The Market Ticker

Bloomberg (and everyone else) is reporting that The LDP of Japan has suffered a crushing defeat, calling it a "bloodless revolution":

Hatoyama, who quit the LDP in 1993, has pledged to revive an economy emerging from its deepest recession since World War II by boosting child-care spending, cutting taxes and curtailing the power of bureaucrats. His grandfather founded the LDP in 1955 and became the first of that party’s 22 prime ministers.

“This election has been all about changing the government,” Hatoyama said in a nationally televised press conference. “Everything starts now.”

Indeed it does.

Before the election The Democratic Party of Japan had talked assiduously about the avoidance of US Debt Hegemony (read: Japan may stop buying or even sell US Treasuries) and in addition they made noises unthinkable just a few years ago - their stance towards China, long thought of as an arch-enemy of Japan, is quite friendly and cooperative.

While Bloomberg and others seem to be reporting that the Japanese debt and stock markets will cheer this win, that is not necessarily something that I would be inclined to chase in our markets if indeed it translates over here at all.

There is a tremendous amount of contradiction out in the marketplace in regards to what this means.  I have seen articles over the last two months claiming that this win would mean dramatic increases in bond issuance, and then others claiming that the party is adverse to bond issuance.  Which is the truth? Who knows - but what has come through loud and clear is an unmistakable tenor that the DPJ is well-aware of that the policies of the last twenty years, adopted on the back of the Nikkei's and Japan's property market crash (gee, anyone see parallels?) have not worked and have instead stagnated the Japanese economy for close to two decades.

The DPJ has audacious goals in terms of social spending.  One way to meet them could be to sell some or part of their US Treasury holdings to raise cash (oops!), which would have dramatic and immediate impact in our Treasury market.  It could also do interesting things to the Yen/Dollar balance, but between that and trying to sell huge quantities of additional debt into the Japanese market, I suspect the former, rather than the latter, would be the wiser policy - for them.

More ominously a link-up between the Yen and Yuan, unthinkable with the former government, now looks possible.  Create a basket-of-currency settlement system over in Asia with the Yen and Yuan as the core elements and the US immediately loses control of the game we've been trying to run with the banksters and fraud-laced credit games in the United States.

That which cannot continue forever won't, and I suspect we're about to get a lesson in reality from our friends over in Japan and China - a lesson we may not like at all.

Time is drawing short for The US to clear The Bezzle on a voluntary basis, lest we be forced to as a consequence of US Debt rejection by the Asian nations that have, thus far, enabled us to continue this charade.

... is that they're always trying to sell something.

By the way, Karl Denninger needs a reality check. He does great forensic analysis, but has not produced a single original thought or global hypothesis in memory.

Global hypothesis?  You mean global conspiracy theory, right?  Why bother with those unless you're trying to drive someone toward a paid "newsletter" in which one can push some "alternative" that relies on something that "will happen tomorrow" - and when it doesn't, well, we just got the day wrong, but it will happen tomorrow!

Why do spooky visions of Jim Jones keep flashing before my eyes?

His view of a need for a New Resolution Trust Corp to clean up the mess shows a big blind spot. Any New RTC must be designed to operate as an independent entity, capable of turning a profit in a vast liquidation cycle with fees earned.

Absolute nonsense.  The purpose of an RTC is not to make a profit.  In fact, it will generate a loss - a big one.  Probably as much as a trillion dollars, maybe two trillion when one considers the backstop of depositors that has to be provided  (and which we will do, one way or another, as the alternative - screwing Granny out of her $30 large - means the shotguns come out, and the government knows it.)

The purpose of an RTC is to take out the trash and fix the US credit intermediation system by removing the clog.  We must do so in order to restore sound fundamentals and, on a forward basis, the ability to prosper and clear ordinary commercial credit transactions - a necessity if we are going to participate in the global monetary structure on a full and fair basis.  Since all modern monetary systems are in fact debt-based there is no real alternative to this that does not lead to us being left behind in an economically-crippled state, with the high likelihood of economic depression.

The fact that many individual properties under mortgage are linked to multiple mortgage bond securities hints that the trust would actually lose quite a handy sum of money.

Prove it.  This is simple; while these complex securities are "complex", they are so by obscurity.  That CDROM (or worse, DVD-ROM!) delivered content that lists each "thing" in the security pool does exist.  We also have things called computers, which can analyze and crosslink the data.

I've heard this allegation for years - going back to at least 2003.  That's a hella-long-time for this to be sitting out there without substantiation.  And while there are certainly lots of people who do not want this uncovered, the fact remains that the data is available, it was put on those CDROMs and DVDROMs, and it hasn't been destroyed. 

Hundreds of billions of dollars have been lost by investors worldwide in this collapse, and each of those dollars is a reason for someone to chase this.  I have never in my life subscribed to a conspiracy theory that requires me to buy into the belief that a whole lot of separately-interested parties, specifically lawyers, all of whom earn a fee on contingency, would fail to investigate and rip to shreds any such conspiracy on such a grand scale.

Further, the moment that such a thing was proved hundreds if not thousands of people would wind up in prison.  Yes, some of them would make threats (cf. Keating and what he said with regards to William Black) but that doesn't change the outcome - note that Bill Black's body remains at an elevated temperature compared to the room.

Other mortgage bonds are pure counterfeit, with no property income stream linkage.

Again, prove it.  There are billions of reasons for people to prove this if it is true.  Nobody has.

I look to motivation - the scammers have lots of reasons not to disclose but the harmed have billions of reasons to sue and press discovery if necessary.  It hasn't happened in this light to any material degree.  I don't buy it; this sort of kook-a-berry inspired rant does nothing to advance the debate on how we got here and how we get out.

Some bonds would cost more than they could redeem, while other bonds would not be redeemable at all. Mortgage bond fraud represents the gigantic shoe in the machinery. No meaningful home loan modifications, no New RTC, only top-down solutions favoring the big banks. My clarion call for a New RTC was made in 2007, but stopped in 2008 when that criminal fraud detail was revealed. Denninger must have been asleep back then. He has a great knack for dissecting trees, plants, and ferns, many rotten or acidic, but he misses the forests. Every squirrel has its expertise, but some have limited vision.

Bah.  Willie is great at putting forward what others have said, but of course he has a newsletter to sell.  I don't.

Oh, and what is Willie's prescription for investors?  Here we are again with the same old tired song:

 But real money emerges triumphant after the inevitable crisis that ensues. THAT REAL MONEY IS GOLD, ALONG WITH SILVER, EVEN PLATINUM.

Of course he's been calling for this "huge move" for a while.  I know, I know, gold is "screamingly undervalued" even at $1,000.  Ok.  So when will the big move come, and what's the target?  Willie, like most of these clowns, plays coy - he doesn't want to be caught having to "revise his calendar" when the end of the world does not materialize (or worse, hand you a cup of grape KoolAid) so he merely says this:

The gold breakout will come suddenly, without warning. In my view it could easily come from ENEMIES AT THE GATE, foreign creditors responding to their own stress.

Emphasis his, of course.  But this lack of a means to discern when (or if) the event is coming means that he can never have to say "I blew it"; unlike those of us who put forth an annual forecast with material and objective targets that we can grade a year later, he doesn't.  I wonder why not?

The "rush to junk" is one that I and many other commentators have pointed out on multiple occasions.  This isn't some conspiracy - it is how these sorts of parabolic blow-off movements come.  If you think this isn't a parabolic move, chart the S&P 500's price .vs. P/E over the last six months and tell me if your opinion changes.

As of July 31st we stand at 143.95 for that ratio, with a new update out in a few days.  By any measurement you care to use this is a parabolic move and those always follow the same pattern coming off the base (or bottom):

• First, the strongest firms have a nice, measured, volume-backed move.
• Then their volume and strength on a relative basis starts to weaken.  The middle-tier companies get it next, with their volume supporting their advance, dragging the strong firms along (but on flat to declining volume.)
• Finally, the used dogfood firms like Citibank, AIG, Fannie and Freddie "catch the fever" and their volumes spike to three, four, five, ten, even 100 times their normal volume and they take off like a rocket.  The "drag along" effect gets weaker and weaker as people start to look at the charts and go "heh, wait a second - that's a company that's doubled in three days, represents 10% of the entire NYSE volume, and on any reasonable valuation basis is a zero?

Not long thereafter the move collapses.

The foundational error that Willie and most other so-called analysts (AND "degreed economists") make is that they fail to properly recognize what the monetary base is in a debt-based monetary system.  Most will cite M1, M' or some other similar stupidity.  This is false and a bit of cogitation will lead you to the right answer, if you think about it for a while.  Consider the facts of all such modern systems: Your $100 bill spends identically to your VISA card.  What is the "monetary base" of your VISA card?  Now consider what, on a population-wide basis, this means for the monetary base of a nation's currency and credit system and the light should come on.  If it doesn't please check your cranium for the presence of a functioning set of neurons and if you have an economics degree make sure you turn it in to the university that issued it as it should clearly be revoked.

PS: At least the "bio" on FSN says this about Jim's intentions - in tiny, small print at the bottom, of course:

 Articles in this series are promotional, an unabashed gesture to induce readers to subscribe.

To which I reply: No, really?

Henry Blodget writes an interesting piece over at Businessinsider in which he cites Paul Kasriel of Northern Trust:

Today, we have federal deposit insurance Therefore, the probabilities and magnitude of depositor runs on banks are much reduced compared with 1933. Yet, we can see “runs” by stockholders and other creditors of banks if there is a suspicion of financial problems. If the Fed is required to  publish the names of financial institutions to which it has extended credit and this publication induces financial institutions to refrain from borrowing from the Fed, one can only speculate if this would be the tinder for another liquidity conflagration in the coming months.

How about a little honesty from commentators in the mainstream media?

"Liquidity conflagrations" happen when people discover they have been lied to.

Anyone remember Bear Stearns?  "We're well capitalized" on CNBC?  "Everything is fine"?  Cramer's pumping of them on his show as "safe"?

Market participants in fact knew everything was not fine.  There were statements flying around (that turned out to be true) that some counter-parties had begun refusing to novate deals with Bear. 

It was the discovery of the lie that caused the run on Bear Stearns and its ultimate collapse.

Likewise with Lehman.  Remember Dick Fuld's "I'm gonna burn the shorts" comment, again, on CNBC and elsewhere in the National Media?

The truth got out: they were having liquidity problems.  Once again, as soon as people discerned that they were being lied to, Lehman's fate was sealed.

The problem The Fed has is that as the supposed "risk regulator" for the American Banking System it has absolutely refused to do its job of prudential regulation and still is. Instead of demanding that its member banks hold capital against all unsecured lending it has "blessed" models rather than markets.  But at the same time it has declared "haircuts" against collateral that make clear that so-called "face value", or "par", is a farce.

The Fed is supporting institutionalized lying - that is, the intentional mis-marking of assets.  If The Fed was an honest regulator and monitor of market risk it would insist that no bank carry an asset at a value materially higher than its "haircut" off par at the window.  After all, the penalty rate for discount window use already discourages banks from coming there; the "haircuts" must (and I argue do) reflect what The Fed actually believes about the quality of these alleged "baskets" of asset classifications.

If The Fed believes that these asset classes have this sort of haircut from face value in the market how does it justify allowing any bank under its jurisdiction holding such "assets" at a higher value on their balance sheet?

The claim that people shouldn't worry about a bank that needs an emergency loan at a penalty rate and with a haircut that in some cases is 30% or more below declared "balance sheet value" is criminal idiocy, and any argument that such emergency facilities should be kept secret so that the public does not know when such an extreme emergency exists is, I would argue, an act in furtherance of racketeering. 

After all The Fed isn't lending with its own money - those are our dollars that are being lent out and their actions confer obligation on the taxpayer.  The Fed's legitimacy and backstop are predicated on the back of the American Taxpayer - a privilege, not a right.  That privilege comes with the responsibility to justify in each and every case, in a transparent, fully-disclosed fashion, their actions.

The discount window exists as an emergency facility.  That's made clear not only by the fact that its use has a penalty rate, but that there are also haircuts on assets "deposited" there as collateral that dramatically exceed where these assets are being carried on bank balance sheets.  You only go there and take your haircut and pay the penalty rate if you can't borrow in the interbank and other ordinary commercial markets - an event that occurs because your book of credit has deteriorated to the point that you're on the edge of outright failure.

When your house is on fire it's too late to argue that we should not let any of your neighbors see the fire trucks. The correct question to ask is why you were playing with both matches and gasoline in your living room an hour ago!

Bloomberg's FOIA is spot on and the District Court's decision is exactly correct.  The brief filed in defense of The Fed by The Clearinghouse Association reads like something you'd expect out of Tony Soprano's family - specifically:

"The Clearing House believes, based on the experiences of its members, that publicly releasing information about a financial institution's participation in the Emergency Programs can cause significant competitive harm.  It is difficult to imagine information that is more competitively sensitive or harmful to a financial institution than information that it has lost the independent ability to fund itself fully in the marketplace."

Yes, and it is difficult to imagine a piece of information that more-fully fills the requirements for the immediate filing of an 8-K of "significant events" as well, wouldn't you agree?

Let's see what we find there....

1. Item 1.01 Entry into a Material Definitive Agreement

a. Filing of Exhibits

b. Considerations Regarding Business Combinations

Isn't a discount window loan (or participation in these "facilities") a material definitive agreement?  If, without their use, the firm would be at risk of collapse, the answer is obviously YES.

6. Item 2.03 Creation of a Direct Financial Obligation or an Obligation Under an Off-Balance Sheet Arrangement of a Registrant

Uh, that one's pretty obvious.  A direct financial obligation clearly exists once you go to the window, right?  A new obligation under an emergency "rescue" facility that did not exist before.  It is quite clear that under the law this requires an 8-K.

7. Item 2.04 Triggering Events That Accelerate or Increase a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement

You mean like the imposition of night mark-to-market requirements on that collateral by The NY Fed that didn't exist before you tendered it, and which constitute an "extraordinary" or "emergency" action (per the Clearinghouse's own brief!)  Another 8-K requirement.

9. Item 2.06 Material Impairments

That's a big 10-4; what do you call a 30% haircut off your booked value on a given "asset"?  I call that very material.

14. Item 4.02 Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review

That might apply too.

Looks to me like this "disclosure" being complained about is more akin to an attempt to cover up outrageous and repeated failures to comply with US Securities laws.

Or do those laws only apply to "little people" like Martha Stewart?

The decade-long record of Fed secrecy must end and those who have refused to follow the law and file public disclosures as required by existing law must be held to account.

From Marketwatch:

Dell's release slipped out about three minutes before the market closed Thursday, giving the company's shares a boost of 98 cents, or 6.7%, to end at $15.65. The stock topped $16 ahead of Friday's opening bell.

Really?  You sure about that Marketwatch?

This is about as blatant as it gets - a huge ramp, on huge volume.

"Someone" (or a bunch of someones) had that report 17 minutes before the bell, and if you were one of the "chosen few" you had a "high frequency" 14 minute window to loot the joint - again.

This sort of scam is so "in your face" that it leaves open not only the question of whether there are any cops (answer: No) but also whether one should have any confidence in our markets as a fair place for people to invest (again: No.)

In a nation honoring the rule of law this sort of trading pattern would result in an immediate investigation and a literal blizzard of subpoenas within minutes.

But we don't live in that sort of nation, do we?

Income and spending numbers are out for the last month....

Personal income increased $3.8 billion, or less than 0.1 percent, and disposable personal income (DPI) decreased $4.6 billion, or less than 0.1 percent, in July, according to the Bureau of Economic Analysis.  Personal consumption expenditures (PCE) increased $25.0 billion, or 0.2 percent.  In June, personal income decreased $133.4 billion, or 1.1 percent, DPI decreased $119.9 billion, or 1.1 percent, and PCE increased $60.9 billion, or 0.6 percent, based on revised estimates.

Let's have a look inside the report...

Private wage and salary disbursements increased $6.7 billion in July, in contrast to a decrease of $24.5 billion in June.  Goods-producing industries' payrolls increased $1.4 billion, in contrast to a decrease of $10.0 billion; manufacturing payrolls increased $5.0 billion, in contrast to a decrease of $5.9 billion.  Services-producing industries' payrolls increased $5.3 billion, in contrast to a decrease of $14.5 billion.  Government wage and salary disbursements increased $2.1 billion compared with an increase of $3.5 billion.

Looks like the usual seasonality was present, just late and not as strong as usual.  Theme park and other "destination" hiring, especially in the northern half of the country has a very strong summer seasonal component.  I was worried that this had completely disappeared this summer, which would have been extremely bad.  As it turns out it didn't disappear entirely, but I wouldn't call this "robust."  In any event it is what it is.

Real DPI -- DPI adjusted to remove price changes -- decreased 0.1 percent in July, compared with a decrease of 1.6 percent in June.

On balance, we're still losing.  Slowly, but losing.

Real PCE -- PCE adjusted to remove price changes -- increased 0.2 percent in July, compared with an increase of 0.1 percent in June.  Purchases of durable goods increased 1.8 percent, compared with an increase of 0.8 percent.  Purchases of motor vehicles and parts more than accounted for the increase in July and accounted for most of the increase in June.

Just wait until the payment hangover hits... that should be starting just about now, and continue for the next four to six year.  Booya boys - you traded in a paid-off vehicle for a car payment!  That ought to do wonderful things for spending in places such as restaurants, vacation spots and the like.

Overall this isn't an apocalypse-style report, and has a ray of sunshine here and there.  However, I'm skeptical of the durability of this change and whether we've managed to do anything more than pull forward demand with the CFC and similar programs. 

If that's all we've done then it is going to be a long, hard winter, and unfortunately we'll all find out only when we need that extra money for minor little inconveniences such as heat.

(On the bright side if natural gas is your heating fuel of choice oversupply and stuffed storage facilities continue to drive down cost, so this could be a very nice winter for you in that regard indeed!  No such luck if you use heating oil....)

I have one really serious question though - is this report accurate?  If so on the income side, how do you reconcile it with this?  (Courtesy Barry Ritholz who cited Matt Trivisonno)

Uhhhhhh... wait a second.  That's updated through August 26th and includes July's numbers - while the BEA paints an entirely-different picture.

How do we have an improving income picture according to the BEA when withheld income TAXES (which are withheld and paid immediately on that income) continue to collapse?

Someone's lying and I bet it isn't Treasury and their tax receipt numbers.