Recession call is in...finally!

Well, the NBER finally made official the call that readers of this and many other blogs have known for along time. We're in a recession and it started back in 2007...December to be exact.

What was obvious to a few has now become impossible to ignore by everyone.

New frontiers

Earlier in the summer I made a couple of notes in my blog entries...

"Market's Closed! (July, 2008)"Things we've never seen before are going to start happening over the next year or two. Considering we've already seen some once in a life time kick saves from the Fed and Government, that's saying alot.

"Jumping into the Poole (July 2008)"Too many fools, too many shoes and way to late in the game to stop it. As I've said before. Protect your assets, eliminate debt, stay liquid and mobile and be prepared for the worst. Things are gonna happen over the next 3 years that nobody is ready for. "

...the S&P 500 was around 1300 at the time...806 today ~ -35%

Here's an interesting entry from Barry Ritholtz today ...

Record-Breaking Data Everywhere!

One of the interesting aspects of this unprecedented housing collapse, credit crisis, economic recession and market crash has been all the new records we keep seeing:

• Over the past year, the S&P 500 index lost ~$1 trillion more than the entire 2000-2002 bear market, according to Standard & Poor’s. From the October 2007 highs of 1,565, to yesterday’s close of 806.58, the S&P 500 market capitalization lost $6.69 trillion. That’s almost $1 trillion more than entire 2000-03 bear market losses of $5.76 trillion. (Marketwatch)

• The S&P 500 hasn’t been this far below its 200-day moving average on a percentage basis since The Great Depression. (Doug Kass)

• CPI: U.S. consumer prices in October registered their largest single-month decline since before World War II. It is the largest monthly drop in the 61-year history of the data;

• PPI, down 2.8% for the month, was also record breaking drop.

• The dividend yield on the S&P 500 is now greater than the yield on the 10-year Treasury. That hasn’t happened since 1958. (Barron’s)

• First-time claims for U.S. unemployment insurance rose to the highest level since September 2001. The total number of people on unemployment benefit rolls jumped to the highest level since 1983.

• Housing starts fell to 791,000, off 38% from a year ago. That’s the slowest pace of starts since data began being compiled in 1959. Starts are now down 65% from the early 2006 peak — this has become the very worst housing downturn on record.

• Permits for new houses, at a 708,000 pace, were off 40% from a year ago, also the lowest total since it has been tracked starting in 1960. Put this into context of population — in 1960, the total U.S. population stood at 180 million — 60% of today’s 300 million.

• more Doug Kass: The 30-year return for BBB-rated corporate bonds is now greater than the 30-year return for stocks. So it has not paid to take equity risk for 30 years! (The Street.com)

• The TIPS Spread ( Treasury Inflation Protected Securities versus the 10-year Treasury) is at a record low 54 basis points (1997)

• The Russell 3,000 now has 1228 stocks a share price under $10. That’s 42% of the index. At the market’s 2002 lows, there were significantly less stocks trading below $10/share — just 884 (Bespoke Group).

More Keysian nonsense worldwide...and a rant

http://www.nakedcapitalism.com/2008/11/taiwan-to-hand-out-shopping-coupons-to.html

Taiwan is handing out $100 in shopping coupons to every citizen (works at registered stores and restaurants). Don't laugh, this idea has been kicked around by officials in the US. It's this type of STUPID BACKASSWARDS logic that is pervasive world-wide. Keynes must be rolling over in his grave as the world's knuckleheads continue to bastardize his legacy and theories. I'm not sure how any good ideas will get implemented, when the overwhelming number of both educated and uneducated leaders rely on unsound and proven to be rediculously ineffective policies, to try and manage this worldwide crisis.

Facts:

1. You can't avoid a recession/depression following the greatest worldwide credit bubble in history. It's necessary and good for the long-term health of economies.


2. Any money used to bailout or stimulate broken economic models is lost and wasted money in the form of taxation without representation. Yes, debt spending is a form of taxation. No, there has been little to no referendum on the majority of these spending decisions.


3. Keynesian policies of stimulating economies CANNOT work when funded through debt and applied to broken models with insolvent companies.


4. Sustainable economic growth can only come from internal investment based on savings (not debt based). We have NO savings. That will take years to reverse.


5. Excessive debt backed by inflated assets must be destroyed either through defaults, bankruptcies or restrustructuring of loans through principle reduction. PERIOD.


6. You CANNOT target asset prices as a solution to a debt bubble. It only delays the necessary processes of returning to equilibrium. Go ask Japan or the small group of smart economists who were alive during the Great Depression.


7. We are in DEFLATION. Do not listen to any other BS regarding disinflation, etc. We've been in deflation for almost a year...I called it back then even when almost every single investment bank, economist, central bank and government was calling inflation during the commodity bubble (which I also called).
   
8. Most economists, financial analysts, bankers, governement officials, etc...have no clue about how economies work. This stuff isn't rocket science, it's dumbfounding to me the ignorance worldwide.
   
9. This ignorance benefits only the wealthy. PERIOD. Does that make it premeditated ignorance?...to be determined.
   
10. There are criminals on both Wall Street and in the federal government who have blatanly lied under oath. Where is justice? If their excuse is they didn't lie, then they should be fired for incompetence and failure to fulfill their duties or removed from office immediately. PERIOD.
    
11. This country is full of a bunch of apathetic, lazy, spoiled, selfish fucks. It will take years and maybe a generation to break the back of this lack of initiative and drive. Let's hope free markets and capitalism survive the transition.
    
12. We haven't had true free markets or capitalism in this country in decades. Let's give it a try for once.
    
13. There are solutions to this crisis. Myself and others have addressed these countless times. Why are governments ignoring these voices? Who benefits from this?
    
14. Americans are asleep at the wheel and punishing their kids and their kids' kids because of their apathy. When will they wake-up and force the government to make smart choices that don't ruin the future of their kids through excessive debt?
    
15. Voting for Obama was not the wake-up call. It was a great day historically for America, but far from change or a solution. Will people go back to the couch and hope change appears miraculously?


16. Fact: I'm a ranting lunatic...does anybody even read this anymore?

Krugman starting to wake up...I hope

I've given alot of grief to Paul Krugman, our liberal nobel prize winning economist. He did a good job predicting the downturn in the economy, but I've railed against his Keynsian theories that promote massive economic stimulus from the government. His latest article suggests he's starting to understand the problems that lie at the core of Keynsian policy in our current environment. Have a looksee...

After the Stimulus
http://krugman.blogs.nytimes.com/2008/11/17/after-the-stimulus/

For the coming year, and probably well beyond, the economy will be on life support — sustained by massive fiscal stimulus. (Either that, or we’ll be in a very deep slump.) But eventually the economy will have to come off life support. What will take the place of the stimulus?
I don’t really know the answer.

I really don't know the answer. That's a telling statement. It's also the primary reason that this stimulus WILL not work. The reason he doesn't know the answer is that he KNOWS that the economic model that the economy is currently based on is broken and kaput. All a stimulus does is try and reignite the old model. It doesn't promote the proper allocation of funds to NEW economic models. This is the CORE PROBLEM when stimulus is provided to an economy that is FUNDAMENTALLY failing. Stimulus can work under some scenarios, but generally they don't involve DEBT stimulus and they generally are applied to economic models that are viable, but have sustained an unexpected shock causing interruptions in the flow of GOOD CAPITAL to GOOD MODELS. This current stimulus is 0 for 2 on both those fronts. Instead of the stimulus coming from built up surplus during the good times, it is coming from foreign financed DEBT. And further, the stimulus is going directly to companies that are mired in flawed sectors based on unsustainable business models (financial, housing, auto, governments).

Krugman is stuck in the trap that all "blinders wearing" Keynsians get stuck in. Eventually you can no longer prop up a failed economic model with more stimulus. The law of diminishing returns kicks in. You gain less and less for every dollar spent and eventually you get no benefit. At the same time, that money has failed to be allocated to new and better economic models that would provide the ACTUAL growth needed to move this country forward under a sustainable model. The real question is will the Keynsians actually UNDERSTAND this and make the necessary adjustments to their logic or will they continue to move forward with ill-advised stimulus injections HOPING that better days lay ahead. Hope is a HORRIBLE way to run a business. It's a great way to destroy an economy however.

Denninger's latest and greatest

I've been following Karl Denninger's blog for the past year. The guy is a major ranter, but he is also one of the most intelligent writer's out there when it comes to understanding this mess and how to correct it. His latest post is excellent and he eloquently describes the "confidence" game that I've ranted about in the past. Please read:

http://market-ticker.denninger.net/archives/651-Yes-We-Will-Have-A-Depression.html

How low can we go...

Here's a clip from a Krugman article in the Times. He's half right and half idiot.

GURK ZIRP
That’s Zero Interest Rate Policy — which is now, in the wake of this morning’s terrible employment report, inevitable. Yes, we’re Japan.
Add to this the news of a retail sales collapse, and we’re looking grim, grim, grim.
Monetary policy obviously isn’t enough. It’s time to raise Keynes: we need big fiscal stimulus, now now now.
Any way we can get current management at Treasury to take early retirement, and get the new guys in right away?
Add: The unemployment rate has now risen more than 2 percentage points from its pre-recession low. In 1990-1992 the unemployment rate rose 2.6 percentage points. Given what’s happening to retail sales, manufacturing, and so on, it’s now a certainty that unemployment has a lot further to rise. So the “worst recession in 25 years” thing is now baked in. The only question is whether we hit “worst slump since the Great Depression” territory.

So, he's right on ZIRP (world going there also), correct about Japan similarities, correct about how fing bad this is going to be, but he along with the majority of our leaders are COMPLETELY RETARDED when they talk about Keynes and Keynsian policy as the answer to this mess. Throwing fiscal stimulus in the form of BORROWED MONEY TO PAY OFF MORE DEBT AND INTEREST is a TRAP. It will crush our economy just as I've been predicting for over a year would happen and then would be implemented. Even my hero David Walker is promoting some of this Keynsian non-sense. I still love him to death (he was on Squawk Box this morning...more on that in a moment), but fiscal stimulus WILL NOT AND CANNOT WORK in an over-leveraged debt driven economy. Has anybody learned from our past experiences and experiments with these methods? Does anyone really understand the mechanisms behind debt bubbles and debt collapses, consumer driven recessions, etc... They are different animals and beasts completely from a lack of liquidity in the system. They are INSOLVENCY and DEBT problems. You must eliminate, reduce or default on the debt to recover...PERIOD. It is SO FUCKING SIMPLE yet not one sound bite in the media has made any sense other than a few marginalized "doomsdayers". We are heading straight into the perfect storm and our leaders are insisting on pushing down the throttle and driving through it. That mindset will seal the collapse of our economy.

Back from the dead...hopefully

Sorry about my absence...been slammed on time. Some posts are coming...

Third world america

Third World America
http://krugman.blogs.nytimes.com/2008/10/07/third-world-america-2/

Paul Krugman's latest article touches on a subject of mine 6 months ago.

Subprime Nation
http://economicrantsoflunatic.blogspot.com/2008/05/subprime-nation.html

Mark to market witch hunt

If mark to market is to blame for banks woes as many of the shills have said, then answer me this. If these assets are really worth more than what the market is bearing, then why isn't the market (which has plenty of capital...Buffet, PIMCO) buying these assets left and right. If something that should be worth 80 is being marked to 40 and you know it is worth 80, then there would be a rush to buy these assets at a discount. The reality is, the smart people (market forces) know the value of this garbage. Price discovery will not happen until the government clearly removes itself from the game. Otherwise, there is no incentive for private equity to step in and no incentive for banks to sell at the low (true) value. Don't fall for the bullshit being spewed by banks, investors and the government. They want the tax payers to prop these assets up for all the wrong reasons.

China and Economic Warfare

The evidence is mounting that China has pointed the economic equivalent of a nuclear weapon at the US. China (and possibly some other countries) are in a position to cut-off the flow of money into treasuries that the US NEEDS to pay federal expenses month to month. We are a debtor society. We require foreign funding to sustain our current spending. Without it, the government would be forced to print worthless dollars. Checkmate (hyperinflation). China swallowed a shitload of toxic MBS and agency debt. They are pissed. It's becoming pretty clear that they have backchannelled a demand to our leaders that funding will be cut-off if the toxic debt is not purged from their markets. That is what this bill is really about when it comes down to it. It does nothing to recapitalize banks, but it does restore the foreign money pump required for us to fund our economy. We are no longer controlling our destiny or government. It's a sad predicament.

Not unlike a gambler begging the loan shark for an extra week to try and kite the debt.

State and local finances crumbling

As predicted, states and local governments are starting to feel the pinch of decreased revenues. As I've said before, they are completely underestimating the severity of these shortages and they will get massacred over the next few years. The news is starting to pick-up on this oncoming tsunami. It's getting overshadowed, however, by the larger financial crisis in the credit markets. This will only exacerbate the problem at local levels, as spineless politicians will refuse to cut costs far enough and will refuse to raise taxes high enough. This will leave borrowing as the only remedy for shortfalls and borrowing won't be cheap. All of this was predictable, yet the weak remain in power and the weak will continue to destroy the foundations of this country.


Alabama County Misses Bond Payment- Bloomberg
State, Local Tax Revenue Stagnates- Wall Street Journal
Under Strain, Cities Are Cutting Back Projects - New York Times

So much news and so little time

So much is going on right now and I have so little time. I hope to get back into the swing of things shortly. Underneath the surface crisis, there are a number of ominous signs of depressionary times ahead.

False hopes

I hope none of the readers of this blog (if there are still any), have any false hopes that the proposed bailout will help the economic disaster we are facing. It is far from a coherent solution to the fiasco. In fact, this bailout more closely resembles the Japanese version of zombifying banks by maintaining artificially inflated asset prices. It failed miserably in Japan and will fail here as well. You must address the underlying fundamentals. There are 3 clear things that must happen to do that.

1) Balance Sheet Transparency - institutions must be forced to disclose all of the assets that they have clearly. No offsheet assets, level 3 assets, etc... Until everyone knows what's on the balance sheet, there will be no confidence in the system. Yes, I know this will collapse some companies, but those companies for all intents and purposes are dead anyways. This bailout will only help keep the weak alive maybe only temporarily, but it is a misallocation of funds.

2) All over the counter derivatives must be placed on an exchange and the counter parties must verify that they are adequately capitalized. These derivatives will still be ticking time bombs regardless of this bailout. You have to have a transparent market to manage this.

3) All institutions must be limited to 12 to 1 leverage at most. There could be a time frame provided for the deleveraging to occur, but it must occur. Leverage ratios above that are unnecessary and completely at odds with any sensible risk strategy.

This is the only way to provide confidence back into the marketplace. The assets underlying these debt products will continue to deflate. They have to. We were at the peak of the greatest asset bubble in history. There is no possible way that current incomes can support the payment streams of these inflated assets. Trying to artificially support that is a joke at best and the joke will be on taxpayers. People may want their houses to stay at the current price, but like it or not, 9 times out of 10 that is just unrealistic. It sucks, but that is the price we pay for artificially low interest rates, loose loan standards and a stagnant income base. The bubble has to burst.

Forcing tax payers to absorb all the risk of a bailout aimed directly at propping up more than likely insolvent companies is criminal. Especially when there are plenty of coherent and sensible solutions to addressing this nightmare.

This bailout achieves only this:

1) Burdening taxpayers with 100% of the risk
2) Maintaining artificially inflated asset prices
3) Maintaining non-transparency at the corporate level
4) Further eroding confidence in the market (delayed reaction)
5) Continued obfuscation of the price discovery process of the free market
6) Weakening the dollar
7) Spurring commodity inflation

Please don't be fooled by any version of this plan. Because of what this plan doesn't address, you can expect trillions more in pain down the road. Only now there may be a few more companies on Wall Street and a few more hedge funds that will survive to bleed this country of more misallocated funds.

Colbert Report Funny

Last night in the Colbert Report, they made a funny. In discussing the bailout, they flashed up this title...

Hindsight is $2020 billion

Ken Lewis: Glass gonna be half full

Ken Lewis seemed to get caught off guard in an interview with Maria Bartiromo. Lewis was discussing how he thought the investment bank model and mid size bank models weren't viable long-term. This is a significant prediction from a high-level executive.

BARTIROMO: SO RIGHT NOW WE HAVE, WHAT, 9,000 BANKS? 9,000 BANKS IN THIS COUNTRY. WHAT WILL YOUR PREDICTION BE AS FAR AS HOW MANY THERE ARE IN THE NEXT FIVE YEARS?

LEWIS: GOSH, I HAVEN’T THOUGHT ABOUTTHAT. MAYBE HALF.“

Buffett gaming the system

Buffett is an extremely smart investor, but he is no savior. He is certainly gaming the system with his investment in Goldman. Not only is he making a killing on his preferreds, he is also basing his decision on the fact that GS is one of the main beneficiaries of the bailout. GS and Morgan Stanley more specifically are the big winners in Paulson's plan. Atleast Buffett is honest when he is trying to screw you.

On his investment in Goldman...

"If I didn't think the government was going to act I wouldn't have done anything."

Is that showing faith in the financial system or is that pointing another gun to the head of congress? Buffett knows congress is between a rock and a hard place and his ball-busting deal with GS will make him a killing if the government proceeds with a bailout. Mostly he will profit at the taxpayer's expense. Will the sheeple actually catch on to this? That's to be seen.

Such hypocrites

18 months ago in China, Paulson was touting free market principles to China. He lectured a Chinese audience that it was risking trillions of dollars in potential economic growth unless it freed its capital markets.

"An open, competitive, and liberalized financial market can effectively allocate scarce
resources in a manner that promotes stability and prosperity far better than governmental intervention," Paulson said.

How do you think China is accepting Paulson's views now?

The US has a consistent do as I say and not as I do foreign policy. Any wonder why the world view of our government is so poor?

Markets Give Paulson a Big FU!

The markets spoke today and they spoke clearly. FU Paulson and your blank check bailout!

This is what happens in a global economy when you start trying to implement policy that blatantly is an attempt to inflate your way out of a mess. These are the checkmate scenarios that I and many others have discussed. Paulson and the FED will have limited options to deal with this, especially when it comes to tanking the dollar. Their mistake is forgetting that although the US dollar is the world currency, the US no longer is the dominant provider of commodities as it was in the Great Depression. In the 21st century, any whiff of the printing presses will cause an immediate flight to safety and a thrashing on the US dollar. That will in turn spike commodities like oil. It will also, ultimately lead to our foreign loan sharks insisting that interest rates go up in exchange for their support of our trade deficit.

On July 15th, I had a post entitled CHECKMATE!!! . The main jist being that the Fed was all out of options at this point. Subsequently and right on queue, the Treasury began to step into the game. It was clear the Fed couldn't support the size of this problem. Quickly however, Paulson and the rest of the government "elite" will realize that they to are in a checkmate scenario. We no longer control our own economic destiny as a country. No debtor nation does. It was and has been a myth to think we did. This was allowed to continue because the unsustainable growth of the US also benefited the very foreign nations that funded this growth (China, Japan, Middle East). As soon as these loan sharks begin to see we are replacing dollars with slugs, that jig is up. Again, the markets spoke clearly at the first hint of this game.

Great stuff from John Hussman

This is truly a must read...

http://www.hussmanfunds.com/wmc/wmc080922.htm

Open Letter To Congress On The $700 Billion Paulson Bailout Plan

Please read the following from Mish. This is excellent.

Open Letter To Congress On The $700 Billion Paulson Bailout Plan