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Insanity defined: Doing the same thing over and over but expecting different results.

Here we go again.

Bernanke and pals have over the last two days rolled out some $1.3 trillion in new so-called "facilities", including buying agencies and consumer debt.

While there are many screaming about the agency purchases, this is permitted under The Federal Reserve Act (actually an amendment passed in the 1960s, although it has never before been used.) 

But consumer credit obligations are a different matter.  They are both unsecured and not federal instrumentalities at their source, and there is absolutely no authority for Bernanke to do this.

Loan against them, yes.  Buy them?  No.

Obviously, the smashing of the TNX along with agency spreads came of this; gee, is this a surprise?  But how does this help the banks?  Remember, banks borrow short and lend long.  They ain't doing any lending with that sort of spread. 

Of course we already knew that, right?  So what is this?

Its a raw attempt to support house prices - an attempt that will (just as have the others) fail.

I come back to first principles - the root of the problem is that banks and others made loans to people who could not pay.  That is, on balance there is too much debt in the system overall, and the quality of it is too poor.

It might be nice to think you can "unring" this bell, but you can't.  Nor can you solve anything by shifting who has or is guaranteeing the debt.  All that does is change who eats the default - it does not change the fact of the default, nor the credit quality.

The unfortunate second-order effect of all this bad credit is that it pumped consumption - that is, GDP - by about 15-20% from where it would have been without it.  That is, the majority of the GDP increase over the years from 2003-2007 was due to the granting of bad credit, not organic growth in wages and productivity.

Now we can deny this for as long as we'd like, but until we face this truth we will not solve the problems that ail this economy.  Sustainable growth will not return, jobs will not "come home" and productivity will not mount a sustainable increase.

Attempting to drive down the cost of money (credit) to "restart" lending is a fool's errand.  That simply extends more bad credit into the economy which of course puts on the table even more defaults over time.

Down this rathole lies Japan's experience of the 1990s, and ours to come - or worse.

You can only drive asset prices in a sustainable fashion by driving up real wages through productivity and new technologies.

If you do it through protectionism you get the 1930s.  If you instead depress wages through illegal immigration economic "growth" reverses unless you start making unsound loans, which is exactly what we did in the 2000-2007 timeframe.  The latter always blows up in your face, and once it does, you can't reverse it.

I am happy that Volker is on Obama's economic team.  I am not happy with the idea that we're going to play FDR, because any dispassionate analysis of the "New Deal" infrastructure and "make work" programs shows that they were quite counterproductive to economic recovery (never mind the other things FDR did like burning farmer's fields and shooting their livestock to "boost prices"!)

Paulson needs to be fired and Bernanke sacked - or he needs to resign.  Today.  These "promises" have no more ability to be kept than do promises that everyone can have free unlimited health care from 65 years of age onward. 

Paulson and Bernanke are effectively writing checks that President Obama is going to have to cash.  I suspect he is going to find that this will get extraordinarily difficult some time in 2009, and when it does, that's when the real trouble will come.  Just as President Clinton discovered that he's not really the "guy in the charge", so will President Obama - one way or another.

Enjoy this bounce in the market and if you're trapped long use it to raise cash, and for God's sake, don't do anything stupid shopping over the holidays.

More when I'm back from vacation.....

I guess we've got at least part of our answer.

Friday about an hour before the market closed, it was "leaked" that Obama intends to appoint Tim Geithner as head of Treasury.

Mr. Geithner is the President of the NY Fed.  Among other travesties he has overseen we can include the Bear Stearns and Lehman, along with AIG fiascos.  The first can legitimately be categorized as a looting operation, as Bear was told they had a term credit facility only to see it evaporate a couple of days later - giving them no time to work something else out.  We never have seen details of exactly what happened there, and we've seen zero detail or explanation on the big pile of money that apparently "disappeared" from the NY Fed when Lehman went "poof."

While there are worse picks Obama could have made, this is hardly "change."  Indeed, unless Mr. Geithner comes with a promise to open the books of the NY Fed (and the Washington Fed), which I rate about as likely as that of Santa Claus personally appearing in my fireplace in a month or so, we certainly aren't getting "change" in Treasury.  Opacity reigns, even though its all our money (at least in theory.)

The market apparently liked it (from one pigman to another!) and rallied 500 points into the close Friday.  Never mind the suspicious timing of the announcement - one hour before options expire?!  I've seen obvious manipulation before (August 07 anyone?) but this was so transparent as to be ridiculous.  One hour later, no market impact. 

I guess Obama can read a chart too eh?  Hmmm.....

Next we heard that Obama wants to "stimulate" the economy.  He's missing the obvious (not that this is a surprise), which is that our problem today is debt load, and you can't "stimulate" something with more debt when carrying capacity has been exhausted. 

It appears to be up to the bond market to deliver this message.  It will be interesting to see if it does.

More ominously on Thursday we got primary bear market reconfirmation on the DOW, Transports AND S&P 500 along with the Russell and Nasdaq.  The bad news is that this reconfirmation Thursday makes it highly likely that we may not see 1500 on the S&P500 for a very, very long time, and that the bear market bottom in this particular cycle could be as low as 300 - an 80% loss from the top.

Hyperbole?  Not exactly.  The "double top" spanning eight years is quite rare, but when they happen, the entire original bull market run is usually retraced, and what's worse, the final bottom might not be seen for three or more years. 

1930s anyone?

Or Japan of the 1990s?

The better question is whether the rally Friday afternoon was something real or just more BS.  We'll know early this coming week.  If we can break back above 800, the intermediate-term rally case has more credibility.  Over 850ish, it has significant credibility.  Of course if we immediately collapse and head lower..... brimstone.

In either event believing in the "bottom" being here means you think the economy will turn within the next 6-12 months.  Not even Obama believes that; he said as much in his speech, in that he expects it to get worse before it gets better.

So do I.

The question becomes whether we can avoid any of the disastrous things that could turn a nasty recession (or even a Depression) into political and monetary failure.  That's the worst-case scenario now on the table, and it is NOT far-fetched. 

Thus far virtually everything that has been done has been wrong.

Go back and read "Tired of The Crash?" and then show me any evidence of a change of course.

I sure haven't seen it.

I'll be out-of-pocket this coming week - enjoy your Turkey; it sure looks like we got plenty of 'em in Washington DC......

The market and economy will not stop falling apart until:

1. Paulson is fired and his policies cease.
2. We have transparency in balance sheets - for every firm on the exchange.  No exceptions.  All Level 3 asset mark models and assets identified - period.
3. Bernanke withdraws all his alphabet soup programs or is removed from office and his successor does, and the "crowding out" in the credit markets ceases.

Its that simple, and all three must happen before we will see any sort of sustainable bottom put in.

This doesn't mean we can't have "rip your face off" rallies - we both can and will. 

But the market and economy will not bottom until the three things above are done, and the only way that is going to happen is when you make it happen.

That's right.  Your 401k is a 201k (and will soon be a 41k) because you (collectively) sat on your butts last October when I started running petitions and because we have managed to garner only 50-odd people at protests.

There should be hundreds of thousands.

There should be general strikes - people who simply refuse to go to work, en-masse, across the nation.

There should have not been one Congressman or woman who voted for the bailout returned to office.

Bottom line: You have and are consenting to this economic depression - and make no mistake, that is exactly what the credit markets are saying we are entering right now.

Remember that more than a year ago Subprime Mortgage Bonds forecast a total meltdown in that industry, and that nearly all of the companies in that space would go bankrupt.  We were told that this sort of "Armageddon" scenario would not and could not occur, and that the credit market was playing "histrionics".  A number of so-called "smart money" investors (Wilbur Ross anyone?) stepped in and bought these supposedly-undervalued instruments - and promptly got slaughtered when the actual performance was worse than the credit markets were forecasting.

The credit market was right and those who said it couldn't happen were wrong.

Now the credit market is saying that we are going to have more defaults than happened during The Great Depression.  That is, it is forecasting a Greater Depression that worse than the 1930s.  The TNX (10 year yield) is threatening to break three percent, down another 6% (!) this morning to 3.16%.  The bottom going back as far as my charts extend is 3.07%.  Almost there.

The 13 Week T-Bill (IRX) stands at 0.1%, which is for all intents and purposes zero.  The Effective Fed Funds trading rate has been between 0.2 and 0.3% since the last putative rate cut to 1% - that is, effectively zero. 

Corporate AAA commercial mortgage spreads are at extreme wides, standing at over 700 bips; added to reference this means that super senior AAA commercial mortgages now yield more than 10%.  Given the level of credit enhancement in these deals this forecasts default rates of more than thirty percent in this space.  Similar extreme spreads are found among both the "high grade" and "high yield" corporate bond markets.

The credit market is telling you that we are headed for an S&P 500 trading at three hundred and a DOW at under three thousand.  That we are headed for unemployment north of 20% on the U6 (broad) measure, and GDP contraction of twenty percent cumulatively from top to bottom.

That's one person in five in the US without a job, deflation of 20% cumulatively or more in prices, over 2 million businesses going bankrupt in the next three years, and literal starvation and privation - all across America.  No part of this nation will be spared.

The market callers are all saying all this is impossible.

Even though every thing the credit market has forecast thus far since this problem began has been not only proved correct but conservative; that is, if you bought believing that it would not be as bad as the credit market is forecasting, you have had your head handed to you.

So who are you going to listen to?

Ben Bernanke ("we won't have a recession") and Hank Paulson ("the economy is fundamentally strong"), along with all the market "callers" on CNBC, who have been wrong every single time for more than 18 months?

Or the credit market which has been right 100% of the time thus far since this crisis began?

Welcome to The Greater Depression, and make sure you remember that the blame for this event belongs to Congress, Henry Paulson, Ben Bernanke, and of course..... you, since you have failed to insist and force your government (and yes, its your government, just as its my government) to stop these clowns.

We will get out of this when - and only when - you stop believing that you can "have a pony", "a chicken in every pot", "economic stimulus", and "free credit for everyone."

Only when we the people (collectively) are either all bankrupted or we come to our senses and demand that the fraudsters be locked up and the bad debt purged by default will the system clear and both the economy and market find a sustainable bottom.

Those are the only two choices folks, and right now, you're choosing bankruptcy and Depression for all.

How many of the automaker CEOs (and by the way, that includes Gettlefinger, if my viewing of the hearings is correct) travelled commercial to get to Congress yesterday and today?

Zero.

All three CEOs - Rick Wagoner of GM, Alan Mulally of Ford, and Robert Nardelli of Chrysler - exercised their perks Tuesday by flying in corporate jets to DC. Wagoner flew in GM's $36 million luxury aircraft to tell members of Congress that the company is burning through cash, asking for $10-12 billion for GM alone.

.....

GM and Ford say that it is a corporate decision to have their CEOs fly on private jets and that is non-negotiable, even as the companies say they are running out of cash.

Fine.

As a US Taxpayer this is my answer to your request for a bailout:

Is that clear enough or do you need it spelled out one letter at a time?

Ben Stein needs to be locked up - or BBQd and eaten - for penning this article:

In this situation, the governments that care about their citizens should and must have extremely expansive policies. That would include running very large deficits — which we are doing, not even mentioning tax hikes until the situation is stabilized, and possibly cutting taxes as a temporary measure. Public works projects, tax rebates, even to people who paid no taxes, extensions of unemployment insurance payments — all of these are necessary. Bailing out the big auto companies, offering loan guarantees to encourage banks to lend, making sure lending facilities are in place for credit card issuers - all of these should be done and immediately.

"Mr" Stein is an ass - and that's being polite.

This sort of "beggar thy neighbor" concept - that is, mass and intentional devaluation of one's currency (what else do you think happens if you "reflate" by throwing money around?) is precisely how we wind up with a hyperinflationary depression, which is far worse than a deflationary one.

Deflationary depressions are nasty business, but they are created by governments who attempt to stimulate economies beyond the point of reasonable credit and business growth, thereby guaranteeing a deflationary bust. 

Mr. Stein was NOT, if I recall correctly, one of the people who sounded the warning back in 2000-03 about the excesses in credit growth nor did he advocate stopping that stupidity - going all the way back to the 1980s!  In short, where was his objection to creating the mess in the first place?

Missing, that's where. In fact I distinctly remember Mr. Stein being unabashedly bullish back in January of 2008.  Indeed, here's what he said January 4th of this year:

This isn't a development to strike terror into your hearts -- if you're a long-term investor, it signals a time to buy. (As I've said many times, if you're a short-term investor you can just skip my column.) The history of stock market investing is unequivocal on this point: When the market is low, when the economy is in a recession, it is -- in the long run -- by far the best time to buy.

Such a wonderful record you have there Mr. Stein!  Why, you'd only have lost what - 40% of your money listening to this buttclown (the SPX was at 1440, more or less, on the date that column was published, down ~125 pts from its top! That was a time to buy?!)

Hyperinflationary depressions are worse than deflationary ones, because a hyperinflationary depression almost always results in political failure.  For examples you can look at Weimar Germany or Argentina, both of which resulted in the destruction of what were democratic political systems, right up until the government decided to take Mr. Stein's general approach.

Let's look at some more from Stein's most-recent piece of stupidity:

I desperately hope I am wrong and I may well be, but the government has to put in a bottom here. Otherwise, the bottom is very hard to see. Again, I hope very much I am being too pessimistic.

Government created this mess by removing leverage limits and blocking state enforcement of predatory lending laws.  In 2004, specifically, our present Treasury Secretary lobbied as CEO of Goldman Sachs for the removal of one of the last safeties on the nuclear credit weapons, obtained his requested change, and in doing so set the timer on the bombs.  Where is Mr. Stein's call for the people responsible for this to be recognized, outed and punished?

NOWHERE, that's where. In fact if you read Mr. Stein's writings archived over on Yahoo Finance you will find unabashedly bullish BS all the way down the pipe, until he finally got hit over the head with a Clue-By-Four.

How long did it take Ben?  Was it when YOUR retirement accounts got clobbered for 40% of their value that you finally woke the hell up?

And how does one avoid taking the pain that results from setting off a firecracker in your hand once you've lit it and it explodes?

Let's continue:

If workers can only rely on dividend and interest income and not on long-term capital gains of 8% or 9% per annum, pre-retirees have to save enormously more than they had anticipated to adequately fund their retirement. This is serious business.

No kidding!  You mean that spending more than you make and betting on silly credit expansion - that is, granting loans to people when you have no reasonable expectation of ability to pay, isn't a valid and appropriate strategy?

Gee, who'd have thought that you should actually save 10-20% of your income toward retirement instead of spending it (plus even more money you don't have!) on IPods, cruises and Hummers?

Finally, he says that because we can't expect people to behave prudently, he calls for:

This makes reflation even more desperately needed. I hope Mr. Bush will wake up, stop listening to Dr. Evil, his Treasury Secretary, Henry Paulson, and work with President-Elect Obama to get a large, serious stimulation package into the economic bloodstream pronto.

This is getting ugly.

The ugly part is listening to you Mr. Stein.

Advocating the impossible is puerile and idiotic, and that you managed to find an audience in Congress to spew this crap today in the context of the automaker bailout hearings is even more stupid.

If you're dumb enough to listen to someone who has this sort of public, easily-accessed record of accuracy you are better off with paying a weatherman to guide your investment and economic strategy.   The weatherman, after all, is right about whether it will rain at least half the time!

There is apparently some "backlash" to my idea of boycotting the automakers if they get bailed out, with people wondering where my anger was at Wall Street.  Gee, have 'ya read any of what I've written for the last year and a half folks?  The tens of thousands of dollars I've spent trying to stop this crap?  I've advocated what amounts to a personal credit boycott the entire time, have advocated that people look into whether it makes sense to walk away from their underwater homes, and have advocated other actions that amount to personal acts of retrenchment that will punish those who did unsound (and I'd argue evil) things in the context of Wall Street securitization and the credit bubble. 

Funny how people want an exemption when the anger against bailouts extends to them, eh? 

This, by the way, is one of the reasons that the idiocy of Wall Street (and Main Street) requires leadership from Washington to stop, and if its not forthcoming we will see the destruction of our economy.

EVERYONE is against bailouts - until its their pet industry, firm, or region that is going to be bailed out. 

Then the bleating and even threats begin.

Congress needs to let the adults into the room and banish the mouth-breathers who have consistently been wrong since the beginning of this mess, acting as an adult to remove the punch bowl and force the detox process that will purge excessive credit creation from the system.

You want to know why the market keeps going down?  Why various support levels keep falling, and the stock market, while it has sharp rallies from time to time, remains in a confirmed downtrend?  Why your 401k keeps shrinking?

It is happening because government keeps changing the rules and there is still no transparency nor is there any reasonable belief there will be any going forward, and the bleating continues to produce "free money" - which the market fully-understands is in fact not free.

As a consequence there is no way for anyone to value companies and industries on a clean, transparent basis.  Neither I or anyone else can determine if a given company, whether it be a bank or industrial concern, is fairly priced, overpriced, or underpriced in the stock market.

When I cannot determine the value of a company the only price at which I am willing to buy (as a stockholder) is for pennies, spreading my bets around with "stink bids" while being willing to be wrong at least half the time - because all I'm doing is guessing. 

There is no floor on valuations and thus prices because there is no way to derive an honest understanding of underlying value!

I have said this all along - so long as the government continues to meddle in this fashion the market is going to continue to fall, because literally every sector of the market is potentially subject to the same sort of crap!  So as each sector comes under suspicion it is taken out and sold and the market goes down further.

The private sources of money that, for example, came in to do a deal with Goldman or Citibank got screwed by the government and they will not be coming back.

The stupidity of our government agencies in this regard has destroyed the analytical foundation in our equity markets and investors have sold out as a consequence of their inability to derive fair metrics for any firm in the United States, along with the intentional destruction of private equity investments.  Examples?  Dick Bove's "generational buy" call in the financials.  Look at the XLF since then - you've lost more than HALF YOUR MONEY listening to him; in May the XLF, the financial sector ETF, was over $25, today it broke $11! 

I said at the time his call was idiotic as there was no possible way for him to derive an honest valuation and thus there was absolutely no possible way for anyone to know what a fair market price was for these firms. 

Read what I said at the time in full; or the condensed version:

"The Truth: The "powers that be" (including the media, The Fed and The Banks) are absolutely beside themselves with the possibility that stocks, especially bank stocks, might decline in value. For "why" see the top of this blog entry. If you fall for this you will be wiped out. DICK BOVE PUT A MARKET PERFORM RATING ON BEAR STEARNS STOCK ON MARCH 11th - JUST THREE DAYS BEFORE IT BLEW UP AND (THE FOLLOWING MONDAY) WENT TO $2! You have NOT and you WILL NOT see CNBC or DICK BOVE take responsibility for the wipe out of SEVERAL BILLION DOLLARS IN SHAREHOLDER WEALTH - when he could have preserved YOUR MONEY if he had told you the truth about our financial institutions and that YOU SHOULD SELL ALL OF THEM AS THERE ARE AND WILL BE MORE EXPLOSIONS, ALTHOUGH NEITHER HE OR I HAVE NO WAY TO KNOW WHICH ONES AND NEITHER DO ANY OF THE ANALYSTS SINCE WE CAN'T SEE HONEST BALANCE SHEETS!"

Who was right, six months later, judged objectively?

At the same time the machinations of the Treasury and Federal Reserve have destroyed liquidity in the credit markets and introduced insane distortions where investors have "front run" expected bailouts and handouts, then fled instantly when it becomes apparent that their bet wasn't going to work out.  This has produced repeated dislocations in the credit markets with the latest being the asset-backed credit market (ABX and CMBX) when Treasury suddenly repudiated the stated purpose of the EESA/TARP. 

These dislocations are not "natural outcomes" - they are the direct and proximate product of government interference with what should have been forced into the open and resolved last fall.

Recessions are the natural product of business "exuberance", but Depressions are caused by government interference with the normal and necessary recessionary adjustment process.

Thanks Washington; I now expect and am preparing for a Depression, and it is specifically due to your actions that it is going to come to pass. 

It is Washington's willful refusal to force full and complete transparency in the Capital Markets, instead extending ever-more TARPs and other means of obfuscation, including "23A" letters, "bank secrecy" among and in The Fed, along with intentional distortions in the credit markets that have "crowded out" private capital and caused it to flee that now threaten this nation and indeed the world with an Economic Depression.

We're not alone, of course.  Our idiocy is shared with the rest of the world, who if anything have done even more stupid things than us!  The leverage in European banks is, believe it or not, actually higher than ours, and they are more opaque! 

But that other people are drinking gasoline does not give you license to take a nip off a bottle of antifreeze under the argument that its "less harmful" to drink the glycol in comparative terms, when both will kill you very dead!

The Treasury, ABX and CMBX market today all continue to have their "pointers" aimed straight at economic depression, literally worsening by the hour.  There is every reason to believe we are on the precipice of a deflationary credit collapse that will make the 1930-32 bond market dislocation look like a cakewalk.

Washington must stop and in fact reverse this idiocy here and now before our economy lawn-darts into the ground at 600mph.