The Market Ticker

It appears that Pimco's Bill Gross is finally willing to blow the whistle on the fraudulent CPI statistics that I've been harping on for a while. Of course I doubt his motives, as it has been disclosed that he's shorter than a midget in the US Treasury market right now, but that doesn't make him wrong:

"Changes in the way the Bureau of Labor Statistics measures prices over the past 25 years have led to the understating of inflation, Gross, co-chief investment officer of Newport Beach, California-based Pimco, said in a commentary on the company's Web site today. The Federal Reserve's focus on 'core' instead of 'headline' inflation has also helped understate the increase in prices, he said."

"Join me in lobbying for change in U.S. leadership, the attitude of its citizenry, and (to the point of this Outlook) the market's assumption of low relative U.S. inflation in comparison to our global competitors."

What took you so long Bill? Had to get "maximally short" before you blew the whistle eh?

I guess he's given up on the idea that he's gonna get his bailout in the MBS space.....

But despite my intense personal distaste for Bill Gross and his incessant "book talking" even a blind (or disingenuous) squirrel finds a nut once in a while, and it appears Bill has been reading The Ticker.

His urging of people to get out of the United States and into other nation's stocks and bonds is, unfortunately, exactly what people are likely to do as confidence in our financial system and reporting continues to erode.

When the world's largest bond fund manager, based in the United States, says that people should move away from United States investments because of our incessant book cooking you had damn well better listen up!

(You can read Bill's full missive here)

Even better though is the fact that now all the stinky garbage that was pulled in the wake of ENRON - this time by the banks - is coming to light, as the stench can no longer be hidden under a couple of wraps of "newsprint" from the Wall Street Journal:

"'They never got the real problem fixed after Enron,' said Lynn Turner, the chief accountant for the Securities and Exchange Commission when the Enron scandal was exposed. 'When people find out how little FASB did, they're going to be shocked. FASB needs to be taken out behind the woodshed and given a good whoopin.'

Variable interest entities, or VIEs, are a post-Enron version of special-purpose vehicles, the term for the investments Citigroup created that led to the demise of the energy-trading company. The lack of disclosure about VIEs is adding to concern among investors after financial institutions reported $382.6 billion of writedowns and losses from subprime-contaminated debt since the start of 2007."

But remember, we have to bail these banks out.

Never mind that Citibank was the organization that created ENRON's nuclear off-balance-sheet vehicles, and guess who was doing it this time? Banks - the same folks who did it the last time.

FASB would be a good start, but it can't end there. We the people must insist that this goes much further, and extends to those who not only enabled the fraud but are now trying to prevent the impact from being felt by those who committed it.

That inherently includes The Fed and Congress, both of which have not only enabled these games but have tried to cover it all up so "we the people" don't know the full extent of the damage, while at the same time causing a great deal of that damage to be offloaded to us through the commodity markets.

It must also extend to these bankers and we the people must stand up and raise hell until it is stopped, the people responsible are held to account, including forfeiture of bonuses, civil fines and, one would hope, prosecution for fraud.

This sort of game will not stop until we all turn up the heat on CONgress and insist that they stop taking money from their clowns via their PACs and instead of shaking their hands start issuing subpoenas. Hiding exposure off-balance-sheet is not done because it "benefits investors"; it is done so that the public and banking regulators cannot figure out how much exposure someone has and leverage can be increased without disclosure.

This is great only as long as the economy permits continued expansion of the game; as soon as the default statistics turn and instead of being "way below trend" they rise to "above trend', as all cycles must, then the boom goes "bang" and someone gets stuck with the bill.

It is then that we discover the true purpose behind these "off balance sheet" vehicles - it is to prevent the responsible parties from being saddled with the losses, while they benefitted from the profits!

Oh, and according to S&P we've already seen more corporate defaults in 2008 than in all of 2007. So much for the "permanently lower plateau of corporate bond defaults and problems in the debt markets."

So make sure you say "Thanks Ben" every time you fill up your tank and pay an extra $25 for gasoline, as it is precisely due to his machinations to shield those who made these bad bets from the consequences of the bust that it has happened.

Wednesday the BLS released the actual job report from the third quarter of 2007. You know, the one minus all the "doctoring" in their preliminary numbers? It got zero press attention and in fact I missed it until a Forum Member linked it, and I went and had a look.

Gee, I wonder why CNBC didn't talk about it?

Remember, we didn't lose jobs according to the original data. But what does the actual data show, now that we have it in public?

"From June 2007 to September 2007, the number of job gains from opening and expanding private sector establishments was 7.2 million, and the number of job losses from closing and contracting establishments was 7.5 million, according to data released today by the Bureau of Labor Statistics of the U.S. Department of Labor"

That would be a net loss of 300,000 jobs, or 100,000 per month, on average.

Still think we're all ok on the job front eh? Hmmmm.... I wonder what the 4th quarter and 1st Quarter 2008 numbers will show when the real data is released?

Yes yes, I know, government jobs aren't included in that survey. And exactly how much GDP does a government job add? Zero - government consumes GDP as it is funded wholly from tax receipts. The degenerate case should make this clear - if everyone was employed by the government, all salaries would inevitably spiral down towards zero, as the government taxes only a portion of income (which is all there would be to pay those salaries.)

This morning we had an interesting change in tone on CNBC. I woke up to see a couple of "gurus" from the LBO/PE world (Peterson, one of the founders of Blackstone), plus David Walker (former Comptroller General of the US), talking about, of all things, the economic challenges facing America.

They were talking about things I've been discussing in my blogs for years - the fact that we have a negative savings rate, our debt, both personally and as a nation, has gone parabolic, that entitlement spending is totally out of control and that we have essentially exported all of our research and development through our unwillingness to save and invest rather than buy Hummers.

I was shocked; the "pump monkey" games were put away for one morning, and the truth was told, at least in part. Art Cashin from the floor was speaking truth too - that the consumer is getting hit with a 2x4 in the face from food and energy price inflation, and that the market will, and must, eventually respond to this.

There is typically a bullish bias to the days going into a Holiday Weekend, if for no reason other than people start smiling and thinking about the boozing they're about to engage in and are more inclined to buy than sell. Of course Goldman comes out this morning with a "goose job" on one of the Horseflies, Apple, in what certainly looks like yet another desperation move given that the Qs have dropped off by $1.50 in the last three days.

Will it work? Well for the day, I'm sure it will. But think folks before you follow that trade - Apple is a consumer discretionary purchase virtually across the board. Their computers are mostly consumer (rather than business) purchases and their iPOD is of course the ultimate consumer discretionary device.

The P/Es on stocks in this sector are insane and to the extent that there is exposure to either US corporate or consumer purchases, you're begging for trouble just as you were in the early summer months of 2000 after the "first swoon."

Tech is a horrible place to play with the consumer softening and credit standards tightening. The LBO machine has been strangled and the consumer's balance sheet is constrained. Those two elements spell multiple contraction, which is exactly what you can't have happen when P/Es are up in rarified air territory, as they are today.