks you don't want to own this time are GOOG and AAPL to name a couple. I would venture GS is another that is probably a poor stock to own. There has been much urging on CNBC that the listener get on these stocks as soon as they can possibly find the money to buy them, which tells me the holders of these stocks are urgently looking for buyers or bag holders to get them out of them. I read the public never in history has made any money out of a stock market bull run and this one appears to be no exception. We are now looking at over 50% of the past 20 years being above the current price and more money goes in on the way up than goes in when the market is down. It is probably time to look over the worn over stocks like MSFT and INTC (I saw a video with Marc Faber and he was bullish the old 1990's tech leaders longer term) and keep an eye on them. MSFT is down to less than 1/3 its peak value. The exception is GE, which I believe is in business only because of political connections and Fed intervention and has been doomed for a good decade due to their financing arm.