Saturday, December 8, 2012

The corruption of a country

There is supposed to be a housing revival.  Like Karl, Doug Noland takes apart the z-1 or what ever that quarterly report is called.  He noted that mortgage debt fell considerably.  What hasn't fallen is the money we are on the line for in the GSE's, the federal deficit, which was on a borrowing basis over $1 trillion again and so forth. 

It is kind of like farting in a room and leaving.  The air is clear until the fart drifts to where someone can smell it.  Politicians are the same way, in that we don't smell their farts until time has passed.  We hear this shit about Clinton and high tax rates in the 1990's producing a boom.  The credit bubble and stock market mania produced a boom.  Clinton had the Republicans, Alan Greenspan and Robert Rubin shoveling coal into a downhill train.  2000, we were left with a hangover, which was solved by more booze, a housing bubble. 

The fart in the room today is the Federal defict and the politicians that are still there need to do something about it.  They need the Wall Streeters to shovel coal for them and the lunatics at the Fed, the delusional students of revisionist history, to provide the money.  More and more debt on less and less worth.  Keep the stock market inflated, so it appears we can still pay. 

I was either listening to or reading Kyle Bass.  The Japanese national debt is now greater than the net worth of the households in Japan is what I understood him to say.  Solution?  It appears they are going to try to pump air into a new bubble in Japan.  Problem is, there isn't anyone over there with enough wind to blow one.  They never fixed the holes in the old one.  Neither have we, the Europeans nor anyone else.  The China bubble rests on unsound banking practices that make the subprime mess look tame.  Think we have mark to fantasy? 

We are about to see the worst bear market in history.  Doug mentioned one of the unintended consequences of Bernanke's shennanigans, the fact that regardless of how low mortgage rates are, they are massively higher than what the banksters are paying on your savings.  You have $100K in the bank and a mortgage, you are giving up $3000 a year.  Forget the tax deduction, which only starts after you have paid several thousand in taxes and interest on your house in most cases.  Getting statements on $100K money market and CD's and seeing the $20 or less they credit to you for interest is stunning.  Rates are about 1/20th what they should be and the system forces someone to hold the cash. 

This is what is missing in this bank money era, the fact that someone is tied up in cash.  It isn't a societal choice, as someone has to hold it.  It isn't so much inflationary as it is deflationary, as either more and more resources are tied up in cash or, should it decline in value, the purchasing power in the economy falls, not increases.  More than anything, I sense this is what has hamstrung Japan for 2 decades, excessive bank credit inflation that is used, not for internal expansion, but international arbitrage finance.

So, the politicians need some loaded ammunition.  This is why it isn't fixed.  The politicians are in the shitter and the bankers have the toilet paper.  The only solution is to make the problem worse, as to not do so would mean the fart gets out while the politician is still there.  We are now going to war and the ammo boxes are filled with more and more spent casings.  National debt is a spent casing.  Bank money credit is a spent casing.  It can only be recycled to factories that reload it and immediately fire it and send out reloaded casings that are already spent.  This is what the debt bubble and the expanding national debt are, fired casings. 

Look what is going on?  Intel borrowed $6 billion last week.  Why?  Their dividend payments were yielding higher than the interest rate on the debt, so why not load up and buy some of their own stock?  We are going to find out why not in the future.  This makes INTC the ultimate short in the next slowdown, which will be worse than the last slowdown, because the ammo box has been spent.  INTC could reduce its dividend in a cash crunch, but they won't be able to reduce the interest on this debt, nor evade its payment.  INTC isn't in the catbirds seat it was before, because so much of what is computers has moved to phones and they aren't on this sailing ship.  I have read they are going to attempt to become blow buddies with AAPL, as AAPL is waging war with its supplier, Samsung.  The price wars are coming in the phone business, as they have in the PC business.  What happens to AAPL if margin shrinks? 

Speaking of which, the 4th quarter results of AAPL show 26.028 million phone units, producing 16.245 billion in revenue.  This is right at $625 per unit wholesale.  Each dollar less margin produces $26 million less gross.  These items will be commodities in a matter of a few years and to annualize these figures, multiply by 4.  I'm sure the Chinese in the rice paddies are going to be lining up to buy these items at $1000 retail to use in places there isn't broadband capacity.  I'm also sure that when Samsung and other foreign competitors decide to really get competitive, there will be charges of dumping on the US market.  But, can we really get too upset by loss of revenue by a company that for the most part employs Chinese slave labor?  History shows a complete round trip on mania stocks like AAPL.  I'm sure their cash balances will be discussed when the market price of the stock is nearby.  Remember, in 1998, everyone had to own DELL.

I was nearly out of high school when the hand held calculator hit the market.  TI is 8 miles down the road and half the town worked for them at the time.  A kid brought one to chemistry class.  He probably wouldn't have owned one save for the fact his old man was in TI management.  Half the class copied his homework and of course, couldn't work the problems when the test came out.  While in college, the HP brand was AAPL.  To get one of the fancy HP calculators, it was $300 to $400.  By the mid 1980's, the 12C, what I consider to be a marvelous tool, was about $120.  The last one I bought was $40.  My sister's was run over by a car, as she had dropped it in the parking lot.  It still worked. 

From Doug Nolands Credit Bubble Bulletin, December 7, 2012

I’ve essentially ignored the (stagnant) banking system in my “flow of funds” analyses over recent quarters.  Total Bank Assets grew only $66bn during Q3 to $14.762 TN – and were up only $197bn (1.4%) over the past year.  Yet I would be remiss for not noting the 9.7% y-o-y increase in business loans (to $2.174 TN) or the 8.3% y-o-y increase in government securities holdings (to $2.231 TN).  Meanwhile, Corporate Bond holdings were down 4.1% y-o-y (to $776bn), mortgage loans contracted 2.0% (to $4.334 TN) and Misc. Assets fell 11.0% y-o-y (to $1.267 TN).  On the Bank Liability side, Total Deposits were up $495bn, or 4.9%, y-o-y to $10.532 TN. 
With federal government liabilities now locked in an historic inflationary cycle, there’s at this point a significantly reduced need for the traditional workings of the U.S. financial sector.  The vast majority of system Credit growth remains governmental.  In stark contrast to the mortgage finance Bubble, this Credit for the most part need not be intermediated (transformed from risky Credit to perceived safe instruments) through the banking system, or through asset-backed (ABS) and mortgage-backed (MBS) securitization.  It is also worth noting that, at $7.544 TN, total GSE Securities (debt and MBS) were little changed during the quarter and declined only 0.5% over the past year.  And while Total Home Mortgage Credit has contracted $660bn over the past two years, GSE securities have declined only $54bn.  Despite talk of “winding down” Fannie and Freddie, total GSE securities are about where they were in early 2008.  It is worth noting that GSE securities began year-2000 at $1.723 TN.

Monitoring the financial sector for signs of rejuvenation remains less than fruitful.  Finance Companies were stagnant for the quarter and year.  Securities Broker/Dealer assets were down slightly during the quarter (assets up $70bn, or 3.5% y-o-y, to $2.051 TN). The ABS market continues to contract (down $216bn y-o-y to $1.824 TN).  Money Market Funds expanded $39bn during the quarter to $2.507 TN, reducing the year-over-year contraction to $170bn.  Fed Funds and Repo increased $32bn y-o-y, or 2.9%, to $1.134 TN.  Funding Corps increased $70bn y-o-y, or 3.6%, to $2.256 TN.  Credit Union Assets did see year-over-year growth of 5.5% to $897bn.  Real Estate Investment Trust (REITs) Liabilities jumped $67bn to $792bn, with one-year growth of $172bn, or 28%.

From my analytical perspective, the SAAR $299bn contraction of Home Mortgage Credit was the biggest surprise for the quarter.  This compares to Q2’s $214bn contraction and Q3 2011’s $200bn decline.  With mortgage borrowing costs having taken another leg down to historic lows – and all the talk of an unfolding housing recovery – I was anticipating a return to positive mortgage Credit growth in Q3 or Q4.  But, then again, with negative real returns on savings and such highly uncertain policy, market and economic backdrops, it remains perfectly rational to pay down mortgages and other borrowings.   That extreme fiscal and monetary policy measures foster extraordinary uncertainty – thus incentivizing a cautious approach for many individuals and businesses - reminds one of the Law of Unintended Consequences.  And a “fiscal cliff” compromise, while perhaps spurring the markets’ speculative reflexes, would do little to resolve ongoing uncertainties.


Read between the lines and you might understand what is happening.  The households, in general aren't taking the bait.  But, there is more.  Look at the GSE debt figures and the explosion that occurred between 2000 and 2008.  Look back in Doug's archives, which can be found on's website to 2001.  You will note a similar growth rate in the 1990's, money which fueled the stock market bubble. 

Why no prosecution?  Some of you might recall the 2008 Presidential election.  Who were Obama's financial advisors?  I recall seeing them listed as Robert Rubin (talk about a fart in the room), Larry Summers (the actual turd?), Paul Volker (the legitimate voice brought along to legitimize the nonsense that I am certain he disagrees with) and Franklin Raines.  Who is Franklin Raines?  A black man from Wall Street who worked in the Clinton Adminstration, I believe in HUD.  He is also the guy who ran FNMA during this disaster.  He also financed the black congressional caucus and Obama's rise to prominence.  Could there be a connection?


There have been 4 years of tickers here I have read.  I venture 20% of them have dealt with the thin layer of dirt overlying the massive pile of shit known as the mortgage securitization market.  The whole pile likely leads to Raines and maybe Rubin.  Raines was the leader of the band in the mortgage business.  Any uncovering of this massive stench puts this guy and all his cronies in prison.  But, he has Obama, HUD and Eric "Place" Holder between him and broad striped outfits.  Raines goes, Obama goes with him, as he will be wrapped around Obama's neck like an anvil around the neck of a man in deep water.  Bought and paid for.  Banker capitalists don't care what are the means as long as the ends are achieved, to the point of historically putting communists and fascists in power.  Anyone kicks off a little dirt, the administration quickly covers up the bare spots. 
Corruption in bubbles has almost always centered around stocks and real estate loans.  We had the swampland deals in the 1920's.  The stock market manipulations between the trusts.  All were designed to leave others holding the bag.  Now we have the greatest scam, leaving the people of the US holding the bag and the elected officials arranging it.

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