Mirage Monday

Me thinks Mr. Market has finally figured it out.

Maybe.

This morning Citibank's announcement of Prince's departure - which clearly was bad news - was interpreted as bad news.

The Futures had their high of the day at midnight, and despite some heroic pump attempts, were sold.

Does anyone remember back in APRIL when I opined that any mortgage that was originated with fraud as its foundation was subject to being put back, irrespective of the expiration of a "rep and warranty" time period?

Well, guess what kids - six months later, the media is (finally) getting it:

"But if parts of the origination process are found to be fraudulent, investors can potentially force lenders to buy the mortgages back at the original price. If the assets have suffered delinquencies and have dropped in value, the lender takes a financial hit."

The Bulls on The Street subscribe to this thing called "magical thinking", in that they believe that people can commit fraud and get away with it by shoving off the cost on someone else, attaching a very short "warranty period" which will expire before the bomb goes off.

The Law says that it doesn't work that way.

Fraud voids all contracts and what's worse, the Statute of Limitations doesn't start to run until the fraud is "outed"!

It took six months for the media to figure this out?

Or is the truth that the media simply doesn't want to talk about reality? "The Street" doesn't want to talk about it either, never mind that they have plenty of $1,000 per hour lawyers who do understand it.

Why not?

Because once this is clearly out in the public eye and in their mind, this entire house of cards comes crashing down as all these bad loans are put back as far up the line as there remains money!

This will sink originating banks and mortgage companies. It will sink securitizers (which are the big Wall Street "boyz") and raises all sorts of interesting SarBox issues.

It will also wipe out every broker and real estate agent who participated in these schemes.

The second order effect is even worse - it will precipitate a full-on consumer confidence collapse; a collapse that no longer can be avoided.

The "Tech Bubble" was, for the most part, about starry-eyed people bidding up stocks that had business plans that could be written in one sentence: "We're on the Internet, give us money."

At least they were honest about it.

But the worst parts of the "Tech Wreck" were the big infrastructure players that blew up. And there, we did have fraud - claims that "The Internet is doubling in size every three months" - a claim that I, and thousands of others, knew was bollocks once the first year or two of the Internet had passed us by.

But this time it truly is different, because the fraud has become embedded in all elements of the housing bubble:

• "Grade inflation" in the claimed credit quality of securitized mortgages.
• Appraisal fraud - if the recent suit proves up, this was systematic, and if you ask Real Estate agents (and can find an honest one) they will tell you that appraisers were frequently given the "sale price" - a clear violation of their intended neutrality and, in some states, a violation of the law. The number of appraisers who found themselves "blacklisted" for failing to hit desired target prices is the stuff of legends as well.
• Mortgage fraud - an example related to me on the phone over the weekend was of a hairdresser at CostCutters who claimed $8,000 a month in income. How does this get through underwriting - say much less past the broker who is given that information? It doesn't, unless its being done completely by computer and no human looks at it - or they just don't care.

In short, the entire "Real Estate boom" that "powered our economy" over the last five years is one giant ball of fraud.

A ball of fraud that turns out to have a nuclear core, and it is now starting to "rapidly disassemble."

If you're a "Bull" in the market today you have to be willfully ignoring this.

Is that smart?

How well does magical thinking work in general?

Let's cut the nonsense - CNBC is still pumping "tech tech and more tech". How does tech survive when a huge part of the tech sales go into the financial area, and every company in that space appears to have a significant amount of exposure to these "putbacks", either directly or indirectly - and what's left is consumer sales which have been fueled by phantom "income"!

I don't get it.

I understand being bullish on the economy - when its strong.

I understand being bullish on tech - when both consumers and businesses have lots of money to spend on your products, and get tangible benefit from them.

I understand being bullish on America, because in general, its been a winning bet.

But let's cut the BS.

The "recovery" from the 2003 lows has not been driven by "solid earnings", "a solid economy" and "a solid consumer."

It has been driven by organized fraud in the housing market, from appraisals to "subprime" mortgages to pumping "interest only" and "negative amortization" loans (which brokers knew where unaffordable once they reset or recast) to outright false claims of phantom income by borrowers.

All of this produced phantom economic activity which fueled the export business - China's making things we consume but our consumption is unsustainable!

By best estimates, 6.5 trillion dollars worth has been withdrawn from their "household ATM" by US consumers in the last four years and spent.

To put perspective on this the US GDP last year was about $13 trillion dollars.

Let's presume that 20% house price appreciation over the last four years is "about right" given 3-4% real wage growth. So the rest - 80% - is the product, direct and indirect, of fraud.

That makes roughly $5 trillion over four years of phantom money that wasn't real wealth created by real economic activity.

That's 9.6%, roughly, of our GDP on an annualized basis!

But for this fraud we would have been in a deep and long recession for the last FOUR YEARS.

Now this has to be unwound. To the tune of five trillion dollars.

People talk about how the "subprime problem" is "contained" and then they put a number on it - $100 billion, $50 billion, even $200 billion.

That too is a Chimera.

The real issue is the $5 trillion in so-called "wealth" that was spent but unearned, and as a consequence was been replaced by DEBT on consumer balance sheets.

That debt now requires service and will for years if not decades to come, unless it is written-down en-masse!

Obviously, to try to unwind this "all at once" would crash our economy instantly.

50% losses in the stock market? Try 75% and an almost-certain deflationary depression.

Of course that's unrealistic.

We're not going to take the medicine in "one gulp" any more than we got the benefit from the fraud in "one gulp".

But it is beyond question that we will take the pain and cost of unwinding this mess.

It cannot be avoided.

To the extent that "The Media" refuses to address this they are complicit. To the extent that "analysts" keep spouting "buy buy buy" they are complicit in robbing your wealth. To the extent that investment banks and others on "The Street" continue to hold so-called "Level 3" assets which they claim whatever mark they can get a computer to spit out, they too are complicit.

The entire premise of this "expansion" over the last four years has been fraudulent.

There was no actual expansion. No real wealth created. No real economic activity advance.

Instead, the truth is that our "price/earnings" ratios in the market have been propped up by consumer spending that was wholly built upon a fraudulent foundation. It has been a Chimera; the idea that you can create something from nothing.

I'm tired of it. You should be tired of it. You should not tolerate this from the media, from the regulators and from the politicians.

Politicians will pander to their donors and try to pander to you, yet those donors are why we are here.

But for the "cooking" of financial instruments there was no market for these securities as there was no profit to be made!

Will you wake up? Will you get involved in signing The Petition? Will you write your own letter to Congress and The President? Will you tell your Rep and Senator that you're tired of the fraud and nonsense, that these "financial gamesters" need to be led off in handcuffs - and if they don't start demanding that the law be enforced, you will vote them out of office?

Or are you going to cower under your bed and run some stupid conspiracy theory while your savings are inflated into oblivion (and then what's left is taxed!), your salary fails to keep pace with rising prices, and your debt load goes to the sky?

Heh, its only money, right?

Yours, of course.

Your retirement.

Your children's future.

Nothing to worry about right?

Ok..... you choose.

In the latest display of "stupid" in the tech space, here's a prime example from Google's announcement on their "cell foray":

"Confirming its long-rumored foray into the mobile market, Google said Monday it is developing a free cell phone software package so the Internet search leader can more easily peddle ads and services to people who aren't in front of a PC."

If you read the article in detail, you'll find that what they're doing is producing a "stack" - which isn't really an operating system, but rather a user interface and/or "set of packages" - to run on what are now known as "smartphones". Or maybe it is an operating system. Not that it really matters.

This was worth more than $14 in "pop" today?

Are you kidding me?

For the uninitiated, this is already available for handsets, but you have to install it yourself - at least on carriers such as T-Mobile and Cingular.

Here's a picture (of my house) from Google Maps on my Cellphone....



gPhone? What gPhone? I've already got it and its already free!

YAWN!

You didn't buy their stock on that stupidity did you?

Oh, I bet you did. A lot of other suckers did. And RIMM's too. Double-yawn.

Here's your technical!