The Market Ticker

I still admire those who have the gonads to pump this market.

Let's look at something called "reality":

• There never was a "boom" in earnings power for middle America. The median family income - including all quintiles - was actually down $500 or so over the last eight years. If you exclude the top quintile it was down materially - 5% or so. And that's in nominal, not constant, dollars.
• Price inflation isn't something you need a government statistic to understand. You only need to buy gasoline, milk, meat, cheese, cereal, electricity. You know, things you need? Yep.

So where was this "boom"? Well there was one, if you confine your eyeballs to the price of real estate and stock prices from 2003-2007. Heh, that looked pretty good.

But without earnings power behind those gains they cannot be sustained.

Yesterday we heard Greenspan opine that "he wasn't responsible" in any way, shape or form for the bubble in Real Estate (or any other for that matter.)

In my opinion he has gone senile.

Let's be straight here - Greenspan sat by and "approved" (and still does!) all this "Financial Engineering" that has taken place.

Now let me be clear - I have no quarrel of any kind with speculation. After all, that's how anyone who invests makes money - you buy when you think its cheap and sell when you think its expensive, no matter whether you're long or short. If you're right you make money, if you're wrong you lose money.

What I have a problem with is lying, and there's a lot of it going around right now.

Like those who claim that we can "stop" home price declines.

No, we can't. There is only one way that home prices where they are, even today, are sustainable - that would be for wages to rise by 30% across the board. That, of course, isn't going to happen, and if it did it wouldn't do you a bit of good because prices would simply rise to the same degree, leaving us exactly where we are now!

Or, for example, those (including Greenspan) who claim that things like credit default swaps "help spread risk around." No they don't, unless you know that the person who writes them has the capital to pay under any reasonable set of conditions that can be envisioned, including most specifically a credit crunch, because it is precisely under stress that you need them to perform!

There's no doubt that Greenspan helped set forth the environment in which an overly loose credit environment could take hold. And again, I don't mind if people leverage up and take risk, provided that they don't load it off on the taxpayers when the bets go bad!

This means that the regulated banking system has to absolutely prohibit this sort of garbage from taking place within its boundaries. What happens outside the regulated arena does not concern me, so long as there is no contamination into the regulated side.

We're now going to adjust spending and investment levels to incomes because there is no way for us to adjust incomes to spending levels! The big productivity gains that came from computerization are finished, and we've already offshored nearly all of our manufacturing, so there's no more "cheap labor improvement" available either.

Financial "innovation" isn't. You can spread risk around and you can shift who takes losses, but all of this comes with a cost, not a profit, because nobody works for free. As a consequence the more complex some financial structure is the less profit there is for the end buyer and the more risk attaches, because every organization and individual that has their paws in it from top to bottom has to make a profit and in doing so they extract some of the original value from the structure.

There is no such thing as a free lunch but don't tell the "financial geniuses" that - they continue to assert that they have managed to find the financial equivalent of a perpetual motion machine.

In my opinion anyone who wants to study for any sort of "financial major" in college should be required to take a few classes in physics and thermodynamics, just so that they cannot later claim that there is such a thing as a free lunch and "they didn't know", and we can in turn hold them accountable both civilly and criminally when they run these ponzi schemes and they blow up in our collective faces.

There are some catcalls coming from certain corners claiming that "a guy with an IT background can't get this right." Really? Well since this guy with an IT background also studied the laws of physics and passed both inorganic and organic chem, he, unlike most of those "finance geniuses" who apparently never set foot in a chemistry or physics lab, and didn't bother to pay attention to why things like Newton's Third Law and The Laws of Thermodynamics are so important to our continued existence on this planet, might have a small advantage over those so-called "financial geniuses."

Those who assert that these laws suddenly cease to apply whenever some bright boy waves his wand in the financial sphere have been repeatedly proven wrong over time - after all, wasn't this exactly the argument that Charles Ponzi tried to run?

It gets even better when those same "geniuses" are trying to sell you something.

When you find a car salesman who will tell you its a horrible time to buy a car, or a Realtor who will tell you its a horrible time to buy a house then I might believe that you'll get an unbiased view of asset allocation and investments from someone who is either selling those instruments directly or trying to sell you on his view of the world.

That's not to say that those folks are not sometimes right - simply that relying on those people for your investment thesis is an inherently foolish enterprise as the conflict of interest is both glaring and obvious, and they make money from your "buy in" to their "blinding brilliance" whether you have a profit or loss.

The smart move is to develop your own thesis. Yes, I know that requires you put in some effort, but that sure as hell beats listening to them (or me!) and then losing the contents of your investment account!

In economic news Oil Inventories were down more than expected and the oil market rallied hard, which certainly didn't help people's ideas for the economy. Oil surged over $110 a barrel which is going to cause even more disruption in the transportation sector and, inevitably, flow through to consumer prices. My prediction for $4/gallon gasoline by summer looks to be on track, although this is one prediction that from a perspective of our economy I'd love to be wrong on. The recent rally in the transports has been a real head-scratcher - how you can have a big rally with softening demand (look at freight tonnage coming into our ports - its been heading south now for months) and increasing fuel prices is beyond me. Today we are finally seeing reality intrude into that sector.

Japan, which went through an economic mess 20 years ago that was substantially exacerbated by trying to "hide the sausage" looks to be setting itself up for Round #2. Never one to learn from others mistakes, not to mention their own, it appears that their real estate market again overheated and of course now its going "Bang" once more. The key difference is that this time they have a much weaker economic picture to absorb the loss.... not good.

"'The boom we've enjoyed for the past few years is over,' said the 71-year-old chief executive officer of Mori Trust Co., who teamed with K.K. DaVinci Advisors, a 1.2 trillion yen Tokyo- based property fund, for the acquisition. 'Investors were convinced that prices would keep rising, so in about six months, they'll probably rush to get out regardless of price.'"

Where have we heard that one before? Oh let's see, in Japan in the 1980s, and then again here, and, it appears, over there too! Wow, stupidity has gone global, even when the evidence is right in front of you from what you did just a few short years ago!

Last night I opined on the Citibank "leveraged loan sale" both here and in Presentations on the forum, and put forth my opinion that this "sale" was for all intents and purposes forced due to ratio issues. Bloomberg seems to agree that may be the case:

"'Banks have to maintain their ratios,' said Dennis Santiago, chief executive officer of Institutional Risk Analytics, a Torrance, California-based research firm that monitors banking statistics. 'This is an institutional panic. At what point will consumers feel the panic? I don't know.'"

One thing is certain - the days of being able to get as much credit as you'd like simply because you can fog a mirror are over.

The adjustment is not going to be over in a quarter or two, and neither will the fallout. Real GDP will go negative for a while as the economy contracts back to where actual production is represented by that number, not the falsehood of "finanical engineering."

This is a good thing, not a bad thing, but you couldn't get Bubble TV to admit it - although they should.

The unfortunate reality, however, is that this means profit forecasts are, as I've noted, hopelessly optimistic. As those come in (and they will, even if only by force when the results don't hit the numbers) you'll see the equity indices adjust to the "new reality."

If we can keep the government from screwing things up with more vote-buying attempts we'll get through the other end of this, although people's standards of living will change. You won't be able to afford to milk your house for the second Lexus and six plasma TVs, but is this really such a disaster? I think not.

None of this will be pretty, but its both necessary and appropriate.

Let's make sure our lawmakers don't screw it up though, ok? Like, for example, Barney Frank's idea of the FHA taking on $300 billion worth of crap paper through "voluntary" (read: coerced) buydowns taken by lenders, with the loan then refinanced and guaranteed through FHA. The problem with such a program is that history says that 20% or more of those who receive "workouts" judged to be sufficient to prevent a foreclosure end up defaulting on the reorganized mortgage within a couple of years and foreclose anyway! Oh, and 20% is, well, more than a bit higher than the FHA's implied default rate in their insurance premium structure. That's a bit of a problem for the taxpayer no?

Come listen to the following:

Crisis In Housing - The Choices Facing America

and

TickerGuy Exposes How The Entire Housing Mess Happened

Then get on the phone with your lawmakers and tell them to cut it out.

The financial medicine we need to take is bitter but if failure to do so is likely to be fatal what do you think is the prudent choice?