Posted 2008-04-11 11:00
by Karl Denninger
by Karl Denninger
Yes, stupidity.
First, from the WSJ:
Let's add a few things up.
If you start adding into this the proposals floating around Congress, it gets worse. A lot worse. Indeed, we could see our first $1 trillion add to The Federal Debt.
Anyone who honestly believes that we're going to continue to enjoy low rates on debt (e.g. mortgages) with this going on is flatly out of their mind.
Congress is always tempted to deficit spend like a banshee at times like this, but we simply don't have the money.
We are going to face some very, very difficult times in this nation if we don't cut it out.
A couple of days ago I mused on whether Bernanke wants to cause a bond market collapse, and was essentially goading Senator Kennedy into doing stupid things that would ensure that it happens.
A number of people have emailed me and some have said "oh yeah, I see that" while others have called me nuts.
Well, what say you now? How fast can we escalate the Federal Debt without provoking a case of "no mas!" from buyers of our government debt? Do we know where that line is? Are we certain we're not going to cross it?
I don't know where it is, nor am I certain we won't cross it. But I know what happens if we do cross it. What's left of the housing industry will be destroyed. Corporate and personal borrowing will be essentially cut off, having a cost of double - or more - what it is now.
Let me be clear - if we cross this line in the sand there will be no warning and no way to "take it back" once it happens. Consider your daily life - could you survive for more than two weeks if you suddenly had no access to credit of any sort? If you were forced to pay for each and every thing you buy, from gasoline to groceries, with cash from your bank? If your credit card was suddenly reduced to "zero available", irrespective of how much you paid off?
This is an extremely serious matter, because essentially all of the candidates want to find some way to offload those people who have "underwater" homes. The problem is that lenders won't eat it and this leaves the public to do so, which means that those who acted prudently - which, by the way, is 80% of Americans - get screwed.
What's worse is that it is likely to screw everyone in the end, prudent or otherwise. It is a fantasy to think that we can simply stuff this in the FHA and then get lenders to "eat" the amount of negative value.
A more appropriate response would be to go after the lenders who made knowingly-inappropriate loans to people, and force them to eat the bad paper in a court of law. That would take courage too - get some injunctions against the bad actors, including the Wall Street investment banks who securitized and effectively bribed the ratings agencies, halt the process, and let it grind through the courts. Get a few "unconscionable contract" rulings and voila - we have a couple of insolvent Wall Street "icons" and we can sell their office buildings off to pay the judgements.
Another alternative is to let them fail. Change the bankruptcy law so that mortgages that are underwater can be discharged in a new chapter of bankruptcy, which we create just for this purpose, leaving everything else untouched. Now lenders get rammed for inappropriate lending, not just for their past sins but for any future ones. Betcha nobody will be doing zero down loans after that!
Bernanke is dissembling again, now saying:
Greenspan (that'd be Your Federal Reserve) supported the dismantling of Glass-Steagall and you still do. You and Greenspan both think that CDSs being able to be bought and sold by regulated banks is a good idea, even though there is zero margin supervision and zero transparency on those instruments. You still refuse to order regulated banks to take their SIVs back onto their balance sheets as well.
Those simple changes would have shut down the stupidity long before it went supercritical this time around, and really, they are no different than the games that Enron or, for that matter, the S&Ls played. You can't say you didn't know because you both saw it happen before and you were explicitly warned it would happen again, and willfully ignored those warnings!
Oh, and the WSJ also says that Lehman may be abusing The Fed's discount window facilities, essentially taking junk paper, creating a CLO for the specific purpose of sending it to The Fed, and then doing so. The loans in the pool are alleged to have been from the buyouts of TXU and First Data, which Lehman has been unable to syndicate. Fantastic; we now have debt that nobody wants because its performance is in doubt being posted at The Federal Reserve.
GE (NYSE:GE) whiffed badly on earnings and the premarket futures did a cliffdive. It appears that the pump monkeys were expecting "good things to life" from GE and were sorely disappointed. 15 handles in minutes, straight down. Now who was so stupid as to think that GE wouldn't be impacted by the generalized mess in finance and a slowing economy? Apparently a lot of people!
There was nowhere to hide either - non-US business kinda sucked while US business was a squickfest. So far the mantra of the big multinational has been "the rest of the world is ok and we'll be fine." Uh huh. Then March happened and suddenly financing got a lot more difficult, even for a AAA credit firm like GE.
The really ugly part of this is the lower guidance, now essentially flat (zero growth) in EPS over 2007. Yet profit growth estimates by the "analysts" are still at "moonshot" levels. The only mooning that the analysts got right this time (as they always do when the economy slows) is the moon that investors will be showing them as they stand in the unemployment line.
The theme has been all along that while we might 'slow down' in the US the rest of the world will be fine. That is absolutely off the table now, and the theme of "global recession" is, I believe, something that will increasingly begin to take hold.
Nobody has gotten their hands around the fact that this is a global problem and financial issues permeate everything.
CNBS has finally started to speak some truth - Steve Liesman is finally starting to pound the table and say up front - the equity markets are simply not acting in a rational manner given the underlying issues in the economy and credit markets.
As I have repeatedly said there has been zero reality in the equity marketplace over the last several months when it comes to the market being a "discounting" mechanism for forward earnings and results. One look at the earnings estimates should have been all the warning that you needed, but bubble TV is equally responsible with their insane "Goldilocks" nonsense.
Kudlow has changed his tune materially in the last few weeks, now referring to our dollar as "The US Peso". Gee Larry, did the coke wear off? Have I not been pounding the table on this since August? You, on the other hand, were continuing to claim that the dollar's decline as good for America and claiming that all was "Goldilocks", even as people drove their 401ks and IRAs off the cliff by listening to you.
Import prices were up huge, 2.8% in March alone. This is very bad news; we've now got huge "push" inflation coming into the game as well, which is a monster constraint on trying to "fix this" from a standpoint of The Fed (or anyone else.) The bad news is not local to us either; Japan got hammered with huge cost-push inflation last month also, up 3.9%.
When your 401k gets shredded if you've been listening to Bubble TV you have only yourself to blame, but sending a box of dog-squeeze to CNBC might serve as some balm for your pain, even though it won't make it go away.
Have you learned anything about the "value" of Bubble TV yet America?
Ok, on to other, more "macro" things....
Credit card and HELOC balances are rising precipitously, up 9.5% and 8.1%, respectively in the first quarter from the same time last year. Nice.
Credit: Wall Street Journal
This is a trend I identified last year in April in The Ticker and it has accelerated. Banks are cutting off unused HELOC lines but people are now borrowing to keep their heads above water, not for luxuries. This will not end well, and the wall is likely to get hit sooner rather than later.
The Wall Street Journal isn't helping educate anyone - there is no mention of this protected status anywhere in that article!
WHY NOT?
Why do we tolerate this sort of intentional destruction of personal balance sheets and lives? Why do we sit idly by and listen to the siren's call of "freebies", "bailouts" and "solutions"? Why do we not hold the media accountable for their part of it; is not part of their mandate to educate in their reporting?
Where's the truth - you can't spend more than you make for very long, and now the gravy train has run out!
America simply will not stop being foolish. We have no leaders in this nation who will tell it like it is, and give it to us hard and straight, even when that is exactly what we need. Stocks are always supposed to go up, even when there is no consumer income growth to support rising sales. Home prices never go down. Incomes never decline and people never get laid off and businesses never fail.
This is the fantasy land that America lives in, and it sucks.
I fight the outrageous consumerism that is drilled into my daughter's head by everyone she comes in contact with each and every day. No, you cannot have a $500 cell phone, and I don't care if your friend has one. No, you don't need a $100 pair of jeans; the $20 pair is just fine. No, you don't need three more swimming suits; you have two that fit. No, you don't need a new IPOD, you have an MP3 player and it works perfectly well.
This is not an accident. It is a matter of ingraining greed into our youth and ultimately into us, and it will destroy us. When times are good its fine to spend on vacations and toys, but not beyond what you can afford, because times are not always good.
Yet we never seem to remember that, or if we do, we don't care. We continue to believe that we can have something for nothing, whether its "free" health care, "free" prescription drugs, "free" retirement money or "free" digital music. When we don't get what we want we either whine to our government and demand it or, in some cases, we just steal it.
I'm tired of it folks. I see it every single day, all around me. Kids who think they are entitled to cars when they turn 16. No, they don't need to go get a job and buy one, they deserve that car and Daddy must buy it for them. Kids that once they get that car, don't need to buy their own insurance or gas - that's the parent's problem too. They won't ride the bus to school because its "beneath them", and insist on driving the day they turn 16 - but they won't work to earn the money necessary to make that happen.
For the record I did my fair share of whining when I was younger. But I also paid for my own insurance and gas, and wrenched on my own car - because it was the only way that I could keep it running. Yes, I complained and whined to my folks and sometimes got help, but I also got told "no" plenty of times, and ultimately had to go get myself a job. I carried golf bags and worked at the local car wash. It was a job - minimum wage in the latter case with a tip here and there, but a job (caddying is well below minimum wage by the way, and its real work too, especially when the prick doctor who you're caddying for has 400 golf balls and three bricks in the bottom of his damn bag - and then he gives you a 50 cent tip!) I owned the proverbial $100 car (really!) for most of my youth and bought a motorcycle at one point because it got 60 mpg and the car got 12. Since I paid for my own gas, the choice was easy if it wasn't raining! Even when I entered the "world of real work" I drove a beat-up AMC Pacer for over a year - yet another proverbial $100 car - on which I had to weld the rear suspension back on after the brackets broke free due to corrosion! Nowdays a kid (or a young adult) wouldn't be caught dead driving something like that. Let's be real - it moved, it stopped, and it (mostly) kept me dry when it rained.
Isn't that the primary purpose of a car?
If we don't cut this entitlement and greed garbage out we are screwed folks. And I do mean screwed. Not a little, a lot. We are going to see mass bankruptcies and unemployment like nobody's business.
As for businesses and banks, I would like to ask them - what the hell are you doing? You know these people can't afford the credit you're giving them.
You know these people will fail and you don't care so long as you get the fees!
Yeah, I know, its not the drug pusher's fault if you choose to smoke the crack. But when it comes to drugs, we still lock the pusher up.
How come? We don't lock the bankers up!
I think we need to start.
"Rugged Individualism"? Where? That's what made this nation great and its gone.
Wake up America.
You want a Recession or a Depression? You better ask yourself that question because if you keep demanding that which we cannot pay for - either you individually or we collectively - you'll get it, and our nation's economy will be destroyed.
We have reached the point where the debt service roughly approximates the amount of money made to cover that debt service.
We cannot go any further and if you try, or if incomes fall materially, the result will be mass defaults the likes of which have not been seen since the 1930s.
Worse, the banks will end up both with all your money and all your property.
Think about it, then decide, and make your decision known to your lawmakers.
LOUDLY.
If you don't embrace "rugged individualism" and instead bleat about "bailouts" and "handouts" you will get what you ask for, but it won't work and we will find ourselves in a re-run of the 1930s - yes, including you.
Put the record of those who are "giving it to you long, hard and straight", including myself, Mish and a few others, up against those like Larry Kudlow, Hank Paulson and Bernanke, all of whom have tried to tell you everything is ok as one-by-one the homes on your street sprout "Foreclosure Sale" signs!
Then choose.
First, from the WSJ:
"The Treasury Department reported Thursday that receipts from corporate income taxes fell 16% to $129 billion in the first half of fiscal 2008, which began Oct. 1. The federal deficit during the period hit an all-time high of $311 billion, and was up 20% from a year earlier."Well if that doesn't tell you everything you need to know....
Let's add a few things up.
- $311 billion thus far
- $165 billion for "stimulus"
- $29 billion for Bear Stearns (contingent)
If you start adding into this the proposals floating around Congress, it gets worse. A lot worse. Indeed, we could see our first $1 trillion add to The Federal Debt.
Anyone who honestly believes that we're going to continue to enjoy low rates on debt (e.g. mortgages) with this going on is flatly out of their mind.
Congress is always tempted to deficit spend like a banshee at times like this, but we simply don't have the money.
We are going to face some very, very difficult times in this nation if we don't cut it out.
A couple of days ago I mused on whether Bernanke wants to cause a bond market collapse, and was essentially goading Senator Kennedy into doing stupid things that would ensure that it happens.
A number of people have emailed me and some have said "oh yeah, I see that" while others have called me nuts.
Well, what say you now? How fast can we escalate the Federal Debt without provoking a case of "no mas!" from buyers of our government debt? Do we know where that line is? Are we certain we're not going to cross it?
I don't know where it is, nor am I certain we won't cross it. But I know what happens if we do cross it. What's left of the housing industry will be destroyed. Corporate and personal borrowing will be essentially cut off, having a cost of double - or more - what it is now.
Let me be clear - if we cross this line in the sand there will be no warning and no way to "take it back" once it happens. Consider your daily life - could you survive for more than two weeks if you suddenly had no access to credit of any sort? If you were forced to pay for each and every thing you buy, from gasoline to groceries, with cash from your bank? If your credit card was suddenly reduced to "zero available", irrespective of how much you paid off?
That is what will happen if we cross that line. If you're not prepared for it then you are at risk of an immediate bankruptcy caused by the incessant whining about "where's my bailout?"
A while ago I started stating clearly - RAISE CASH. I meant it then and I double mean it now.
RAISE CASH.
Michigan Consumer Sentiment came in at 63.2, from former 69.5, a 26 year low. Yet another huge decline is recorded as we have more evidence stacking up that consumers get it even if Wall Street does not.
Worse, inflation expectations ticked up huge to 4.9% from 4.3% last month. This is a really big deal, as once inflation "expectations" get unhinged they're basically impossible to stuff back into the bottle without dramatic action to tighten liquidity, because once people get into their heads that prices are going higher they start demanding higher wages and that spiral produces extremely bad results in the real economy. The last time we got that meme going was in the 70s and the result was an economic malaise of nearly 10 years duration - stagflation anyone?
Wake up investors!
John McCain has joined the 'bailout fray", which is no surprise. It takes real courage to tell someone that they bought into a bubble and you can't - and won't - help them. McCain, just like the other candidates, doesn't have that courage.This is an extremely serious matter, because essentially all of the candidates want to find some way to offload those people who have "underwater" homes. The problem is that lenders won't eat it and this leaves the public to do so, which means that those who acted prudently - which, by the way, is 80% of Americans - get screwed.
What's worse is that it is likely to screw everyone in the end, prudent or otherwise. It is a fantasy to think that we can simply stuff this in the FHA and then get lenders to "eat" the amount of negative value.
A more appropriate response would be to go after the lenders who made knowingly-inappropriate loans to people, and force them to eat the bad paper in a court of law. That would take courage too - get some injunctions against the bad actors, including the Wall Street investment banks who securitized and effectively bribed the ratings agencies, halt the process, and let it grind through the courts. Get a few "unconscionable contract" rulings and voila - we have a couple of insolvent Wall Street "icons" and we can sell their office buildings off to pay the judgements.
Another alternative is to let them fail. Change the bankruptcy law so that mortgages that are underwater can be discharged in a new chapter of bankruptcy, which we create just for this purpose, leaving everything else untouched. Now lenders get rammed for inappropriate lending, not just for their past sins but for any future ones. Betcha nobody will be doing zero down loans after that!
Bernanke is dissembling again, now saying:
""I don't think we're ever going to eliminate financial crisis, but we can do a lot to strengthen the system...and to improve the way the system responds," Mr. Bernanke said in response to a question after giving a speech in Richmond, Va."Liar.
Greenspan (that'd be Your Federal Reserve) supported the dismantling of Glass-Steagall and you still do. You and Greenspan both think that CDSs being able to be bought and sold by regulated banks is a good idea, even though there is zero margin supervision and zero transparency on those instruments. You still refuse to order regulated banks to take their SIVs back onto their balance sheets as well.
Those simple changes would have shut down the stupidity long before it went supercritical this time around, and really, they are no different than the games that Enron or, for that matter, the S&Ls played. You can't say you didn't know because you both saw it happen before and you were explicitly warned it would happen again, and willfully ignored those warnings!
Oh, and the WSJ also says that Lehman may be abusing The Fed's discount window facilities, essentially taking junk paper, creating a CLO for the specific purpose of sending it to The Fed, and then doing so. The loans in the pool are alleged to have been from the buyouts of TXU and First Data, which Lehman has been unable to syndicate. Fantastic; we now have debt that nobody wants because its performance is in doubt being posted at The Federal Reserve.
GE (NYSE:GE) whiffed badly on earnings and the premarket futures did a cliffdive. It appears that the pump monkeys were expecting "good things to life" from GE and were sorely disappointed. 15 handles in minutes, straight down. Now who was so stupid as to think that GE wouldn't be impacted by the generalized mess in finance and a slowing economy? Apparently a lot of people!
There was nowhere to hide either - non-US business kinda sucked while US business was a squickfest. So far the mantra of the big multinational has been "the rest of the world is ok and we'll be fine." Uh huh. Then March happened and suddenly financing got a lot more difficult, even for a AAA credit firm like GE.
The really ugly part of this is the lower guidance, now essentially flat (zero growth) in EPS over 2007. Yet profit growth estimates by the "analysts" are still at "moonshot" levels. The only mooning that the analysts got right this time (as they always do when the economy slows) is the moon that investors will be showing them as they stand in the unemployment line.
The theme has been all along that while we might 'slow down' in the US the rest of the world will be fine. That is absolutely off the table now, and the theme of "global recession" is, I believe, something that will increasingly begin to take hold.
Nobody has gotten their hands around the fact that this is a global problem and financial issues permeate everything.
CNBS has finally started to speak some truth - Steve Liesman is finally starting to pound the table and say up front - the equity markets are simply not acting in a rational manner given the underlying issues in the economy and credit markets.
As I have repeatedly said there has been zero reality in the equity marketplace over the last several months when it comes to the market being a "discounting" mechanism for forward earnings and results. One look at the earnings estimates should have been all the warning that you needed, but bubble TV is equally responsible with their insane "Goldilocks" nonsense.
Kudlow has changed his tune materially in the last few weeks, now referring to our dollar as "The US Peso". Gee Larry, did the coke wear off? Have I not been pounding the table on this since August? You, on the other hand, were continuing to claim that the dollar's decline as good for America and claiming that all was "Goldilocks", even as people drove their 401ks and IRAs off the cliff by listening to you.
Import prices were up huge, 2.8% in March alone. This is very bad news; we've now got huge "push" inflation coming into the game as well, which is a monster constraint on trying to "fix this" from a standpoint of The Fed (or anyone else.) The bad news is not local to us either; Japan got hammered with huge cost-push inflation last month also, up 3.9%.
When your 401k gets shredded if you've been listening to Bubble TV you have only yourself to blame, but sending a box of dog-squeeze to CNBC might serve as some balm for your pain, even though it won't make it go away.
Have you learned anything about the "value" of Bubble TV yet America?
Ok, on to other, more "macro" things....
Credit card and HELOC balances are rising precipitously, up 9.5% and 8.1%, respectively in the first quarter from the same time last year. Nice.
Credit: Wall Street Journal
This is a trend I identified last year in April in The Ticker and it has accelerated. Banks are cutting off unused HELOC lines but people are now borrowing to keep their heads above water, not for luxuries. This will not end well, and the wall is likely to get hit sooner rather than later.
The sad part of this is that 401ks and IRAs are protected if you DO file bankruptcy. How many consumers know that?"The rise in borrowing shows just how addicted the U.S. consumer has become to credit. Even as borrowers are cut off in one area, they promptly look for new sources. Workers have increasingly been raiding their 401(k) plans to take out loans over the past year, according to plan administrators and nonprofit groups.
Now, mortgage brokers say some clients are calling them in a panic, worried that their bank will freeze their home-equity lines. Deborah McNaughton, president of Legacy Financial Services Inc., a mortgage lender in Placentia, Calif., says several of her clients have recently borrowed more from their home-equity lines of credit and stashed the money in bank savings accounts. Theresa Leick of San Juan Capistrano, Calif., a loan processor who works with Ms. McNaughton, pulled $21,000 from her available home-equity line of credit in February to park in a certificate of deposit."
The Wall Street Journal isn't helping educate anyone - there is no mention of this protected status anywhere in that article!
WHY NOT?
Why do we tolerate this sort of intentional destruction of personal balance sheets and lives? Why do we sit idly by and listen to the siren's call of "freebies", "bailouts" and "solutions"? Why do we not hold the media accountable for their part of it; is not part of their mandate to educate in their reporting?
Where's the truth - you can't spend more than you make for very long, and now the gravy train has run out!
America simply will not stop being foolish. We have no leaders in this nation who will tell it like it is, and give it to us hard and straight, even when that is exactly what we need. Stocks are always supposed to go up, even when there is no consumer income growth to support rising sales. Home prices never go down. Incomes never decline and people never get laid off and businesses never fail.
This is the fantasy land that America lives in, and it sucks.
I fight the outrageous consumerism that is drilled into my daughter's head by everyone she comes in contact with each and every day. No, you cannot have a $500 cell phone, and I don't care if your friend has one. No, you don't need a $100 pair of jeans; the $20 pair is just fine. No, you don't need three more swimming suits; you have two that fit. No, you don't need a new IPOD, you have an MP3 player and it works perfectly well.
This is not an accident. It is a matter of ingraining greed into our youth and ultimately into us, and it will destroy us. When times are good its fine to spend on vacations and toys, but not beyond what you can afford, because times are not always good.
Yet we never seem to remember that, or if we do, we don't care. We continue to believe that we can have something for nothing, whether its "free" health care, "free" prescription drugs, "free" retirement money or "free" digital music. When we don't get what we want we either whine to our government and demand it or, in some cases, we just steal it.
I'm tired of it folks. I see it every single day, all around me. Kids who think they are entitled to cars when they turn 16. No, they don't need to go get a job and buy one, they deserve that car and Daddy must buy it for them. Kids that once they get that car, don't need to buy their own insurance or gas - that's the parent's problem too. They won't ride the bus to school because its "beneath them", and insist on driving the day they turn 16 - but they won't work to earn the money necessary to make that happen.
For the record I did my fair share of whining when I was younger. But I also paid for my own insurance and gas, and wrenched on my own car - because it was the only way that I could keep it running. Yes, I complained and whined to my folks and sometimes got help, but I also got told "no" plenty of times, and ultimately had to go get myself a job. I carried golf bags and worked at the local car wash. It was a job - minimum wage in the latter case with a tip here and there, but a job (caddying is well below minimum wage by the way, and its real work too, especially when the prick doctor who you're caddying for has 400 golf balls and three bricks in the bottom of his damn bag - and then he gives you a 50 cent tip!) I owned the proverbial $100 car (really!) for most of my youth and bought a motorcycle at one point because it got 60 mpg and the car got 12. Since I paid for my own gas, the choice was easy if it wasn't raining! Even when I entered the "world of real work" I drove a beat-up AMC Pacer for over a year - yet another proverbial $100 car - on which I had to weld the rear suspension back on after the brackets broke free due to corrosion! Nowdays a kid (or a young adult) wouldn't be caught dead driving something like that. Let's be real - it moved, it stopped, and it (mostly) kept me dry when it rained.
Isn't that the primary purpose of a car?
If we don't cut this entitlement and greed garbage out we are screwed folks. And I do mean screwed. Not a little, a lot. We are going to see mass bankruptcies and unemployment like nobody's business.
As for businesses and banks, I would like to ask them - what the hell are you doing? You know these people can't afford the credit you're giving them.
You know these people will fail and you don't care so long as you get the fees!
Yeah, I know, its not the drug pusher's fault if you choose to smoke the crack. But when it comes to drugs, we still lock the pusher up.
How come? We don't lock the bankers up!
I think we need to start.
"Rugged Individualism"? Where? That's what made this nation great and its gone.
Wake up America.
You want a Recession or a Depression? You better ask yourself that question because if you keep demanding that which we cannot pay for - either you individually or we collectively - you'll get it, and our nation's economy will be destroyed.
We have reached the point where the debt service roughly approximates the amount of money made to cover that debt service.
We cannot go any further and if you try, or if incomes fall materially, the result will be mass defaults the likes of which have not been seen since the 1930s.
Worse, the banks will end up both with all your money and all your property.
Think about it, then decide, and make your decision known to your lawmakers.
LOUDLY.
If you don't embrace "rugged individualism" and instead bleat about "bailouts" and "handouts" you will get what you ask for, but it won't work and we will find ourselves in a re-run of the 1930s - yes, including you.
Put the record of those who are "giving it to you long, hard and straight", including myself, Mish and a few others, up against those like Larry Kudlow, Hank Paulson and Bernanke, all of whom have tried to tell you everything is ok as one-by-one the homes on your street sprout "Foreclosure Sale" signs!
Then choose.
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