The Market Ticker

Here are your possibilities:

• The BEA is lying.  In the third quarter they claim that PCE changed +0.2, +1.4, and -0.6% for July, August and September, respectively, leading to an aggregate change of +1.2%.
  
  
• Business that remit sales tax are lying. The overall sales tax collections in the 3rd quarter were down 8.2% from last year's levels, and this is the fourth quarter in a row that year-over-year declines were posted.

One of these two reports is a lie.

One is a count of actual monies remitted by businesses in satisfaction of taxes collected by them from real consumers processing real retail transactions (that's the spending that matters in the real economy, right?)

The other, if you read the BEA methodology papers, has the word estimate peppered liberally throughout.

Which do you believe?

Do you believe that retailers are intentionally under-reporting and under-paying sales taxes? 

Or do you believe the BEA's "estimates" are complete horsecrap and that the government is intentionally overstating economic activity?

When you have two radically different claims of measurement of the same activity (in this case consumer spending) that are impossible to reconcile within reasonable "measurement error" the conclusion one is forced to reach is that one of the two reports is false.

When faced with such a conundrum it is my contention that the default position is that the purported actual count is the one you trust, and the one that contains "estimates" is presumed to be "cooked" until and unless proved otherwise.

Gee, what are they trying to hide?

As I have repeatedly shown there was has been a "one click" P/E available for the S&P 500 - from S&P - basically forever.

Here's one (recent) example.

Well that's no longer "easily findable."

Indeed, now you have to compute it yourself, although they do make it somewhat easy - if you have Excel.

You have to sign up for a (free) account now, and then you can download the spreadsheets with quarterly numbers.

So I did.

The interesting part of this exercise is that you get annualized P/Es doing so for three years, and then you get the quarterlies going into the current period.

They show P/E for 2006 was 18.09, 21.65 for 2007, and a whopping 56.80 for 2008.

What is it now?  On a 12-month trailing basis, 82.25, with nearly all of the S&P 500 now having reported third quarter (HP reports this afternoon.)

The "outlier" if you will, that is, Q4 of last year, rolls off after this quarter.  It is ($23.13) and will disappear after the next quarterly report.

So let's assume a few things.  First, that the 4th Quarter will track roughly with 3rd quarter, which has posted $15.24.  This would give us a P/E of 21 - still radically expensive and roughly right where it was annually in 2007 before the market blew up!

Hmmmm.....

Earnings will continue to surprise to the upside eh?  They better.  I will note that historically bear markets have all bottomed with the P/E in single digits and dividend yield approaching 10%.  A bear market bottoming with a P/E of 130 (as it was a couple months ago) and dividend yield around 2%?

That has never happened before.

You're free of course to continue to believe that earnings will accelerate to the upside.  But one must ask - from where will that come from?  A look inside the sectors shows that consumer discretionary is already producing near-peak earnings from 2007, staples are above (materially so) 2007 numbers, health care is well above 2007 as are information technology and utilities (the latter with one exception - for one quarter.)

Indeed, the entire premise of "accelerating earnings" appears to rest in three places - financials, industrials and materials.

Oh, this also assumes those sectors that have "achieved" their already-extraordinary (above peak) results won't lose any of their moxie either - that is, their firing of employees won't translate back into weaker purchasing power and thus lower sales (and profits.)

The more you look into these figures and prognostications the more unsustainable they appear.

If you remember my consistent position since this mess began in early 2007 has been that the banks have roughly $3-3.5 trillion in losses in residential real estate.

The IMF now says that half of those losses remain unrealized and intentionally hidden:

“It is our view we are still in the situation where a lot of losses haven’t been disclosed,” Strauss-Kahn said during questions at the Confederation of British Industry’s conference in London today. “How much is a difficult assessment, but let’s say something which is close to half of it.”

Now consider the fact that the Central Banks, including The Fed, and governments, including ours (Treasury) have printed, lied, cajoled and otherwise "cushioned" the first half of these defaults and losses.

But with interest rates at or near zero, gold skyrocketing and deficits running well north of $1 trillion annually in the US, the ability to pull that trick again has been extinguished.

So what happens, my friends, when the second half of those losses "come out from the dark" and are forced to be recognized?

Kudlow appears to have started to detoxify from the KoolAid to some extent, but he's pretty much it.  Kneale and the other "useful idiots" continue to spew the party line - "it's all getting better" - but none of them want to talk about what the IMF said over the weekend - and guess what - they're telling the truth.

Someone has figured it out.

“We cannot spin a positive story from the fact that a third-of-a-trillion dollars a week is trying to lock down Treasury bill yields of less that 0.05 percent,” Bianco said. “There is still tremendous demand for the front end of the curve despite the fact that people are saying things like there is no yield there and that cash is trash.”

$300 billion worth of "someones" - per week.

Let's cut the crap.  The IMF has (correctly) surmised that there will be no ability - politically or fiscally - to fund another bailout.

The IMF has also (correctly) surmised that only half of the losses necessary to take have been realized, with the rest being papered over by government malfeasance, accounting chicanery and outright fraud.

Now you might try to make a case that "the worst is over" and "it will all be good, we're recovering in the economy", but to do so you have to explain where the money is going to come from to absorb the other $1.5 trillion in residential real estate loan losses along with how we're going to prevent the MBS on The Fed's balance sheet from detonating - and we haven't talked about the commercial real estate lending market yet.

Have another glass of KoolAid folks - it's grape-flavored, mixed by someone named "Jones" and tastes great!

Ed: I'd like to observe that not all that long ago, I went after Warren and got a rather stern "rebuke" of sorts from Janet, who engaged with me (via email) in a quite-spirited defense of Mr. Buffett.

My, how the worm turns.... welcome to the conclusion I reached months ago Janet.... I still love 'ya!  

Warren Buffett, Stop Using My Credit Card! (pdf)

TSF – Opinion Commentary – November 23, 2009

By Janet Tavakoli 

I like Warren Buffett.  I even wrote a book about the financial crisis contrasting his principles of prudent finance with recent excessive leverage, bad lending, and malfeasance (Dear Mr. Buffett).  Buffett is not a regulator, an altruist, a consumer advocate, or an elected official.  As CEO and largest shareholder of Berkshire Hathaway, his goal is to maximize shareholder value. 

U.S. capitalism has morphed into a financial oligarchy.  If Buffett’s choice is between getting along in the financial community or the public interest, public interest loses.  But he didn’t cause our financial crisis, and he spoke out in advance about excessive leverage and bad lending.  The financial markets are now wildly distorted.  Others have funding advantages Buffett can only dream about, so he exploits an advantage when it becomes available.

I have been a trenchant critic of rampant financial malfeasance, and Buffett has only wished me well and told me to “keep writing.”   For my part, I try to keep in mind that we view the world through different lenses. 

(Click the link above for the rest... it's worth it.)

I am often accused of being a "Permabear" or "Doomer."

Nothing is further from the truth.

I simply call things as I see them.  I did so with Musings before The Market Ticker began publication, I did so back in the 1990s when I ran MCSNet, and I still do.

And let's not kid ourselves - the economic news is simply not good.  Nor is it likely to get better.

Take the leading economic indicators.  People point to the six-month improvement in the LEI as a sign of a "strong recovery."  But the internals of that number are more sobering - unlike every other recession since the LEIs began being reported, the "real economy" subset of the LEIs is showing less than half of the "improvement" found in "bubble" components such as "stock prices."

The problem is the willful blindness to the real problem in the economy - that is, excessive debt.

James Bullard of the St. Louis Fed, who came out this weekend in support of "more asset purchases", underlined the reality: The Fed has been buying literally 90% of all of the new issue in Treasuries and MBS this year.  While their "Treasury" program was "only" $300 billion, the MBS program has allowed various people to exit their MBS position and swap into Treasuries - thereby papering over the near-complete destruction of interest in Fannie and Freddie paper.

This morning I awoke to CNBC with Mr. Kroszner, former Fed Governor and University of Chicago Booth Business School nutball, "laud" the fact that an "independent" central bank had led to "better" inflation outcomes.  Really?

I suppose if you don't include in "inflation" the change in prices of things people actually need, you might be right.  You know, things like houses?  Food?  Gasoline?  Pharmaceuticals?

Never mind that Bullard's "speaking" over the weekend (and let's remember, he's a voting member starting next year!) had the clear effect of further torpedoing the dollar. A clear statement of intent to further debase the currency by purchasing MBS that under any reasonable read of Section 14 are unlawful for The Fed to buy, securities that are likely carrying huge unrealized losses yet will be purchased at intentionally-overinflated prices, is destructive to the currency.  This is what Fed secrecy has brought and continues to bring.

The fact is that Kroszner is forced to resort to flat-out lying to continue to defend the indefensible acts of his cronies (and indeed his own acts of the last few years at The Fed), which is what so-called "economists" and professors have been reduced to.  Government is complicit in these lies; indeed, they have every reason to do so, especially when it comes to so-called "inflation" numbers, as to do otherwise would be to make clear to everyone in the market exactly what sort of outrageous behavior (and the impact it has had on the economy) they have engaged in.  The CPI is insanely fraudulent by being laced through with "hedonic substitution" (when steak is too expensive they substitute hamburger, and call it "equivalent" since both are beef!) and willful refusal to include certain categories of expenditure at all (e.g. "owners equivalent rent" instead of actual house prices, when more than 60% of American families own a house!)

A more accurate way to look at "inflation" is to look at the debt load that has been served up by our "independent" central bank.  And here you find the following chart, courtesy of The Fed's own data:

Notice the change .vs. GDP, and the increase as a percentage.

As I have repeatedly pointed out, we are running between 8-9% growth in debt outstanding - on a compounded annual rate - since 1951.

If this is "better inflation outcomes" I'd like to ask "what would be a worse inflation outcome?"  And don't try to claim that the "anomaly" in the 1970s skews the data either - that would be a flat lie.  In fact, since 1990 to present the rate of change has been 7.90% and since 2000 8.49%.

Let's not kid ourselves.  The claim that "inflation has been low and controlled" is a flat lie.  GDP has consistently run 2-3% below debt levels since the 1950s and that "spread" has in fact been increasing in the last decade.

This is what our Federal Reserve has brought us in terms of "monetary policy" and it is why we are in this mess.

I know I have presented the above chart many times, but it will continue to be presented until people wake up and smell the damn coffee!  It is the policies of The Federal Reserve that have led to this mathematically-impossible circumstance.

Secrecy breeds complicity and fraud, and nowhere is that more evident than at The Fed.  The NY Fed, for example, did funnel a huge amount of taxpayer money through AIG to foreign and domestic banks after, in secret, making known that it and Treasury would not allow AIG to fail, thereby destroying their negotiating position.  It was through secrecy that this was able to happen without the public raising a well-justified amount of hell at the time and now we are stuck with the consequences.

The FDIC has taken a page out of The Fed's "bamboozle 'em by keeping 'em in the dark" playbook, refusing to act to close banks until they are 20, 30, 40, even 50% underwater on asset prices.  How does this happen?  How do "bank examiners" not know that these "assets" are worth far less (or just plain worthless) than their book value?  There are only two possible explanations - willful blindness or outright idiocy.

Neither is acceptable.

Then there's this - apparent FDIC refusal to disclose REO auction results!  It seems to me that a well-placed FOIA is in order, but is one really necessary?  The fact of the matter is that underlying asset prices are still collapsing in the real economy, as the ability to take on more debt to support the bubblelicious values of yesteryear simply does not exist.  The FDIC's refusal to disclose is a raw attempt to prevent the market from realizing the truth - these so-called "assets" are deeply impaired (at best) and there are literally hundreds of banks and other institutions (including most especially The Fed!) that have securities "backed by" these assets that are worth far less than their alleged "face" value. 

Recognition of this will set off another leg down in this crisis and the regulators and Washington DC folks know it.  They have spent over two years playing "extend and pretend" in the futile belief that valuations would recover by now - but they haven't.  It is in fact mathematically impossible for them to do so as the net debt carrying capacity of the private sector has been exceeded.

There are about $10 trillion worth of mortgages outstanding in this country (according to The Fed Z1); of that well over half is linked to Fannie and Freddie.  The actual underlying value of the homes linked to that debt was overinflated by roughly half during the years 2001-2007.

Deutche Bank has estimated that more than half of all homes with mortgages will be "underwater" by the end of next year.  Hiding the reality of this calamity has become the mantra of the government and its agencies at this point - there is literally more than $1 trillion, and perhaps as much as $2 trillion, in additional residential real estate losses that are being hidden in the system right here and now, and The Government, either directly or via The Fed, is on the hook for the majority of it.

The IMF warned this weekend that a second bailout would "threaten democracy":

Dominique Strauss-Kahn told the CBI annual conference of business leaders that another huge call on public finances by the financial services sector would not be tolerated by the “man in the street” and could even threaten democracy.

"Most advanced economies will not accept any more [bailouts]...The political reaction will be very strong, putting some democracies at risk," he told delegates.

I hope you're prepared for that, because our government has intentionally lied its way through this mess so far.  We have refused to force those who are holding paper at well above its actual value to recognize their losses (and indeed have made such a policy via accounting changes!), we have allowed The Fed to monetize $1.5 trillion dollars in bad paper (into which The Treasury immediately issued more debt in order to fund giveaways of various sorts, thereby instantly destroying any beneficial aspect that this program would have otherwise had), and we still have literal hundreds of trillions of "off exchange" derivatives with no accurate accounting of where the net exposure resides or in what amount it exists.

Yes, the Stock Market has had a big rally.  So what?  Is the stock market the economy?  No.  Were Tulip Bulbs reflecting the underlying demand for tulips in Holland during the mania?  No.  Were tech stocks reflecting the underlying demand and business prospects for Internet-based businesses in 1999?  No.  Were stock prices in October of 2007 reflecting a strong fundamental outlook for the economy?  No.  Were housing prices, as Bernanke repeatedly asserted to the public and Congress, reflecting a "strong underlying demand for homes" in 2006 and 2007?  No.

I continue to hear rumors of incipient disaster.  One of the latest, which has come at me from multiple sources, is that Moody's intends to downgrade multiple states, as many as 20, within days or weeks.  This has been floating around in whispers for the last month.  Is this reality?  It damn well should be - California, New York, Michigan, Arizona, Nevada and Florida are all in serious fiscal trouble.  All built up public salaries and pensions, protected by state law or worse their state constitutions from cutbacks, along with unions willing to literally go to war to prevent reductions in expense.  Yet their funding base has and is collapsing - property taxes are going unpaid by banks and the government holding REOs, property valuations (and thus the tax base) are collapsing, business is in the tank destroying sales tax receipts, and those states that charge a personal and corporate income tax have seen those taxes collapse as well.

California has what appears to be a $20 billion budget hole all on its own, and no prayer of being able to close it.  Between these states there are literal thousands of firefighters and police officers who have platinum-plated pension plans that are additionally double-dipping in some fashion, all of them "earning" six figures.  Universities that have gorged themselves on debt-fueled increases in tuition and fees running at a double-digit rate for more than a decade are now finding themselves trying to force students and their families to eat the outcome of their profligacy.  The local school district here in my town built a new addition on its elementary school - complete with tens of thousands of dollars in each classroom for "smart boards" and plasma televisions - the latter of which is used to display THE SCHOOL CLOCK for 90% of the instructional day.  Yes, you read that right - we have a school here that uses a $5,000 plasma television to replace a $10 clock.  We have so-called "health care reform" being pushed while the pharmaceutical companies have raised prices by nearly 10% in inflation-adjusted terms over the last 12 months and health insurance premiums have been rising at a double-digit rate annually for more than a decade.  The "support" for all of this has been one and only one thing - the ladling on of more debt throughout the system, and now that the private sector has reached its limit and is choking on it the government is trying to replace all of it with more borrowing of its own.

This is the sort of rank stupidity that everyone thinks will be "ok" and it is literally everywhere through government and the mainstream media.

This morning I woke up to see The Dollar trashed, down almost 1% overnight.  The expectation was that this would "pump" the stock market, and it did.  But does this matter if your dollars buy nothing?

CNBS is full of bubble-heads that smile and make it all sound good.  Is this good?

You have to love how destruction of a nation's currency is cheered, with CNBS trying like hell to lead everyone into the stock market.

The public is having none of it - retail simply is not "in" at this point, and the "boyz" are starting to recognize that they aren't going to be. 

Why should they?

The "boyz" and "media" have lied to the public twice in the last ten years.  First in the 2000 wreck everything was a "buy" all the way down.  People had their hopes, dreams and retirement destroyed - all led by a bubblicious media that was telling you that it was "time to buy" because "stocks were selling at a tremendous discount."  The orgasms on CNBC and elsewhere in 2001 and 2002, when there was still plenty of downside left, every time the market put in a good rally was clear, convincing - and outrageous.

The "bull market" callers all showed up again on CNBS this summer - right around S&P 900.  Where were they at SPX 666?

Indeed if you bought at 900 you've done well - for a while.  But who bought into the rally at 900?  Not retail.  This is all a trader's market; the people have had it.  They're tired of being lied to and no matter how far the pumpers push things by trading things back and forth the investors of the world have figured out the scam and are sitting on their hands.  Most of the "inflow" from Money Markets has gone not to stock but rather to bond funds. 

The lesson?  You can screw people only so many times before they tire of it and simply leave you to play in your rigged casino - with yourself.

Gold?  It hit $1172 this morning.  But bonds - especially the short end - are yielding zero.  That makes no sense, and one of them is wrong.  You don't buy bonds that yield zero on the back of a currency devaluation exceeding 15% unless you expect both the dollar to rocket higher and the stock market to collapse.

Gold, to a large degree, is being hyped based on Internet-circulated stories of "salted" bars filled with tungsten.  If true - if the so-called "Gold" at Ft. Knox and elsewhere turns out to be false then there is a nightmare about to unfold, and the dollar could easily collapse - especially if this subterfuge is traced to the US Government.

But if this is false, then you're witnessing one of the biggest scams and correlated frauds ever in the history of the markets - and the bond market will be proved correct.

Whichever the case may be someone is going to be proved critically wrong in the coming days, weeks and months.  There are times for tremendous caution, and when asset prices are supported by secrecy and outright fraud the public would be well-advised to stay well away from exposure to those parts of the market that would lead to a 50% or greater loss in a near-straight line.

Unfortunately, at present, this is essentially every asset class - except perhaps copper-coated lead.