Mendacious Monday

Oh here we go again...

Trichet said he's not going to tolerate runaway inflation in the ECB:

"'Our mandate is clear: maintain price stability in the medium term and be credible in this exercise in a way that inflation expectations are firmly anchored,' he told the Sunday edition of El Pais.

The ECB defines price stability as keeping inflation just below 2 percent 'over the medium term' and has struggled to meet that goal since taking charge of monetary policy in 1999. The central bank left its key rate at 4 percent on May 10 to try to curb the jump in energy and food prices. Still, the inflation rate in the 15-nation euro economy rose to 3.6 percent, the ninth month it held above the ECB's target."

Yeah, the price inflation rate is roughly double your target, you have left the overnight call rate at 4% for months, and you're "meeting your mandate."

Liar.

Just like Fisher. Say one thing, do another.

Heh guys, have you figured out that "The Jawbone" has stopped working yet?

Oh, the lying isn't confined to the Central Banks. As noted in last week's ticker rich people have been doing it too:

"May 31 (Bloomberg) -- Real estate billionaire Igor Olenicoff used several offshore banks to hide money from U.S. tax authorities, according to his guilty plea and court records linking him to an indicted former private banker at UBS AG.

Olenicoff, chief executive officer and founder of Newport Beach, California-based Olen Properties Corp., lied to U.S. tax authorities about offshore accounts with Barclays Bank in the Bahamas, Salomon Smith Barney in London, UBS in Switzerland, and Neue Bank in Liechtenstein, according to papers filed with his Dec. 12 guilty plea in federal court in Santa Ana, California."

That's very nice.

Here we have Barclays, Salomon Smith Barney and UBS, all of which operate here in the United States.

Why do we allow this, as Americans, to continue?

Moody's has created a "new unit" that now rates firms and their debt based on the implied risk of default via the CDS market. Guess what?

"The implied ratings frequently show that swap traders think debt is in more danger of defaulting than Moody's credit ratings signify. And here's the kicker: The swaps traders are usually right.
.....
Ambac and MBIA have raised billions of dollars of new capital so that Moody's and Standard & Poor's would keep top ratings for the bond insurers -- and the rating firms have done just that.

Moody's implied-ratings group paints a completely different picture. Using CDS market prices, Munves's unit assigns implied ratings of Caa1 to both MBIA and Ambac. That's seven notches below junk and 15 below the official Moody's rating."

Now tell me again why the SEC, FDIC, OCC, OTS and The Fed (along with Congress, which oversees all of the above) allow these clowns to claim they have written "money good" swaps, thus allowing the banks to claim that they have hundreds of billions of "AAA" securities they don't have to reserve against?

If the "alternative view" is usually right, isn't ignoring it out-and-out fraud?

I think it is. The market should think it is. But because we have a market that has decided that The Fed will prevent anyone from ever having to mark to the market, and will literally destroy our currency and economy before their banker buddies have to face the truth, we have a market where these investment and commercial banks trade at higher than single-digit stock prices.

This gambit is extremely dangerous, for it only works out well if the market for the underlying assets (in this case houses and LBO debt) turns in a relatively short period of time. If not, then the coupon payments that would be necessary to "hide" the fact that there are shortfalls starts to eat into operating cash flow and eventually consumes it.

Consider the case of Lehman Brothers (NYSE: LEH). A quick check of Yahoo Finance shows total debt of $439 billion.

But the revenue number on their balance sheet is $17.7 billion, on a trailing 12 month period.

Let's assume that this debt has a coupon of 6%. If the coupon was to not be paid, and thus had to be picked up by Lehman to hide the default (the nice "Level 3" game) then $26 billion in cash would be required to do so - approaching double the firm's annual revenue!

Now clearly, not all of their debt would undergo this, but the disturbing part of this "back of the envelope" analysis is that its necessary at all. See, without the games we'd have all the CDS that AMBAC and MBI wrote considered to be of junk quality, which means that the underlying assets on which they were written wouldn't be on the balance sheets as "AAA" credit - they'd either be at the underlying credit of the insurer or the issue's actual strength, which ever is greater.

This would result in hundreds of billions of additional writedowns that would have to be taken right now and would force several of these institutions under Tier Capital limits - putting them at risk of forced seizure. It might even put some of the into negative equity immediately.

The problem with hiding all of this nonsense is that the truth eventually wins.

It may take months or years, but it eventually wins.

There are plenty of people who points to the Argentine Crisis where we had several banks that were technically insolvent but were "saved" by The Fed allowing them to defer marks. What they miss is that in this instance the debt was both foreign and it was limited to a few institutions.

This isn't the case here. In this instance the debt is domestic (housing related) and its virtually every bank in the land that is involved to one degree or another. Not all of them are broke by any rational analysis, but a large number of them are, and this is not a hundred billion dollar problem. As I have repeatedly outlined we are looking at $2.5-$3 trillion in actual credit losses, almost none of which have been recognized to date, and close to $10 trillion in "home value loss."

What's even worse is that the smaller commercial and regional banks are up to their necks in commercial real estate commitments (including condos), building is still going on at breakneck speeds, and the "available" signs are sprouting like mushrooms after a monsoon. These institutions can't be saved nor will they be, and anyone who thinks this will simply be "glossed over" in the real economy has rocks in their head.

Oh, and if you think the banks won't game their accounting any way they possibly can, you'd be very wrong. Take a gander at this:

"Merrill Lynch & Co., Citigroup Inc. and four other U.S. financial companies have used an accounting rule adopted last year to book almost $12 billion of revenue after a decline in prices of their own bonds. The rule, intended to expand the 'mark-to- market' accounting that banks use to record profits or losses on trading assets, allows them to report gains when market prices for their liabilities fall."

I've commented on this before, and while legal, it does show the depths to which these institutions will go to hide their true financial condition and prop their stock price.

Speaking of which there are rumors all over the street that UK banking regulators have conducted "raids" at a number of institutions this morning. Hmmmm.... is the UK ahead of the curve here compared to regulators in the United States, where it sure looks like we're willing to "overlook" anything that might impact stock prices?

The WSJ had an interesting piece on price inflation in the weekend edition where they basically dismissed the consumer inflation expectations gauge as being "unrealistic":

"For inflation to become embedded in the economy, workers must win significant wage increases. They will be hard-pressed to do so now, while unemployment is rising, and may be more likely to accept a loss in purchasing power.

So far, wage gains remain restrained. Increases in average hourly earnings, which the Fed watches closely, are decelerating: Earnings rose by a seasonally adjusted 3.4% in April from the year before, compared with a year-to-year gain of 3.7% in March, according to the Labor Department. The increase was the smallest in nearly two years. That is one reason several Fed officials have suggested that inflation expectations remain "well-anchored.""

There is a "small problem" with that view, should it prove correct.

Its the bolded few words.

See, a loss in purchasing power means...... recession, and not a "short, shallow growcession" either. A real rip-snorting negative real GDP recession.

Don't believe for a second that this is unlikely.

Among the folks who have announced huge price increases in the last couple of weeks are Dow Chemical (up to 20%) and their largest competitors (ditto), Kimberly-Clark (8% across the board for your TP), Kraft Foods (cheese anyone?), Michelin (tires), and more. Airlines are now trying to nickel-and-dollar people to death with surcharges such as charging for the first checked bag. Freight haulers are added 20 or even 30% fuel surcharges.

Now Paulson has himself a nasty little problem to go with the rest of America:

"June 2 (Bloomberg) -- As if a slowing economy, a falling dollar, faster inflation and a credit crunch weren't enough headaches for U.S. Treasury Secretary Henry Paulson, he now has to worry that the Federal Reserve will undermine the return of the one-year bill."

Actually, that's the other way around. The return will go higher, while the price goes lower, due to The Fed withdrawing its support.

The real nasty in that article though is here:

"The Fed is selling Treasury bills at the fastest pace since it was founded in 1913 to support bank- lending programs meant to boost confidence in financial markets. The Fed owns $34.3 billion of the securities, down from $267 billion, or 27 percent of the market, in December."

Uh, wait a second. Dr. Spinmeister, please stop and tell the truth.

What truth? Try this.

From $267 billion to $34.3 billion is a decrease of 88%. Yes, it was 27% of the market back then and is much less now, but the more important fact here is that The Fed has sold off 88% of its Treasury Securities and replaced them with garbage CDOs and other toilet paper from the banks! What happens when The Fed runs out of good collateral to sell?

Uh, gee, you think that day has basically arrived?

The not funny part of this is that when prodded a few months ago on "what else should be done to help housing", Bernanke told Congress he couldn't do much if any more and it was up to them.

The Senators and Reps, of course, took this as a direct cue to spend more money, which they promptly did, and now they have a huge problem because all that deficit spending has turned into a debt monster that requires feeding! And how do we feed it? Why we sell more Treasuries, which in turn requires that someone buy them - and if they don't, the yield goes up and the price down.

So after prodding Congress to spend more than it makes The Fed withdraws its support for that debt market, having given the money it would have used to buy them to the banks to prop them up, removing roughly $200 billion of these Treasuries from its holdings in the process!

We now face the very real possibility that the long end (if not the entire curve) will shift dramatically upward devaluing everyone's house even further, shutting down even more of the credit engine, and doing even more economic damage, right into the start of a consumer-led recession.

The sad reality of this situation is that we allowed our government, Greenspan and Bernanke to do this to us while we sat back and cheered and we're still doing it.

All during the '00 decade we loved our credit cards (both literally and figuratively in the form of demanded entitlements and HELOCs), never questioning how it is that someone can realistically be expected to buy a government bond that yields less than the actual price inflation - that is, debasement of purchasing power - or how we can reasonably expect to keep spending more than we make personally on an indefinite basis.

How does that happen?

Well, quite simply, it happens because we exported our manufacturing to China and similar places while deciding that importing oil beat drilling for it here, and those "suppliers", to avoid insane monetary inflation, "sterilized" their incoming funds flows by sopping up our government (and private-sector) bonds. This lowered the yield on these instruments below the price-inflation-adjusted rate, which means that these nations were willing to take an intentional loss to keep the game going.

And we were willing to feed it.

The problem with such games is that they are by definition unsustainable. We can argue about when the explosion will come, but not if. Like a scuba tank that is rated for 3,000 psi, you might get away with 3500, 4000, 5000 or even 6000 psi in the tank, but that the tank will eventually fail if you keep adding pressure to it is axiomatic.

In addition, the more pressure you put in there, the bigger the blast and damage when it does come apart.

Now add to this that we have Mr. Mendacious, that is, Bernanke, who prodded our government into yet more deficit spending which he knew he couldn't and wouldn't backstop and you literally have The Fed, Treasury and Congress all having a knife-fight at we the citizen's expense.

Think this is just some "anecdote" or "someone else's problem" eh? Uh, no, says the WSJ on Page 1 today:

"After a long binge of borrowing, U.S. consumers face a credit crunch and a sagging economy. To sustain their living standards, many Americans are doing what comes naturally: scrambling to raise more cash.
.....
As consumers max out their credit lines and banks clamp down on lending, many older and middle-class Americans are resorting to pricey, often-risky alternatives to stay afloat. Some are depleting their retirement accounts, tapping 401(k)s for both loans and hardship withdrawals. Some new fast-cash options allow homeowners to squeeze equity from their houses -- without the burden of monthly payments. One new product offers a one-time payment. In exchange, the company shares in as much as 50% of any future gain or loss in the property's value, typically collecting proceeds when the house is sold."

Absolutely. It is essential that we Americans live far beyond our ability to earn for as long as possible, even if it means that our life savings will be wiped out and we will wind up broke and under a bridge when we're 70, as Social Security and Medicare are repudiated just when we absolutely must have them.

The merchants of death, er, debt, are lined up to find even more inventive ways to steal your wealth - not that they really needed anything more creative than the last round.... or did they?

Or worse, we will go bust and due to the bankruptcy law changes won't be able to discharge our debts - we'll be stuck with garnishments until we die.

Stripping off every nickel of home equity (while the bankers and their surrogates pocketed their fees with a snicker) wasn't enough was for the "gilded age" Americans who are entitled to two Hummers and a 3500 sqft "McMansion" while our kids are entitled to IPODs, XBOXes and PS3s with a PSP on top. Never mind that our occupation is "hairdresser"; we'll claim $300,000 of income a year and the bank will nod and believe it.

We've done this to ourselves (to the gleeful cheers of those in government who promise us cake and circuses, along with the bankers who do it to us "fast and sleazy") while at the same time throwing our children and grandchildren under the rapidly descending mountain of debt that threatens to crush us all.

Our idiocracy is not limited to our private lives either; we make the same demands of Government, as if it can just fabricate the things we want (health care, prescription drugs, housing, food) out of thin air. Of course it cannot; Government can only take from one person and give to another; it in fact produces nothing.

We spend three months teaching "sex education" in our high schools but not three minutes on compound interest. We have so-called "history" classes that go over Thanksgiving, but we never mention in those classes that America began with an attempt at socialism - The Mayflower Compact - and that its effects killed fully half of the Colonists the first winter. We have an "educational system" that produces "high school graduates" that cannot tell you who the Vice President, Secretary of State, or their two Senators are. In my 10 years of having people working for me nearly half of all high school graduates who were interviewed for a job could not compute the sales tax due on a $5 purchase in their head, nor make change for a $20 on that same sale. We call these people well-educated and name the program "No child left behind." In Florida we have a state testing program called "FCAT"; the teachers omit any part of the curriculum in the state standards that is not tested so they can get "good scores", and the county school board looks the other way. What's "not tested"? Significant parts of the science curriculum and all of history. Great.

We as Americans need to make some hard choices, and we need to make them right now.

We can demand that this nutball tactic of "hide the sausage" stop, excess liquidity be withdrawn and losses recognized. We can stop acting like we're entitled to that which we do not earn, stop spending beyond our earnings capacity, pay down the debt we are able and default on that which we cannot. We will take a rough, nasty, deep recession. It will do severe damage to some businesses, while others will fail outright. Those who overbought homes (and toys) beyond their debt-carrying capacity will go bankrupt. Homes will "reprice" to a sustainable level, at which point they will be purchased by people who actually can afford to live in them. Excesses in business will be purged.

Our economy will be damaged, but it will also recover.

The alternative, doing nothing or worse, screaming for yet another bailout, means that we allow our elected and unelected political leaders to cover up the truth, lie, distort and steal, often from each other, but always from all of us. You will continue to see your purchasing power debased by 5, 10 or even 20% annually, all so that greedy Wall Street bankers don't have to confess to their losses and stop getting their hundred-million dollar bonuses, Congress doesn't have to confront these bastards and force them to tell the truth to the American people, and The Fed can pit both against the middle while laughing the entire time, smug in the knowledge that Congress will eat its losses and shovel them into The People's tax bill.

The "knife fight" between The Fed, Congress and Wall Street will continue and the cuts being taken will come out of your hide. We will witness partisanship become the way that all this is "explained away" as November approaches, with each side pointing fingers at each other, when in truth we should be pointing fingers at ourselves. The election will come and whoever takes office will preside over an all-on economic meltdown; the solution out of Congress will be protectionism to "stop the greedy bastards that are destroying our country", whether it be in oil or other imports. The lessons of Smoot-Hawley will be relearned, and more.

The difference is that if you stand up and stop this now, and you're part of the 80% of America that neither profited from or participated in the fraud, you stop taking damage from it - you stop the fraudsters from stealing your money in order to cover up their losses. We then can have an honest debate leading to the November elections, and while it is too much to expect that the usual partisan bickering will not dominate, we will at least have set forth a path for Government to follow - no bail-outs, no games, no lies - and we the people will have made clear that we mean it.

Only those who profited from or participated in this fraud have a true reason to see it continue, but they are hell-bent and determined to try to tell you that you should allow it, and they have the full complicity and support of The Fed, Congress and the businesses who participated in it.

When are you going to stand up and stop this folks? What does it take before you show up en-masse in Washington DC, in your State Capitols and on Wall Street - literally flooding the streets and shutting down both government and commerce - until ALL the game-playing ceases?

Will you do it before or after you are jobless, broke and homeless?

That, my friends, is the choice you have to make, and you're running out of time.

"If you choose not to decide, you still have made a choice!"