Entries by Karl Denninger

You know it's going to get good when LIESman says something like "there is a point in time when ignorance goes from being amusing to being dangerous" to a grizzled trader like Santelli.

Well, Liesman did, and.... (we'll do facts after the video)

Now for the facts:

Any government can pump stock prices of insolvent institutions for a while by allowing them to lie on their balance sheets.  The poster child for this is, of course, Lehman brothers.  I reproduce for your edification a chart showing two quarterly reports during which Lehman was arguably insolvent (light gray) and then (in pink) a further period of time spanning more than a month when their counterparties knew they had no cash, yet FRBNY and The Fed, including but not limited to FRBNY, Paulson, Geithner and every other bank they dealt with knew they had no money.  Yet their stock continued to trade, the company continued along, and Dick Fuld was on CNBS saying he was going to "burn the shorts."

What was the outcome Steve?  Was it "all ok in the end" even though for a period of more than six months the stock continued to trade and in fact after that first report went up significantly?

What caused the collapse?  They ran out of cash flow.

Now about those other large banks and their balance sheets....

As a corollary to the above governments can also pump markets generally by replacing private demand in GDP with borrowing and spending, just as you can by using your credit card even though your income has been cut off.  This can and does lead to huge market rallies - for a while.  However, unless you can manage to increase credit in the system generally, meaning that private parties "come back" and take over from government, eventually the government becomes unable to sustain such a practice, just as you become unable to sustain such a practice.  In point of fact the government has borrowed and spent ten percent of GDP (in addition to all that it was spending before) for the last two years.  This has prevented the recognition of an economic depression in the "statistics" put forward by government, but that replacement of private demand is not, in fact, private demand!  Thus you have unemployment and underemployment, even under the government's statistics (among those who want jobs), hovering near one person in five in the economy, and only 60% of the labor force is actually working.  The other 40% of working-age, non-institutionalized people, are not working - which means they're drawing on social programs of some sort.  This, of course, exacerbates the demand for the government to continue borrowing and spending that additional 10% of GDP.

What will cause this to collapse?  The same thing - recognition that the banks are in fact broke (and there are a bunch of them that are), inability to sell or roll over enough debt to satisfy the leaches in society, one of the rating agencies growing a pair of balls and downgrading the United States and more.  Indeed, a lockup in the credit markets could easily occur just as it did in 2008, and for the same reasons - a recognition that "heh that jackass over there has no good collateral!"

Can the government keep this from happening forever?  No.  

Can it do so for "an extended period of time"?  Sure, but for exactly how long?

That's the key, isn't it?  We're not running an 89% debt-to-GDP ratio, it's in fact over 500%.  We're lying just as Lehman was lying, but on a grader scale.  Yet when Rick Santelli brings this up, the pump monkeys go nuts.

Why?

Well gee, if you want to sell something to someone that is based on a fraudulent premise, how much luck will you have if the truth is exposed?

'Nuff said.

Wen "cats in the kettle" Jaibao spouted:

“I don’t think the renminbi is undervalued,” Wen said yesterday at a press conference in Beijing marking the end of China’s annual parliamentary meetings, using another term for the yuan. “We oppose countries pointing fingers at each other and even forcing a country to appreciate its currency.”

Oh really?

It's time that we stop the the BS here with regard to China.

The entire premise of so-called "Free Trade" with the Chinese was predicated on the belief that if we opened our borders to their products on a "no tariff" basis that we would, over time, change their political system.  That is, we would import cheap Chinese plastic junk and export democracy.  More or less.

Well, we got all the cheap DVD players but they didn't get any democracy.  Quite to the contrary.  There have been no meaningful improvements in areas of environmental protection, workers rights and wages or political freedom.  Indeed, the recent dust-up with Google just underlines the reality in China: Their government is a band of murderous brigands and thugs.

Disagree with them inside their nation, refuse to censor The Internet, for example, so that people can't read about Falun Gong and China will be happy to arrest the executives of your firm inside the nation and provide this as "corrective influence" to your head:

Oh, they send the 50 cent bill for it to your family too.  Isn't that special?

At least in this country they don't shoot people for talking about the evil-doing that both private parties and government engage in.  If they did, well, I'd be long-dead.

Second, China hasn't changed its spots a bit.  It has pursued a mercantilist policy for over two decades while at the same time stealing anything that isn't nailed down (and some things that are), including such wonders as our technological prowess in nuclear warhead design.  Argue the defensive merits of nukes in a silo all you want - when they're flying, they're anything but defensive.

In short our policies have been an abject failure.  We've destroyed consumer product manufacturing in The United States, we've shuffled a huge amount of wealth over to China due to their manipulated currency, we've trashed our real standard of living and replaced production with debt and the supposed benefits of an open and free market, along with a democratic political system in China have failed to materialize.

It's time to stop the stupid.  It's time to force those firms who want to offshore production to return the so-called "savings" to the United States as something more than executive bonuses.  And it's time to treat those who are a communist dictatorship as exactly that.

The simplest solution is to hit China with a 25% tariff on everything - literally everything - and close the market entirely to anything coming over here that contains stolen intellectual property.

China has done us one better with their "liquidity program."  Instead of allowing the economy to adjust and build internal demand, they have stoked a huge bubble in fixed assets.  This, coming on the back of what we just experienced in our property market, is one of the most-pernicious and outrageous series of acts I've seen out of a sovereign in a long time.  Couple that with questionable (at best) "official" statistics on China's economy and you've got the ingredients for real trouble.

There are often claims that we're "hostage" to China's holdings of Treasuries and other bonds.  Nonsense.  First, if China sells them they cut off their own nose.  Second, in an extreme circumstance we could easily institute capital controls that would effectively neuter their influence entirely - and they know it.  Third, it's time for us to live within our means anyway, so if China was to provoke that, where's the foul?  There's a solid argument to made for such an event being positive for America, not negative.  And finally, China needs us more than we need them - should we throw up a complete barrier to their cheap junk, along with the Euro zone who is likewise tired of the manipulation their mercantilist game would collapse on their heads.

It's time to call the curtain down on the cock-and-bull story coming from China.  We have not achieved our goals with "engagement" and "trade", and won't.  Our nation has been intentionally and severely damaged by these thugs who have adopted a mercantilist "raid 'em and loot 'em" approach to commerce, then hidden behind their communist ability to manipulate and even kill those who disagree with them.  If we don't deal with this now, we will wind up having to deal with it militarily, and it will be even less-pleasant than telling them to stick it with the slave-labor-produced, water-fouling and air-blackening $30 DVD players.

In short, it's time for us to grow a pair of balls and tell the Chinese to put it where the sun doesn't shine, neutering their interference and intentional distortion of trade balance and currency valuation.

We didn't get what we bargained for, so it's time for us to change the bargain.

An ugly thought - what if we're not all Madoff, we're all Lehman?  Balance sheet games are the worst, because they encompass all manner of embezzlement.  Join us for a hard-hitting hour focused on the Jenner and Block report and what it means for your money - and the markets.

3:30 today Central Time at http://blogtalkradio.com/marketticker

Now the interesting part of the game begins....

This year, for the first time since the 1980s, when Congress last overhauled Social Security, the retirement program is projected to pay out more in benefits than it collects in taxes -- nearly $29 billion more.

In a world where we talk about trillions, this doesn't sound like much.  But it's not the amount that's the problem - it's the direction.

For decades government has cooked its books by stealing the Social Security taxes you pay.  This was the infamous "lock box" debate had during Gore's campaign.  Too bad Mr. "the world's getting hotter so I have to live in my 20,000 sqft mansion with the AC blasting in all 79 rooms" Gore decided to make a partisan political issue out of something that his boss (that would be Herr Clinton) had practiced himself to make the (false) claim that he had run a surplus!

There was no surplus in the 1990s folks.  Clinton, like the Presidents before and after him (from both sides of the aisle) simply stole the FICA tax receipts, replacing them with non-marketable bonds. 

If you're wondering why we have hinky accounting in our banks, a good part of the reason is that our government cooks the hell out of the books themselves. 

There's little reason for private business to behave ethically when our government won't, and there's little risk of prosecution when the scamming starts at the very top.

In order for the government to redeem these bonds it will have to issue more marketable debt, dollar-for-dollar.  So if you look at the "Debt To The Penny" screen, what will begin to happen is that the "Intragovernmental holdings" (and boy are they mental) will shrink a bit, while the "Debt Held By the Public" line will of course grow.

This is all fine and well provided that (1) the first doesn't run out and (2) the government doesn't have trouble selling the debt in the second.

The NY Times perpetuates the "big lie" about FICA, specifically:

Social Security is financed by payroll taxes -- employers and employees must each pay a 6.2 percent tax on workers' earnings up to $106,800. Retirees can start getting early, reduced benefits at age 62. They get full benefits if they wait until they turn 66. Those born after 1960 will have to wait until they turn 67.

Bull.  Employees pay 12.4%.  Each and every one.  If you're self-employed, you pay it all right up front.  But if you work for someone else, they reduce your salary (or hourly wage) offer by 6.2%.  You pay it, not the employer.  No business ever pays a penny in tax - it is always shifted to the person that it allegedly "benefits" or "costs", and in this case that's you.

The problem with Social Security (and Medicare) is that the boomers number 78 million and comprise the largest block of our demographic.  As they shift from working to retired over time there will be paradigm shifts in both entitlement program funding and private investment.  Boomers, even with the "great recession" dives in their portfolios (before you cheer about the "recovery" in the market, realize that it's still 30% off the recent high in 2007, and the Nasdaq is more than 50% off its all-time high in 2000!) still have considerable wealth in their portfolios.  Those who didn't play ATM machine with their house have wealth there.  All of this will get tapped and dissipated as these people age out of the workforce.  It is inevitable.

During the "salad years" of the boomers, roughly 50 years of age to 60 or thereabouts, they have tremendously added to market values of, well, virtually everything.  These are widely regarded as the peak earnings years for most people.  Starting in 1946 the peak began in 1996 and with the end in 1960 the "tail" of the boomers hit the start of their peak years this year - in 2010.  But the "Great Recession" has truncated many of these people's peak years, as the most expensive employees are often the first to be let go and the last to be rehired during bad times - so it remains an open question whether those born in the early 1960s (of which I am one) will indeed hit our "peak years" as expected, or whether we just had one of our earning hands chopped off.  Time will tell.

In any event in another 10 years that peak will have passed, and the boomer generation will have entered the "Draw It Down" period in their lives.  This is an inexorable process, and one that cannot be prevented.  Nearly 80 million people shifting from squirrels socking away nuts to eating those nuts is going to change many things, and market valuations for various assets will be one of the larger changes that most people are entirely unprepared for.

More than a decade ago I wrote a paper called "Investable Capital" which, unfortunately, I no longer have available for republication.  What's worse is that some of the data set has been lost - at least I think it has.  I expected that the negative FICA draw would begin in 2015, and that this would make a major shift in all market valuations.  We're five yeas ahead of that time, largely due to the bubble-blowing.  The original paper saw the Internet Bubble (because it was nascent at the time) but did not predict what Bush and Greedspan would do to try to arrest the effect of it popping.

We talk about ratings agencies downgrading the US Debt - they should have done it a decade ago.  Why?  Because we continually call the debt-to-GDP ratio as $12.57 trillion to ~$14 trillion "right", or 89.8%, while ignoring the claimed amounts of the Social Security and Medicare promises.  But unless you're going to tell Granny that she's not going to get her check (or her health care), along with the 80 million boomers (all of who will instantly vote out anyone who tries to tamper with those programs, whether the money exists or not!) those "promises" are real.

So what's the real debt-to-GDP ratio of the federal government?  About 500%, if one assumes the forward liabilities are on the low end of CBO and private estimates, or $60 trillion.  This makes the total "debt" $72 trillion dollars and the ratio 514%!

No nation has ever managed to pull that off past the point of recognition of these costs.  The reason is simple - interest costs.  Compute the damage that, say, 5% interest imposes on $72 trillion and you blanch immediately (that's $3.6 trillion by the way, or more than our entire federal budget!)  We get away with not paying that by sleight-of-hand, effectively playing "Option ARM" and adding to the principal.  But all Option ARMs have a recast point.  We're just not sure where this one is.

Once the "recognition point" happens the decline in all asset classes becomes both relentless and instantaneous.  The power of self-delusion is powerful, but it cannot overcome the math - not in the long term.

The Government's view?

Good luck to the politician who reneges on that debt, said Barbara Kennelly, a former Democratic congresswoman from Connecticut who is now president of the National Committee to Preserve Social Security and Medicare.

''Those bonds are protected by the full faith and credit of the United States of America,'' Kennelly said. ''They're as solid as what we owe China and Japan.''

China and Japan aren't going to get paid either.

This is unbelievable:

The war over mark-to-market accounting is about to get hot, again. In coming weeks, the Financial Accounting Standards Board is likely to propose that banks expand their use of market values for financial assets such as loans, according to people familiar with the matter. That departs from current practices in which banks hold loans at their original cost and create a reserve based on their own view of potential losses. 

Let's cut the pump-monkey crap and recall for everyone exactly how that "current practice" came to be, shall we?

Back last spring as I have written about more than once, the dishonorable Mr. Kanjorsky, Barney Frank's stooge, held a hearing in which he basically put a gun to FASB's head and informed them that they would allow banks to mark their loans to model - or Congress would introduce a law overriding FASB.

FASB objected, but it didn't matter.  In the end they relented.

This was the catalyst for the huge rally in the stock market.  It was a declaration of legalized accounting fraud from the people who oversee financial accounting matters.

Now, a year later, after Barney Frank comes to realize that it was precisely this "gun up your butt" approach to financial regulation that has made all efforts to modify home loans (including cramdowns) worthless, we see some effort to change things.

Why does it make modifications worthless?  Simple - a second loan behind an underwater first (e.g. a HELOC) is worth zero if the first is underwater and forecloses.  That's because it is a subordinate lien and is only entitled to be paid (at all) if the first is fully recovered.  In a case where the first is underwater, it won't be recovered; ergo, the second is worth exactly nothing.

But "mark to fantasy", otherwise known (by me anyway) as legalized accounting fraud, has these banks carrying the loan on their books at or near 100 cents on the dollar.  That's because "the loss hasn't happened yet", so since they're entitled to "model" a potential outcome 30 years in the future, they can say "well property prices won't stay down for that long, so we don't have to take the loss!"

It's bogus of course as the odds of someone paying on an underwater loan for a decade are close to zero.  Anything that interrupts the borrower's cash flow - a loss of job, a medical problem, or simply being tired of taking it in the cornhole month after month while they could buy a house across town for half the price - results in a foreclosure, because the property isn't worth enough to sell and extinguish the mortgage.

Under mark-to-market rules banks had to price these loans at the current market's appraisal of their worth.  Thus, as home prices declined and people were more and more underwater the market price would fall toward the zero that would be recovered if the foreclosure happened.  This would in turn make the foreclosure no more damaging to the bank balance sheet than not foreclosing, and thus, the market would tend to clear.

But no!  We can't have that!  So instead we have this fantasy.  The consequence is banks letting people live in a house that they haven't made a payment on in a year - and sometimes two.  Nobody cares if the loan is performing or not, because it was probably sold to some poor bastard and the servicer is advancing interest payments anyway!  Moody's, S&P and Fitch keep downgrading these bonds in a furious fusillade, but nobody cares at the bank, because the bank doesn't hold that paper - some fool pension fund does.

(What's left unsaid there, of course, is that said pension fund might be getting their interest payments now, but they sure as hell will not get the principal at maturity - because it doesn't exist.  What that will do to the pension funds is obvious, but heh, so long as the banks get to lie, it's all ok that pensioners get screwed, right?)

What the bank holds is the HELOC and they are often the servicer as well.  They have a terrible conflict of interest in this regard because if they foreclose then the HELOC is worth nothing, and they take the full dollar hit right here and now.  If that was to be done across the board with these delinquent loans my analysis shows that many banks Tier 1 common equity levels would be forced below regulatory minimums and in some cases would be destroyed altogether.  The latter would force immediate FDIC seizure.   It is thus cheaper to advance the interest payment to the bondholder and pretend, even though the payments aren't coming in, praying that somehow the borrower who hasn't made a payment in a year will suddenly come up with $25,000 to "come current."  (Yeah, right.)

Let me be absolutely crystal-clear - this is an outright scam promulgated by the same jackassery in The Government (SEC, Treasury and Congress) and The Fed that led to the destruction of Lehman.  Instead of forcing these institutions to take their marks and admit to their losses they were allowed to put forward abjectly false and misleading financial statements.  In the case of Lehman it appears the law was broken.  But in the case of the big banks today Congress got the rules changed by shoving a gun up FASB's nose so as to make the INTENTIONAL false reporting of asset values a lawful act.

This should have absolutely never, ever happened and those dishonorable knaves in Congress responsible should resign NOW.

These banks should have been taken into receivership by the FDIC and closed.  We would still have the $3 trillion we have blown trying to prop up the economy - well more than enough to pay off the depositors when the assets were liquidated.  Deposits would have been dispersed to strong community banks, lending them further strength and ability to lend to qualified borrowers.  The scam-meisters on Wall Street would have lost their jobs and been closed down, we would have taken a horrific hit in the market but it would now be over and the economy would truly be on the mend.

Instead we lied and pretended, creating a false dawn and a market rally based on nothing more than a scam.  This cannot hold indefinitely, and yet the conditions for a true recovery in those asset prices will not happen for over a decade - if ever.  If we do not stop this insanity cash flow will force the issue eventually and by then The Government will have blown its wad furiously trying to replace 10% of GDP in the private market, as it has for the last two years, and thus be unable to fund the FDIC deficiency.

The simple fact of the matter is that as I have written about for over three years I absolutely believe that if valued on market prices these banks were insolvent then and are today.  Hiding the fact of that insolvency with bogus accounting fictions does nothing to solve the problems that face us and in chokes off lending, prevents markets (especially housing and commercial real estate) from clearing and will absolutely prevent any durable economic recovery from occurring.

Oh yes, it has pumped the stock market to the moon, but the test is not whether the stock market goes to the moon - it is whether the market price reasonably reflects underlying fundamental value, and there the evidence is clear - it does not.

The danger here from continued obfuscation could not be more grave.  We may have already passed the point where the government is capable of funding the deficiency to come in the FDIC accounts, but if we do not stop this crap, it is a certainty that such will occur, exactly as did in Iceland.