Ticker Classics

Fraudulent Education Friday

nospam@example.com (Genesis) — Sun, 08 Jun 2008 15:25:00 -0500

Let's continue today with how we got here, that is, why we seem to think that we should be able to poop out babies without regards to whether we can pay to raise them, have risky sex and bill someone else for the HIV treatment, or stuff our pie holes until we weigh 400lbs and then expect society to buy our diabetes medication.

Or, for that matter, "deserve" a $500,000 house if we make $8/hour cutting hair.

(If you want the run-up to this, read yesterday's Ticker)

Someone commented today that I forgot to rant about the government schools that are at the base of all this crap.

Well, guess what? Yesterday I got yet another dose of it as my daughter "graduated" 5th grade (where did THAT stupidity come from; when I was in school you graduated exactly once, at the end of your 12th grade year) and got to sit through something that I have ranted to the school about before.

As I was checking my daughter out of that particular part of the government indoctrination unit for the last time, I managed to corral one Ms. Norris, the Principal, and give her my screed about their "ceremony". She had not heard it before, although her predecessors had - this was her first year.

Specifically, they "recognized" every 5th grade student for "outstanding achievement in art education, musical education and physical education", just as they had in every previous year.

Some students were also recognized for actual achievements - you know, something that exceeded waking up and going to school?

But wait - can't some students be outstanding in their prowess in art or music, at minimum?

Certainly.

But if there are over 100 students, can all of any group be outstanding?

No.

out·stand·ing (adj.)
1. Standing out among others of its kind; prominent.
2. Superior to others of its kind; distinguished.
3. Projecting upward or outward; standing out.

So if we have 100+ students, all cannot be superior to others of their kind by definition.

Of course vocabulary is supposed to be part of your primary education, right? Guess what?

This sort of intentional lie - redefine words so they mean whatever you want them to today is a big part of how we managed to destroy individuality and achievement in America!

Why?

Because we refuse to address the truth and this refusal is a systemic and intentional act that begins on the first day of school and proceeds through the entire so-called "educational system."

On that very first day you bring your supplies to school in Kindergarten - and immediately some part of them are confiscated for "the communal good." Do YOU put those THIRTY SIX pencils in YOUR desk? No! Teacher "keeps them" and "hands them out." I raised unholy hell about this six years ago when my kid started Kindergarten, to no avail.

Do you see what's going on here?

Johnny learns on the first damn day in his government indoctrination class that "the government will dole out whatever you need, when you need it, and will take whatever you have in order to do that."

Of course they don't say that, but that's what's going on! Its "not fair" that a "poor" student might not have enough money to buy all those supplies they proscribe, so "Teacher" (the government) will make sure that those who have more pay taxes to support those who have less. This sort of intentional mental "bending" starts when you're FIVE and it never lets up!

It has become more important that we make all of our kids "feel good" than recognize those who truly have distinguished themselves via their achievements.

It is more important that everyone is the same than to recognize the truth that we are all individuals with different abilities, capacity for success, and most importantly, we will have different outcomes in life.

As a direct consequence of this we have a class of over 100 students and every single one of them got an identical award, with the standard of achievement being that you are capable of fogging a mirror and putting up with the school's crap without shooting spitballs at the teacher!

This intentionally and directly derogates those who truly do stand out through their efforts and discourages them from doing so in the future.

It in fact is a boot to every student's head urging them NOT to work hard since they get NO MATERIAL RECOGNITION THAT EXTENDS BEYOND THOSE WHO DO LESS.

This is an explicit and intentional act, it has been going on for more than 20 years, and it is why we are here in this nation today.

When I was in school the "A/B" honor roll was the lowest form of recognized achievement. All "B"s? Not good enough. You needed at least one "A", and we were graded on a 7-point scale.

First we considered someone with all "B"s on a ten point scale to be "honor roll". This is not a trivial difference at all; it is a full six percentage point derogation and even more when one considers that "all Bs" was good enough.

Based on the standards in place when I was in school, we are now handing out "Honor Roll" awards to students who are getting straight Cs! That is, you get an award for AVERAGE performance, based on a real grading scale.

But even that sort of "dumbing it down" wasn't enough! Next, we added "outstanding achievement awards" for physical education, art education and music education and then awarded them for doing nothing more than showing up in class!

So now "outstanding" means "the truant officer didn't come and pick you up, arresting your parents at the same time"?

Nor does this stupidity stop when one leaves elementary school.

I have a number of friends who have kids in high school, and have for over 20 years. For that entire time I have asked each of them who I have become acquainted with at some point in the time we've known each other, usually as they prepare to go off to college, if they can tell me how much a $10 pizza charged on the credit card that they will have shoved down their throat the instant they set foot on campus (at 18) will cost them at age 65 as a consequence of eating it instead of placing that amount in an S&P 500 index fund that would return, on average, 10% annually.

Not one of them could tell me how to figure it out.

In fact the foregone gains on that $10 over the space of 47 years is $881.98.

So if you eat one pizza a week in college, and are in college 40 out of the 52 weeks of the year for four years, you will have spent $1600 but at 65 you could have instead had $141,115.98.

We spend a full semester or more of our high school student's time in "health class" teaching them about "safer sex" but we do not spend 30 minutes teaching them about compound earnings or compound interest.

You want to know why not?

Because if we taught our kids this they would literally riot when they ran those numbers for Social Security and Medicare, and the first targets of their action would be us as their parents who are sticking them with a bill there is no possible way they can pay without bankrupting themselves and our nation.

So instead we lie by omission and over time little Johnny becomes bigger Johnny and he decides he wants a house. He goes and talks to a nicely-dressed banker or mortgage broker who looks at his pay stub and says "you can afford a $400,000 house."

What Johnny doesn't know, because you didn't insist that he learn, is that he can't afford any such thing. That "loan" is in fact a negative-amortization exploding debt bomb but Johnny is too ignorant to figure it out.

He's ignorant because you intentionally dumbed down his schooling, lest he figure out that dear old Mom and Dad have every intention of bending him over the table and raping him repeatedly when they get older, as there is not a snowball's chance in HELL that the Ponzi Scams called "Social Security" and "Medicare" can be sustained.

So to hide YOUR intent to screw YOUR child you intentionally failed to teach him or her how to calculate these things out for him or herself, afraid that Johnny or Jane will figure it out and tell YOU to go straight to hell for mortgaging their future.

Of course after the first generation does this to their kids, the next generation - the 20-somethings of today - don't know any better! They poop out a few kids but now they don't know what they should be teaching their kids - but aren't.

And the best part of it is that our government indoctrination centers, otherwise called "schools", don't teach this stuff either so Johnny can protect himself from the predators on both Wall and Main Streets, because by gosh, if they did, Johnny would figure out that the government is running that very same gigantic Ponzi Scheme!

Now let's take an objective look at educational standards to see if I'm overstating my case.

I'm going to use for this purpose the infamous 1895 eighth grade graduation test from Salnia, KS.

Snopes has gone after this and claimed that this does "not" demonstrate a shocking lack of educational standards. Notice that they say nothing about the authenticity of the test - that's because, after lots of research, plenty of people have confirmed that it IS authentic!

I'll accept about half of the criticism of the test at face value. Certainly, the history portion of the test is unfair by today's standards - it focuses on the topical events of the time, which we would pay a different level of attention to - and justly so. Geography, unless you live in Kansas, I'll give you half on, considering that a good part of the questions were Kansas-specific.

But how about the grammar portion? Hmmmm..... has "The King's English" changed? Oh I think not. More to the point, are we more concerned with "diversity" in language today than proper grammar? Ebonics anyone?

How about arithmetic? While you can probably argue that some of the units demanded in that section of the test are arcane for all but an agrarian society (e.g. rods and bushels), a few of those questions stuck out instantly given the financial situation we find ourselves in. Specifically:

6. Find the interest of $512.60 for 8 months and 18 days at 7 percent.
8. Find bank discount on $300 for 90 days (no grace) at 10 percent.
10.Write a Bank Check, a Promissory Note, and a Receipt.

Well, well, well. Now isn't that interesting. A substantial part of the arithmetic portion of the test bore specifically on matters of finance that would be of interest (pun intended) to anyone who was borrowing money!

Do we teach any of this today? Of course not! Walk into any car dealer - "how much payment can you afford" becomes the primary focus of any negotiation there as soon as you disclose that you intend to finance the car. And why not? 99% of our government school graduates not only couldn't answer those three questions in 8th grade they couldn't answer them as high school graduates either!

Think I'm being unfair towards the government indoctrination centers, er, schools?

I'm not. Here are the facts.

I ran a company with a few dozen employees for more than a decade - in Chicago. I got tired of so-called High School Graduates that were unable to answer those three questions above, or anything resembling them in the ordinary course of business.

See, if you worked in my office, someone might occasionally come in that forgot to pay their bill. That could require that you be able to make change for them, in your head or on a piece of paper using a pencil, for a $20 so they could get their service restored.

The majority of applicants were unable to do this; I instituted a math and English test necessary to get an interview, calibrated at an average 7th grade level. Nearly 9 out of 10 applicants - out of a pool of thousands over the years - failed. I kept ever one of these tests in a file cabinet in the event that the EEOC tried to claim I had "discriminated" against someone, along with aggregate statistics. It was disgusting.

Now let's be objective about this.

WHY aren't those questions on today's 8th Grade tests?

The government does not want our high schoolers, say much less graduates, to understand that both Government and Private Business are running one gigantic Ponzi Scheme after another, and that all are destined to collapse.

Notice that in 1895 there was no Social Security and no Medicare.

There was no incentive for the government to keep you from knowing about exploding debt bombs, whether on your personal or the public's balance sheet.

In fact, the government was quite interested in you having that knowledge, because you were expected to protect yourself and save on your own - there was no "social security" safety net and if you needed a doctor as you got older, you damn well better be able to pay him. If not, you might die, and government was interested in that not happening, since dead people don't pay taxes (other than one last gasp in the inheritance tax!)

Every year I get a "statement" from the Social Security Administration. It says that it is a statement of "projected" benefits, and shows the money that I've reported to the SS(A), and reminds me of both the dates on which I can "apply" and also that I can "apply" for Medicare as well.

Nowhere on that statement is the fact that according to both Mr. Walker, the former Comptroller General of the United States (you know, the chief accountant?) and The Dallas Fed's Fisher, Social Security and Medicare have a net present deficit of ONE HUNDRED TRILLION DOLLARS, and absolutely no plan or ability to fund it.

Fact is, I have no desire to suck off the public tit. If I cannot pay for my own medical care when I get older, it is time for me to go meet God. If I cannot pay for my own food and shelter, ditto. I have the right to ask my progeny for help, but I do not have the right to force her to cover my medical or living expenses via theft - otherwise called "taxation."

My parents see this differently. They have plenty of money to pay their own way. But they are very interested in not doing so, nor checking out peacefully if they exhaust their resources. As such they are perfectly happy to screw both me (as their son) and their granddaughter. They simply don't care - so long as they get theirs - who gets the bill or whether it can be paid.

Who's right folks? Well guess what - if you think you have a "right" to Social Security, a "right" to Medicare, or any similar "right" that extends beyond your present value to pay for whatever good or service you wish to purchase then you are claiming a right to screw your children and grandchildren in order to cover the bill.

It is my contention that those people who believe this are either ignorant of the impact on their kids and grandkids (in which case education and their repudiation of their position is the answer) or they simply don't give a damn, in which case they are spawn of the Devil and I pray that my belief in the Divine, which I will finally have proof of when I pass, turns out to be true.

One is obligated to look at incentives when looking at why things happen.

It is really quite simple:

We provide incentives for people to poop out babies they cannot afford (more food stamps than you get as a single person, and welfare.) We thus get lots of pooped out babies that the parents cannot afford, and create incentives for women to sleep with men who can't or won't help support a family.
We craft Ponzi schemes in social programs (Social Security and Medicare) which then gives cover to dozens of additional Ponzi Schemes, with the latest one (housing) consuming our economy. We thus get an education system that intentionally refuses to teach our children that we as parents are literally raping our childrens' futures, and that in turn turns them into PREY for the bankers and hucksters who then destroy their personal balance sheets and financial lives so they can turn a "profit."
We start on the first day of Kindergarten indoctrinating our children that "from each according to his ability, to each according to his needs" is appropriate, beginning with a five year old's pencils and paper. We then find ourselves continuing this by claiming that every student in a class of more than 100 is "outstanding" at the same time for the same thing, a mathematically impossible feat, destroying the incentive of students to truly excel. We learned exactly nothing from the socialism experiment at Plymouth Colony, which resulted in the death of more than half of the colonists - a downward slide that was only reversed when The Mayflower Compact was torn up and private property rights, along with recognition for hard work and success, was instituted in its place. Oh, and we don't teach that inconvenient little fact in our so-called "history class" with regards to the Thanksgiving Holiday; if we did some of the students might discover that we're a bunch of flaming hypocrites and flip us the bird instead of "respecting" us. (As an aside, lying is worthy of respect, isn't it?)
We are "happy" as parents when our schools get "good" test scores on things like the FCAT, even though the schools are achieving this by intentionally ignoring part of the state curriculum standards so they can "teach to the test." See, not everything in the curriculum standards is on the test, so the parts that aren't simply get ignored. Instead of demanding Principals and Curriculum Directors be fired and replaced for this, we cheer the "great" performance of our schools. Bluntly, we cheer cheating by our school administrations. (As an aside, can you really punish your kid for doing it if he or she does when the school board and administration are doing the same thing?)
We not only countenance federal, state and local budgets predicated on unsustainable Ponzi Schemes (e.g. the housing bubble and school budgets on up the line) but we reward those people with re-election and reappointment to their positions. We then whine - after we've allowed these asshats to spend $9,000 on "smart boards" for classrooms, when a $50 white board works just fine - that our schools "don't have enough money."
We allow people like Henry Paulson and Bernanke to pontificate on how "subprime will not spread", "the economy is fundamentally strong" and dozens of additional and similar lies, when these are people with advanced educations and actual knowledge of their falsehoods, who are speaking for the explicit purpose of "inciting confidence" - that is conning us. We then act on this and find our economic futures decimated; ask those who lived through this crap in the 1930s! Oh wait - you can't - they're all dead. Gee, I wonder why they're getting away with it this time when we no longer teach actual history in the damn schools!

We deserve what is coming folks, and the first place to direct your ire is at your County School Board.

You live in a district, you pay taxes, directly or indirectly, to support those clowns. Whether you have children or not the kids in school now are the wage-earners of the future and you had damn well better care about the quality (or lack thereof) of the education that is being doled out in them.

GET OFF YOUR BUTT AND DEMAND THAT THE CURRICULUM REFLECT REALITY, THREATENING TO FIND WAYS TO CUT OFF ALL THEIR MONEY IF THEY DON'T!

Specifically:

No more "socialism" in the classroom. You bring pencils and paper to class, they are yours. From the first day of Kindergarten. This does not prevent someone who "has less" asking for a pencil, but it does prohibit confiscating your pencils, whether directly or via coercion ("c'mon Johnny, you have plenty of pencils.... can't Steve have one of yours?")
The first time Thanksgiving is taught and from then onward, Bradford's diary and the truth about the colonists and The Mayflower Compact needs to be discussed. Fact: Socialism has never worked in the history of the world for any substantial period of time in other than small, insular, single-socio-ethnic groups. Presenting it as a "competing socio-economic theory" is not only ok but should occur, however, failing to note that every attempt at living under it for larger societies has failed is not acceptable. Period.
Mathematics must include discussions of compound interest and compound earnings. When kids learn how to do percentages, they must be taught about compound interest and compound earnings. By fifth grade any kid should be able to take $100 and tell me what the total interest due is on that for 10 years at 10%, and how much money they will have if they start with that $100 and earn 10% a year, compounded.
"Home EC", "Life Skills" or whatever you want to call it must spend at least as much time on financial education as sex education. You're just as screwed if you make a mistake financially as if you do sexually. To pass that class you should understand the basics of what a stock and bond are and how they're priced and traded, what a mortgage is, what depreciation is, how to compute the total imputed cost of owning .vs. renting a home and where and when fiduciary responsibilities apply and when they do not - and why you care. The fact that The Fed follows the market on rates; it does not set rates, must be discussed and understood, along with the overall monetary environment, including the difference between monetary and price inflation. The economic cycle, including Kondratieff Cycles (long cycles) and shorter-term cycles (18 years on average for housing and 7 for general business) must be understood. This cannot be an elective - it must be a required course. If you don't arm kids against the thugs on both Wall Street AND Main Street they WILL get screwed; Greenspan's example of urging people to take ARM mortgages at the bottom of the interest rate cycle in 2002/03 is just one example!

As for "we adults", here's reality folks:

This is a recession. We just saw a huge jump in the unemployment rate today. Those "goldilocks" crooners are wrong, and if you listen to them whatever is left of your portfolio will be destroyed. Get to safe harbor with your investments NOW.
Congress, The Fed and The Administration have all encouraged "holding" losses instead of selling bad positions and recognizing them. This is a gambit that will not pay; it is predicated on housing bottoming in 2009. THEY ARE WRONG - housing will not bottom in 2009. The best time to take those losses and sell those assets was in August of 07, and the longer banks and others wait, the worse it will get. We may have already passed the point where a depression is inevitable, but if we keep sitting on our butts while Congress, The Fed and The White House fiddle, allowing banks, pension funds and others to hide losses, we will get one with certainty.
If you are going to have to sell your home in the next five years consider doing it right now and renting. You are at severe risk if this economic dislocation is mishandled by Washington DC, and there is absolutely no evidence that they understand what is going on or are willing to face reality.
It is absolutely essential that as taxpayers you do not allow government largesse nor can you give a pass to the incompetence of state and local government officials who drew budgets and spending plans based on the housing bubble continuing. These people must be forced from office NOW. California is facing the possibility of bankruptcy as a state as soon as August of this year! Florida and other states will follow unless immediate austerity measures are taken. This is not optional.
The states, municipalities and the Federal Government must get the illegal aliens - all of them - out of our nation immediately. These individuals are a huge net cost in social service, education and judicial resources and we do not have the money to spare. Worse, we need the jobs for Americans. This is not limited to California and Florida - Colorado and Illinois, for example, both have huge illegal immigrant populations. The arguments over "humanity" simply are no longer applicable - this is about economic survival, not whether we want to "be nice".

Time for the tough choices folks.

Either make them or they will be made for you.

Desperate Men, Desperate Measures

nospam@example.com (Genesis) — Mon, 12 May 2008 08:53:00 -0500

Last February, when the Asian markets collapsed overnight and led to a 500 point loss in the Dow Jones, we heard that there was a minor "subprime" problem, but it would not spread to housing in general, or to the broader economy.

Through the spring and summer months, we were told that the economy was doing fine and housing was going to recover in the back months of the year.

There was no risk to the markets or the broader economy.

Bear Stearns disclosed punishing losses in two hedge funds, wiping out their investors assets in those funds. The market began a precipitous decline.

The Federal Reserve, facing a potential waterfall collapse in the stock market, launched a "surprise" cut in the discount rate on the morning of options expiration, trapping thousands of index option owners - and arresting what was destined to be a certain plunge.

But they told us there was no risk to the markets or the broader economy.

Into the fall, we continued to hear that the housing market was getting worse - much worse - and dozens of lenders folded their tents, going out of business wholesale. Countrywide Financial's stock slid day after day, and the stock market underwent a sickening series of lurches higher and lower. Oil climbed higher as the dollar went lower.

But they told us there was no risk to the markets or the broader economy.

As the holidays approached the markets rallied as is usual, but it was more tepid than we had seen in past years. Evidence of consumer slowdown was all around us, but the cheery-eyed commentators on national television continued to predict good times ahead. Oil continued its climb, while the dollar continued to tank.

But they told us there was no risk to the markets or the broader economy.

On December 26th the markets began a precipitous slide, with daily news items of monoline insurers potentially going bust, lenders having billions of dollars of exposure to bad mortgage and other paper, and billions of dollars of losses related to complex instruments like CDOs were reported. The DOW lost nearly 2,000 points in the space of one month, or almost 100 points a trading day.

But they told us there was no risk to the markets or the broader economy.

Then Bear Stearns blew up and The Fed "rescued" them, forcing the firm into the hands of Jamie Dimon and JP Morgan, all at our (the taxpayer's) expense.

But they told us there was no risk to the markets or the broader economy.

Since then we have seen a ferocious rally in the markets. Is it over?

Let me point out a few things that you, as Americans, need to be aware of.

First is the general principle that desperate men will take desperate measures.

Look around you. You may know someone who was a "home flipper" or "speculator" in the real estate market, and if you don't, you certainly can find the stories in the media. As these people got closer and closer to imploding financially, they took more and more risk - levered up higher and higher in a desperate attempt to pull the one ace remaining in the deck to avoid the certainty of bankruptcy and ruin.

We've all seen the stories of people who take their last $1,000 and go to Vegas, betting it all on "00". Or the lady who, facing foreclosure, buys $100 worth of Powerball tickets - with her last $100.

Or how about John DeLorean, who set up an "upstart" car factory and got into trouble? His version of "desperation" turned to putting up $1.8 million to bring 100 kilos of cocaine into the United States, a deal that promised (had he not been caught!) $24 million in profits - and the salvation of his company. He, of course, got caught, although he was later acquitted.

But it seems that wasn't the limit of his desperation. He was indicted and charged with income tax evasion, mail fraud and wire fraud and, while not convicted, was ordered to reimburse investors to the tune of $9 million. In 1995 he was hit with unpaid legal fees of $10.3 million, and in 1998 a New York Jury ruled that DeLorean's accounting firm owed DMC investors $46 million, plus $65 million in interest.

Funny how that $1.8 million "mistake" multiplied itself nearly 50-fold as desperation festered and, ultimately, consumed John DeLorean.

Why do I recount all of this, and point it out?

Because we, as Americans, face a critical choice at this juncture.

We know that there is much desperation out in the markets today.

You see it in your daily life.

The housing speculators and families facing foreclosure; those who took on more leverage than they should have, those who lied outright about their incomes, or those who in some other way were less than honest about their financial and personal circumstances.

The "financial media" continues to pound the table for you to "buy" - but why? Do they have your best interests at heart? Or do they know that should you not have a reason to buy, you also don't have a reason to watch, and will turn off the Boob Tube? Who runs advertising on Bubble TV?

Bank CEOs confidently claim they do not need more capital, and then, within days, issue more stock, more debt, more "convertibles" and other financing instruments to prop up their balance sheets - in short, doing exactly what they said they did not need to do.

Corporations, such as Linens-N-Things, hang on by a thread, negotiating furiously trying to stave off bankruptcy. Some succeed, some fail. Some, like DeLorean, might even cross a line or two.

Hedge Funds, facing margin calls, lock themselves down, refusing withdrawals from investors in a desperate attempt to prevent liquidation.

Hank Greenberg as just one example has filed a lawsuit against AIG, accusing the firm of intentionally hiding losses. Their claim is that "if they knew they would have sold their shares" ahead of the bad news that tanked the stock. Desperate?

Now sit back and contemplate this.

If we, as citizens of the United States, allow our Federal Government in any way, shape or form to bail out the people who are now desperate for a solution to their problems, then The Federal Government will have transferred that desperation onto itself.

Consider that we already know that Hank Paulson, Ben Bernanke, and others in the government are well aware of the risks in the broader economy. The FDIC has been hiring and "calling back" bank examiners like madmen. Chris Cox at the SEC is now making noises about forcing investment banks to disclose to investors what they hold, and initiating "probes" into various firm's exposures in "subprime."

Treasury published a damning report last week pointing out that we are - right here and now - going to run a $500 billion deficit this fiscal year.

We know that people like Bernanke and Paulson are and have been lying about the risks to our financial system and our economy. Paulson often stutters when on TV at a rate that would make a woodpecker bow in awe.

They are desperate men, and their desperation arises just from observing what may happen in the private portion of the economy.

We know that more than half of all "ALT-A" loans had some element of fraud in the claimed "income" of the borrower, that fraudulent appraisals were as common as fire ants in Florida, and that this bad paper is spread through the system.

We know that Fannie Mae is "offering" to refinance underwater mortgages - where the owner has negative equity. Why would Fannie do such a foolish thing? Because in many states a purchase-money first mortgage is "no recourse", but all refinances are recourse loans. They won't tell you this up front, but if you refinance such a mortgage you throw away all protection for your future earnings power in that they can (and then will!) come after you if your attempt to keep your home fails in the future.

These are desperate men and are taking desperate measures, refinancing unsound loans on their books in a crass attempt to get borrowers to sign away their legal protections against wage garnishment!

If we allow the Federal Government to proceed with their mission of bailing out the private economy then we run a very real risk that Washington DC becomes the "desperate man" to top all others, as foreigners increasingly shun our US debt and pull away from what they correctly perceive to be a Ponzi Scheme that is destined to end very badly.

The Federal Government spent $430 billion on interest in 2007 and is projected to spend $500 billion or more in 2008. To put this in perspective, in 2000 the government's interest expense was $361 billion, and in 1990 it crossed $250 billion for the first time. In December of 2007 alone it spent more than $100 billion - on interest payments.

It is absolutely critical for the fiscal stability of the United States that the government be able to finance its debt on attractive terms - meaning that government debt costs must come down, not go up.

Should the government take on an attempt to "bail out" people in the markets there is a very real risk that a rapid and uncontrollable rise in the government's funding costs will result.

There are already signs in the market that this shift may be starting, with Treasury Auctions finding decreasing bid-to-cover ratios and foreign ("indirect") interest over the last six months, and rumblings of organized protest (e.g. a "national moratorium" on paying mortgages) that are likely to take root should further injustices be heaped on the 80% of America that neither profited from or committed fraud during the bubble years.

As government debt costs rise increasing desperation will take hold and basic social programs - Medicare, Social Security, Food Stamps and others - will be unable to be funded.

In the end someone not-yet-known will inevitably appear and proclaim that they have the answer to end all the pain.

But, they will announce, there will be a necessary compromise.

The "compromise" is likely to be our American way of life.

History is replete with examples. Wiemar Germany gave birth to a politician who claimed to have a solution for all that ailed Germany. He had one all right - "the final solution."

How about Benito Mussolini? He too was hailed as a hero of "the people." After being invited to form a government and placed in power by Parliament, he altered the electoral process and imposed strict censorship. The rest is history.

Now of course nobody can be certain that such a negative outcome is in store.

But desperate men turn to desperate measures; should we, as Americans, take the risk that our government becomes desperate?

What is the alternative?

We must choose, as Americans, to "circle the wagons" around our government when it comes to this economic crisis.

We must make clear to our Congressmen and women, daily if necessary, that they must not commit any public funds, in any way, shape or form, to bailing out any part of the private and commercial credit markets.

We must stop the Housing Bill that was reported out of the House.

We must not have any more "stimulus" bills.

We must not allow The Fed to commit one more dollar to bailing out financial institutions, and in fact we must insist that they withdraw the "TAF", the "TSLF" and other similar "alphabet soup" machinations, forcing banks to hold real reserves, recognize losses, and allow interest rates for private debt to float to wherever they are most appropriate, based solely on perception of risk.

We must insist that financial firms report all Level 3 assets, what they are, and how they are valued, without exception.

If that results in some firms being declared insolvent, then so be it.

We must make clear our demand that fraud be prosecuted vigorously, irrespective of how much money the fraud-committing party might have "given" to political action committees.

In short, the federal government must insure that it too does not become a "desperate man", and therefore compelled to search for desperate measures - even as portions of the private economy are and do.

We must pester our Representatives and Senators daily until we have confirmation in the form of bills and votes, not platitudes and barely-on-topic form letters, that they not only heard us, but that America is and shall steer this course.

The choice is ours.

We can insist that the Government "ring fence" itself, refusing to bail out any element of the housing market or the knock-on effects in the greater economy. Those firms, including banks, that are "bust" will go under. Homeowners will lose homes they cannot afford. Businesses will see spending contract and, should they be unable to meet their obligations, they will fail. Private borrowing costs will rise and may rise dramatically, especially for weaker firms.

But our American way of life will go on.

The government will remain a safe place to invest one's money, and the system, as a whole, will survive.

The Federal Government will be able to finance its operating needs.

Or, we can either insist The Government step in and provide bailouts or remain silent while others advocate for that option.

We can transfer the desperation of the American Speculator, whether they be a house flipper, investment banker or corporate executive, many of whom made millions from fraud and deception and are now facing "tough times", to The Federal Government.

Down the latter road lies the very real possibility of a credit market dislocation that will cut off the government's ability to fund the programs that we, as citizens, find essential.

This will, in turn, lead to calls for "a solution."

At that point, someone yet unknown will emerge with the promise to "fix it all."

History says this is inevitably what happens when desperation replaces optimism and hope.

Is this a risk we are willing to take in order to provide "help" to those who made millions during the preceding years by intentionally abusing our trust and ripping us off?

I say the answer to that must be "No", and that we, as Americans, must rise now and give our Representatives and Senators one simple message:

"We will not tolerate one dime of public money being spent to 'bail out' the housing crisis, irrespective of who gets the bailout or why. This is a private market matter and, other than prosecuting wrongdoers, of which they are many, the government must stand back and stand tall as the safe and secure place where money can be invested."

The future is in our hands, and time is running short to make our decision and act.

Those howling for bailouts have made their demands known.

What is your response?

A Fraud For The Ages - And How You Know You're Being Lied To.....

nospam@example.com (Genesis) — Mon, 14 Apr 2008 12:41:00 -0500

Their lips are moving.

Let's start with the simple:

"By the end of July, the G-7 wants financial companies to fully' disclose in mid-year earnings reports their investments that are at risk of loss. Firms should also establish 'fair-value estimates' for the complex assets that investors have shunned and boost their capital as needed, the G- 7 said.
Regulators must revise liquidity risk management rules, improve accounting standards for off-balance-sheet units and enhance guidance on how assets are fairly valued, the group said. International panels of supervisors will also be formed by the end of this year for each of the largest global financial companies."

Liars. Here are a few things that Bernanke actually said:

"Ben Bernanke, chairman of the Federal Reserve, has laid the blame for the credit crunch on the ratings agencies, the investors in sub-prime securities who believed them, and inappropriate incentive structures." (honest, its not my fault, even though I was warned and let the banks play in the unregulated derivative pool - Lie #1)

"There is nothing fundamentally broken on Wall Street that a little regulation and incentives for participants to be slightly more honest couldn't fix, said Federal Reserve Chairman Ben Bernanke said Thursday." ("slightly more honest"? You mean actual honesty is not part of what you stand for Ben? Thanks for telling us - in print.)

So now that we have established that Mr. Bernanke not only will tolerate intentional deceit from the banking system but is actually encouraging it - just as long as there's "a little less" of it, can we have an indictment or impeachment handed up by the Congress please?

After all, he's now admitted that he recognizes that Wall Street is laced with fraud and intentional deception but that its ok with him and The Federal Reserve, and in fact they'll even make loans to liars, so long as they lie "a little bit less."

The "G7" says it will not "sit by and watch the dollar continue to slide."

Really? Are you prepared to find a way to remove Bernanke and bring in a Fed Chair that will insure that we actually get the truth? If not, then the dollar will continue to slide because in point of fact the problem is one of confidence, and Bernanke has said, publicly, that he is just fine with lying so long as "there's a little less of it."

How much confidence do you have in a known liar?

Wachovia is both trying to secure capital and is tightening standards for mortgages. Or are they? Its tough to tell but this this is the sort of deterioration that is being cited:

"The proportion of U.S. borrowers at least 30 days late on their payments rose to 4.5 percent in March, compared with about 2.9 percent in the same period a year ago, according to data collected by credit reporting bureau Equifax Inc. and analyzed by Moody's Economy.com. Mark Zandi, chief economist at the Moody's unit, yesterday called the report 'astonishingly bad.'"

Uh, yeah. 4.5% overall delinquent eh? That, by the way, is an increase of 55% year/over/year.

Congratulations bankers, this is what happens when you're a "little less honest."

In a special act of stupidity, we now have this comment on the bond market:

"The dollar isn't the only casualty of the Federal Reserve's rescue of seized-up credit markets. Bond traders are finding there is nothing special about Treasuries anymore, now that the Fed accepts substitutes for government securities as collateral -- having concluded it wasn't enough to reduce the benchmark interest rate for overnight bank loans six times since September."

Let me decode this bit of Orwellian-speak - its not that mortgage securities have come back to "normal" levels, its that Treasuries are now considered "contaminated" and worth less - a lot less - than they used to be.

A casual reader might think that this is good news, but only if you have a brain the size of a pea. Its like arguing that if I am driving a car with a smashed in door, the solution to my car being worth less than yours is for me to T-bone you so you have a smashed door too.

Down this road lies disaster and a potential bond market dislocation, which, by the way, is what Depressions are made of.

You might want to stop looking the other way when people lie Ben, and "a little bit more honest" won't do.

Fannie and Freddie are apparently issuing threats about people who "jingle mail" their keys.

"The country's two largest sources of mortgage money have a blunt warning for anyone thinking about joining the growing "walkaway" trend, where homeowners stop making payments and months later send the house keys back to their lender: You will feel the pain."

Awww, cry me a river. Let's see what their "new rules" are:

"On March 31, Fannie Mae sent out new guidelines to lenders intended for walkaways and other foreclosure situations. Fannie will now prohibit foreclosed borrowers from getting another mortgage through the giant investor for five years, unless there are "documented extenuating circumstances." In those cases, the mortgage prohibition is for three years.
Even after five years, borrowers with foreclosures in their files will be required to make at least a 10 percent down payment, and will need minimum FICO credit scores of 680."

Gee, you mean we're going to need a whole ten percent down now? Didn't you clowns know that the standard for a "safe and secure" mortgage is twenty percent? This means you're still taking liar loans and loans with zero skin in the game no?

You're not going to want to actually buy a house for three to five years anyway - that will be about when we get to an actual sustainable bottom in housing prices - if we're lucky.

You're better off renting until then.

Uh, wait a second.

I thought Fannie and Freddie only made sound conforming loans? You mean you can (today and during the bubble) can and could get a Fannie or Freddie loan with middling to somewhat-crappy credit (680 ain't THAT good) and with less than 10% down?

Aha - is that an admission buried in there that Fannie and Freddie have been buying trash mortgage paper? Now we know why they're concerned, eh? They've been buying the same sort of toilet paper that sunk AHM, CFC, New Century and others, and that's why they're worried about the Jingle Mail!

Now there's an admission that you'd hope investors would pay attention to!

It is becoming increasingly clear that both of these firms will go under, with the only wager left to take is an "over/under" on when.

I'll take "before January 2010" please.

In addition this little "threat" means is that people should jingle-mail NOW if it is to their advantage to do so, in order to start the clock. Oh, do go see a lawyer first and make sure you weren't bamboozled into turning your original mortgage into a "recourse" note (or worse, you live in a "recourse" state) - that would be bad (if you were conned in that fashion maybe its time to see that lawyer about a bankruptcy instead!)

Oh, speaking of liars, here's a whopper in that article:

"Federal legislation enacted last year allows homeowners who negotiate loan modifications with lenders and have portions of their principal debt eliminated to escape income tax liability for the amount forgiven. Walkaway borrowers, by contrast, have nothing forgiven, and the IRS may demand income taxes on the balance they never paid, according to Migala."

That's a lie. Here's the official IRS statement on the matter:

"Update Feb. 4, 2008 — The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief.
This provision applies to debt forgiven in 2007, 2008 or 2009. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion doesn’t apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition."

Need another reason to Jingle Mail? How about being lied to by the lenders, including Fannie and Freddie? That article is dated just a couple of days ago, and this update was filed on February 4th. (Oh by the way, that exemption does only apply to no-recourse loans - again, it is very important to go see a lawyer)

Chalk up (another) knowing lie.

Oh by the way, under the IRS code if you sell the house at a loss, you can't deduct that - its a personal loss and you eat it - no deduction.

If your choices are to jingle mail a no-recourse loan or sell at a loss, the former may be a "win" twice! Go see a lawyer!

It also appears that Volcker is tired of the lying too. He has been speaking out about Bernanke's Fed the last week or so, and this is an extraordinary act in and of itself - no matter the subject. In this case its even more extraordinary because his words are uncommonly sharp:

"But last week Mr. Volcker spoke his mind bluntly. He said, in effect, that the current Fed is not doing its job.

This would have been unusual enough. But Mr. Volcker went further. Not only is the Fed not doing its job, he said, but it is doing the wrong job: It is defending the economy and the market, instead of defending the dollar. And just to stick the knife in, Mr. Volcker added that this bad job now will make the real job - defending the greenback - much harder later. It'll cause even greater economic suffering.

In plain words, Mr. Volcker implied that the current Fed is not only incompetent, but that its actions are dangerous.
There is no record of Mr. Bernanke's reaction, nor that of anyone else inside the Fed. But there was plenty of buzz in the market because what Mr. Volcker said amounted to a rousing call to raise interest rates. Yes, raise rates, and do it now."

On that, Mr. Volcker and I agree.

Lying is a common trait when playing Poker and is considered part of the game. Its called "bluffing" and is well-recognized as essential to winning play - misrepresenting your hand on purpose in order to get the other players to fold their (stronger) cards instead of "calling" your bet.

There is, however, a secondary purpose to the bluff that is not understood among weaker players - by being "caught on purpose" once in a while you make it more likely that when you bet with a very strong hand that someone will call the bet - and lose!

But when it comes to monetary policy and banking regulation, these concepts are anathema to trust. I never trust anyone at the poker table to be telling me the truth with their bets, and yet that trust is essential in monetary policy and among the citizens when it comes to the banking system.

The truth when it comes to banks is this - all banks are subject to being destroyed by a run. All. This is a fundamental reality of fractional reserve banking - if too many people show up and want their cash at the same time, the bank goes under even though it is otherwise ok!

As such it is paramount that our banking system be based 100% on honesty and truth. "Slightly more honest" won't do.

I don't know about you but when I choose a bank one of my primary considerations is that they not lie to me at all. In fact over the years I have closed bank accounts instantly upon my detection of anything that smells like "dead fish."

If I'm now being told by the Chairman of The Federal Reserve that essentially all financial institutions are lying and its ok with him so long as they are "slightly more honest".....

I've said it before, but I'll put the short list of what we need to do to fix this out here for those who want to see it again.

No commercial bank of any sort (that is the subject of federal insurance or a "backstop" of any kind, including access to the Discount Window) may be permitted to buy or sell any derivative not traded on a public exchange.
No off-balance-sheet vehicles of any kind may be permitted.
Mark-to-market and margin requirements must be enforced nightly.
No "slightly more honest." 100% honest must be the only acceptable standard, with any financial institution unwilling to live up to this standard forcibly merged or put into receivership.

All of this needs to be done now, not a year, two or three from now. The "100 day" barrier that the G7 put forward is enough time. Yes, its a tight schedule but we're on a tight deadline. Let's get it done.

No, the upcoming election is no reason to sit on this. In fact quite the opposite - its a reason to accelerate the effort to get this accomplished, as we never know what we'll have come November in the White House or Congress.

If Investment Banks or other institutions wish to play in the world of unregulated credit instruments, let them. However, it must be made clear that those institutions will not be backstopped in any way, shape or form should they fail, without exception.

There are those who say that this is "unrealistic" in that much of what banks hold are illiquid "hard asset" paper such as raw mortgages. This, of course, is pure nonsense - in other words, its yet another lie.

Whether a mortgage is in fact illiquid and "hard to value" depends entirely on the value of the property behind it.

With 20% down behind the note essentially no mortgage is exposed to significant risk of loss even in the event of a default as the owner pays down the note faster than negative value adjustments can accrue in most cases.

In addition the 20% down requirement, plus a requirement that all mortgages be amortizing, stomps on these speculative property bubbles before they can get going, as it limits leverage to 5:1 and prevents the sort of insanity we had occur in the first instance.

The regulatory solution to this problem of "hard to value" mortgage securities is for banks is to require them to hold reserves against all value in excess of 80% LTV on a dollar-for-dollar basis.

Therefore, if a bank wants to write a 90% mortgage on a $200,000 house (a $180,000 note) it must hold $20,000 in reserve against that note until the principle is paid down by $20,000, irrespective of the presence of PMI or other so-called "guarantees." If you "originate to distribute" then no regulated entity can hold a piece that is subject to loss with with less than a 20% decline in resale value unless they reserve dollar-for-dollar against that decline.

For instance, if the bank wants to hold an "Equity Tranche" on a CDO that is exposed from the first dollar and is wiped out with a 5% default rate, it must reserve dollar-for-dollar against that CDO - it has no "credit quality" to it whatsoever in the reserve computation world.

These changes are not difficult to make. They will result in many institutions being forced to raise a lot of additional capital immediately, massively diluting existing shareholders, but that's the price of imprudence. Those institutions that lack a solid enough brand to be able to bring convertible and secondary offerings to the market will be forced out of the market - again, this is as it should be.

Do we want an honest credit and financial system, or are we willing to accept one that is "slightly more honest"?

Call, email, fax or write your Congressfolk.

America deserves - and needs - better.

PS: Wachovia (NYSE:WB) missed badly and is called down more than $3 premarket and Circuit City (NYSE:CC) got an unsolicited bid between $6-8 that the bidding company (Blockbuster) says was improperly interdicted by the company. PPI tomorrow and CPI Wednesday are expected (by me anyway) to be smoking hot - those should be fun.

A Long Term Investment Timing Signal That Works

nospam@example.com (Genesis) — Wed, 26 Mar 2008 08:55:00 -0500

There are all sorts of people parading around saying "its time to buy" on CNBC (as there have been for the last couple of months) - how'd that work out if you bought in December?

For a bit of history, here's a lesson from the last time we were here with a bear market:

How much of your money would you like to lose?

Have you ever noticed that the "crooners" on Television never tell you to get out at or near the top, and call it a "buying opportunity" all the way down? Well gee, the last time they did this it only took 7 years before you were back to "even", and of course that's before price inflation ate up all your money.

Here's a hint kids, and this one's free - here's a long-term timing signal that, over the last 20 years, has never lost money.

This is a very simple timing signal that requires no more than 2 minutes a week to monitor and yet if you followed it over the last 20 years it has produced very few whipsaws and on balance has had you out of the market for all major bear trends and in the market for all major bull trends.

The use of this strategy is simplicity itself - you buy the SPY (or a S&P 500 mutual fund such as VFINX) when the 20 week moving average crosses the 50 week moving average by more than 1%, and you go to cash (or treasuries) when the 20 week moving average crosses the 50 week moving average in the downward direct by more than 1%.

The 1% threshold is to reduce whipsaws - typically, on a real trend change this only keeps you in the market (or out of the market) for another week or two beyond making the move right on the cross.

If you go back and look at the S&P 500 for the last 20 years, you have never been left out of a bull, or in a bear, if you followed this signal. Never.

Now you know what they say about "past performance does not equal future results", right? Its absolutely true, and your mileage may vary. This signal may stop working at any time, and it may start producing punishing whipsaws.

But over the last 20 years, it has performed insanely well.

If you are a long-term investor - for example, you're investing for retirement and have a 20+ year time horizon, you care only about beating the index over long periods of time. The magic of compound earnings takes care of the rest.

There's a nasty little secret that the market "crooners" will not tell you, but it is absolutely essential if you are to have any chance of beating the index over time - your total return must be measured against BETA, or risk!

That is, its easy for me to beat the index if I take lots of risk. Its also easy for me to lose a lot!

The nasty part of losses is that controlling them is absolutely essential. See, if you lose 50% you must then make a double, or 100% gain, to get back to where you were. For obvious reasons if you take big losses you're in deep kimchee, especially with your retirement money. Avoiding those big losses is absolutely essential!

So the key is to reduce beta while outperforming the index. And how does one reduce beta? One important way is to be out of the market, thereby taking zero risk, during bear markets!

Since the market is, on average, in a "Bull" about 75% of the time, if you are in cash the other 25% you will have a beta of 0.75 automatically, assuming the rest of the time you're in the index.

But you will grossly outperform the index since you will catch little of the big declines but most of the big advances!

Now you can pay some "managed mutual fund" to try to time the market and pick stocks, and likely underperform the averages, or you can use what you just learned, do it yourself, pay nobody any of those ridiculous fees, and you're odds-on to outperform those so-called "managers."

Oh, and while if you're investing in a tax-advantaged account (e.g. 401k or IRA) tax efficiency doesn't matter if your investments are in a taxable account this indicator is also extremely tax friendly, on average generating taxable events only once every three to five years, all at long-term capital gains rates.

One question raised on the forum is "why not use leverage and go into SDS when you get a sell and SSO on a buy"? My answer to that is simple - this is for long-term investors, not traders. If you're a trader then why would you follow something like this at all? The point of long-term investing is to build capital over time, not speculate!

Make up your mind what you are with what portion of your portfolio and act accordingly.

Oh, and on the "financial media" - if their purpose is to educate (and not obfuscate and/or simply screw you out of your money by getting you to buy when you shouldn't) then why is it that this - the most simple of indicators, yet one that has a 20 year track record of outperformance for long-term investors - is not covered? Yet you hear Kudlow every night talking about "investing for the long run."

What purpose does the financial media have again?

Something to think about.

Why Dick Bove (And Market Callers Like Him) Are Wrong

nospam@example.com (Genesis) — Fri, 21 Mar 2008 23:13:00 -0500

Ok, having spent a good part of the day (and all of the afternoon) in an hour-and-a-half phone call with Mr. Bove, and then following up with a bunch of emails, I think I understand the premise of his "buy bank stocks now" call.

I also understand where I believe his fatal errors of analysis lay, and why this will be borne out in the fullness of time.

Let's start with the premise:

"This is a generational opportunity to buy (bank stocks) on the cheap."

Ok, that's pretty clear on its face.

But what did he really say?

He also did say that the economic turmoil is not over.

In fact, on the phone with me, he admitted that he expects a "mild to moderate" recession - remember that while I (and many others) believe we are in one right now, you can't call a recession until you are deep into the middle of it, and often they are not officially called until they are over!

But what underlies this bullish call on bank equities?

Simple - the ability to earn cash as a consequence of "positive carry" due to the upsloping yield curve.

Now let's examine the underpinnings of the argument, and see how many trucks I can drive through it. (By the way, I'm emailing Mr. Bove a link to this; if he's interested in rebutting any of the arguments or I have misunderstood his position, I will be happy to append to this entry.)

Mr. Bove's assumptions are bold, italicized, and underlined. The rest is mine.

The yield curve is positive sloping and this will drive positive earnings reinforcement. True. Point to Mr. Bove.

Housing will bottom this summer and begin to recover in the fall. Oh boy. I'll take the other side of that bet. The argument is that in "previous housing recessions" this has worked out because housing tends to collapse fast, then plateau and eventually recover slowly. However, there is a problem this time, and its best represented here:

Now let's define the other housing tops. Specifically, according to Mr. Bove (who has done his homework in this regard) they are generally agreed to be 1904, 1926, 1950, 1972 and 2006, roughly.

Notice anything? All of those tops were in fact peaks (except for 1972), but they were very small peaks in terms of adjusted home prices.

But incomes will (do) make up for it. No they won't. In fact, since 2001 if you exclude the top 5% of income earners average household income has actually declined slightly on an inflation-adjusted basis.

We went from an indexed 125 (the maximum peak of previous housing bubbles) to 200 this time, and are just starting to roll over. The trough is in the 100-110 area on a historical basis; to assume that we will have a year of decline followed by stabilization when only 20-25% of the corrective move necessary has taken place thus far is hopelessly wrong. This is the largest housing bubble in the history of the nation and simply on that basis to assume that it will unwind in 2 years is pure folly.

Also note that we STILL haven't gotten entirely back to sound lending principles, which are 20% down payments, 36% DTI and a 30 year fixed mortgage. Until we do and prices adjust at that level we are not at a housing bottom.

The Fed has our back, basically. Really? The Fed has consumed about half of its balance sheet with the TAF, TLSF, PDCF and whatever other alphabet soup they have dreamed up thus far, oh, and about $100 billion in direct slosh (at present, less the TAF.) They do not have an infinite balance sheet with which to play. I'll deal with the "they'll print" argument below.

Bear Stearns was a sea change. Actually, no. I argue that Bear Stearns was both a raw violation of The Federal Reserve Act (for which The Fed may find itself in a bit of trouble when Congress gets done) and an indication of pure desperation. It may also have some element of a Jamie Dimon "jam job" in it but that's speculation on my part. Sea change? Only if you consider the tide going out before a tsunami strikes as a "sea change." Intelligent people run when that happens, not stop to pick up the seashells and fish!

Corporate balance sheets are strong. Point granted. Do you think perhaps CFOs and CEOs have some sort of idea of what is coming and as a consequence they have been raising cash?

Household balance sheets are strong. The hell they are. They are no more accurate than are the phantom "marks" on subprime CDOs that are allegedly "wrapped" by the monolines. Take out the phantom home price appreciation and suddenly household balance sheets don't look so good. Now subtract out of the stock market losses of the last three months. Guess what? The debt is still there, but the assets have shrunk. For most people their largest asset is their house, and it has "doubled" in value in the last five years. Fair and well, but if that "doubling" is in fact all phantom appreciation, what happens to the balance sheet when it comes back off? Hmmmmm.....

Bank balance sheets are strong and so will be earnings. Really? Prove it. Give me a value on all the Level 3 assets. And let's talk about accounting games; Lehman essentially took down liabilities and due to how accounting works that inures to "earnings", but in fact its a problem because it shrinks the balance sheet and further is unlikely to be repeated. Without that little accounting gimmick they would have reported a loss last quarter. While we're at it, shall we discuss the off-balance sheet liabilities? Finally, didn't Bear Stearns come out three days before they blew up and tell us all they had a tangible book value of $80/share? Where did it all go in three days? Finally, if balance sheets are so strong then please explain to me why S&P just cut the ratings outlook on that very same Lehman (and Goldman!) to negative, citing a belief that profits may fall as much as 30%? (Psst - what if Lehman can't find another $600 million to play with next quarter in accounting moves? Hmmm... do they lose $400 million? I think S&P is overly optimistic.)

So long as bank cash flows are sufficient to cover expenses, all is ok. Really? How'd that work for Bear Stearns? Or Northern Rock, if you want to put not-to-fine a point on it? In reality all banks exist only because of confidence in their operations; this is a reality in a system where banks are allowed to fractionally reserve. If confidence fails then so does the bank, as Bear Stearns so vividly demonstrated, and that failure can literally come within hours. In today's world of ACH and wire transfers you can literally have your funds out of a bank in 15 minutes.

Commercial credit demand is growing and is generally very strong. Granted, although the rate of increase has slowed significantly in recent weeks. Now answer this - how much of that borrowing is FORCED as other means of raising money have slammed shut in borrower's faces? CIT drew down $7 billion Thursday; that shows up in C&I loans made but it was hardly a "voluntary" borrowing! This is going on everywhere as asset-backed commercial paper, auction-rate markets and others have seized tight. Forced borrowing being used as an indication of "strong" credit demand is similar to the mistake people made in counting "M3" growth in the last year or so - that too is forcible as "shadow banking system" money is forced out of that conduit and into the regulated system where it can be counted. This isn't an indication of "robust" demand, it is an indication of panic!

Foreign money is coming into the market (at least in Florida) and this is helping. Yeah, like it helped the fine folks from the land of sand who bought into Citibank eh? History is replete with people throwing their money down the toilet trying to call bottoms, and just because someone has a lot of money doesn't make him or her right in their call (Joe Lewis anyone?) Florida, south Florida in particular, is still outrageously overbuilt. The state bird down there is still the construction crane - I was on a cruise out of Miami this winter and was astonished to see empty condo buildings - literally empty, but complete. How do you know? All the units are dark at night!

That's the gist of the argument as it was presented to me. Now let me add a few more implicit assumptions which Dick may not have made, but I suspect he did, because you pretty much have to in order to arrive at where he landed. Again, these are MY assumptions, so I will un-italicize them to differentiate them from what he actually said in one form or another.

The economic impact of the housing adjustment will be reasonable. No it won't. Assuming Fannie and Freddie's estimates for home price declines plus Case-Schiller's existing index, we've seen 7% declines in home prices in the last year and Freddie/Fannie are assuming another 5-7% to the "bottom" (which they also claim they think will happen this year.) Assuming this figure is correct, it will wipe out 10-15% of the $36 trillion (roughly) value in our housing stock, for an economic impact of $3-5.4 trillion dollars. That wealth is permanently gone, never to return. If you use my "base case" figures of double that (30% peak-to-trough declines on average) then the economic impact is somewhat north of $10 trillion. The US GDP is $14 trillion annually, more or less. This WILL produce a permanent change in the standard of living in over 100 million US households, and our economy is 70% consumer spending. Now obviously, all this adjustment will not be taken to spending at once, but to think that it will not cause decided negative prints in the US GDP for some time is difficult to stomach. This contraction in household wealth, as it flows through to spending, then leads to decreases in economic activity (e.g. you don't buy as much stuff) which in turn leads to decreases in C&I loans - lending activity dries up from the demand end as well. We haven't even begun to see the impact of that on the banks.

Push comes to shove, The Fed can print. Sure, they can try. What happens if they do? Well, first, Treasury would have to print up some bonds to do that, which means Congress would have to raise the debt ceiling. By how much? Well, let's see, to absorb the entirety of the above, $4-5 trillion worth. The total public debt outstanding, by the way, is nine trillion. Anyone care to believe that The Fed (and Treasury) would get away with this without having real interest rates (set in the bond market) shooting up to 20%? Me neither. What happens if real interest rates go that high? Well, with the blended government borrowing costs running about 1/4 of that, interest rate expense for the Federal Government would quadruple, from $400 billion to $1.6 trillion a year, or more than half the Federal Budget. As the total budget is approximately $3 trillion dollars, its obvious that this would instantaneously destroy Medicare, Social Security, or some combination of the two. In short, entitlement spending would be severely impacted. Pitchforks and Torches would shortly appear from Granny's garage and descend on Washington DC. At the same time corporate borrowing costs would triple too, which would basically destroy those "nice and strong" corporate balance sheets. We get a depression this way via the wholesale destruction of The Federal Budget and private enterprise all at once. Congratulations.

Long-term interest rates can be held down around 4%, fixing the affordability problem. Nice try. Notice that that didn't happen even during the 2001-03 slowdown with a 1% FFT. We got close though - 5%ish. Unfortunately this time around we won't be so lucky. The last time we had a confluence of virtuous factors in play, including foreign governments needing to "sterilize" our trade imbalance; as a consequence they were heavy buyers of Treasury debt, holding down yields. Sadly this cycle has finished; the concept of "burying" our price inflation into emerging markets has come to an end. China is now faced with a horrifying inflation problem and a bunch of bad debt and is both raising interest rates and reserve requirements to try to deal with it. Currency pegs are being stretched all over, with Hong Kong being the latest to threaten an implicit breach (they refused to follow our latest Fed action.) That cycle is likely over for good, which means that the abnormally low interest rates of the last five years are over too. Historical average 30 year mortgage rates are near 8%!

Timing wise, its a good time to buy because the bear market is (nearly) over. Like hell. Show me a bear market in the past 100 years that has lasted only four months and a recessionary market (with a REAL recession) that has fallen only 15% peak-to-trough. You can't, because on average bear markets last nine months and peak-to-trough valuations suffer a haircut of 30%. The last Bear Market was in 2001-2003, lasted about two years and resulted in a loss of fifty percent in the S&P 500 yet the economic conditions barely met the classical definition of a recession! That all happened without a credit and derivative bubble to do systemic damage! The only "short and fast" market drops like that were not associated with recessions - 1987 and the summer of 2006 being the poster children of examples, with the latter being a circumstance that I made an insane amount of money from buying hammered stocks very cheaply only to dump 'em in the early part of '07 when the overextension of this Bull became apparent.

Bottoms are accurately called by many market participants. Historically, it doesn't work like that. Bottoms happen when nobody wants to own stocks. In the 2000-2003 bear market CNBC called bottoms all the way down until the summer of 2003 - when they basically gave up. That was the bottom! At present we have Dick Bove calling a bottom, half the people on the floor of the NYSE and CBOT interviewed on CNBC daily calling a bottom, and Cramer alternating between calling a bottom and looking like he is about to blow his brains out on national television. In addition as I have shown a true bottom happens on a cross of the 20 Week over the 50 Week moving average by more than 1% - this is a timing signal that has worked since the 1930s. As of last week the gap between the 20 and 50 week moving averages continues to WIDEN, not narrow. This same signal on the XLF shows an unmitigated disaster. By the way, on the XLF that indicator went positive on the week of 6/9/2003, which was damn close to the actual bottom, no? It also called the top on the XLF around the week of 9/17/07. Not bad, not bad. Oh, the gap, as of Thursday, was 14%, which increased from the week prior.

The market is cheap. The hell it is. On a current market basis the S&P and Russell P/E have actually increased in the last year. The Russell is currently trading at a P/E of FORTY! That's ridiculous. While small-cap stocks frequently trade at a premium in terms of P/E, "premium" means somewhere around 20ish. That puts the Russell around 350 and currently it is right near 675! In addition current S&P earnings estimates are actually above last year's actual earnings. There is not a snowball's chance in hell that those earnings numbers will be met on a full year basis; analysts are always late to this party and as estimates come down P/Es rise which puts more pressure on equity prices. Reality should start to intrude on earnings in the first quarter, and really get some legs into the second and third.

The credit markets are "unsticking". Like hell. An IRX print of 3.0 (0.3% annual yield) is "unstuck"? More like absolute panic buying of treasuries. Now why would someone do that? They'd only do that if they were looking for somewhere that they were absolutely certain they'd get their money back! Realize that with an 0.3 or 0.5% yield annually investors who are parking their money there are willing to take a roughly 3.5% annual LOSS just to insure they get their money. If you have someone intentionally taking a loss they are either insane or well-aware of what is coming and this is the best of the choices available - which is a pretty clear statement that all the other choices are, in their opinion, WORSE!

There won't be a "mark" explosion. A bet I wouldn't take. MBIA/Ambac were important to the municipal market but far more important is the wrap they provide on a number of other institutions' holdings. The key item here is that bank reserve requirements against those holdings are based on their credit - an implosion by any of these firms could triple the reserve requirements against wrapped-and-held CDOs, CMOs and similar overnight. The result of such an event is likely to be extremely severe. There is no way these firms can possibly pay any but a minuscule amount in claims .vs. their book and there are rumors all over the street that defaults are being hidden by banks here and now rather than calling them out on it because doing so could precipitate a cross-default firestorm. Unfortunately, Merrill may have lit the fuse on this last week when they went after a division of XL Capital alleging exactly that - they owe 'em on a swap they wrote and are refusing to pay. XL's latest quarterly has an ominous statement in it related to capital adequacy should they be forced to pay off on too may of their obligations. Hmmmm....

We will get through this without forcing all the balance sheet games to stop, all marks to be taken, and all off-balance-sheet nonsense brought back into the open. If you say so. I don't believe it, because, as I've repeatedly noted, confidence is all that a financial institution has to sell when you get to the end of the day. Confidence is, at this point, basically gone.

That's it, in a nutshell.

We'll see who's right in a year or so.

Heh, if I'm wrong, I'm wrong. Toss the slings and arrows my direction. But if I'm wrong then the entirety of history in the US Stock Market is also wrong, and just once, "this time its different" will prove out.

I don't like those odds.

Open Letter To The President And Others

nospam@example.com (Genesis) — Sat, 08 Mar 2008 17:30:00 -0600

President Bush
1600 Pennsylvania Avenue
Washington, DC 20015

Transmitted by Fax

CC: Joint Economic Committee Members
House Financial Services Committee Members
Senate Banking Committee Members
Hillary Rodham Clinton, Senator New York and Presidential Candidate
Barack Obama, Senator Illinois and Presidential Candidate
John McCain, Senator Arizona and Presidential Candidate

Dear Mr. President:

It is now clear that we face a nearly-unprecedented financial crisis in this nation.

Since President Clinton signed the repeal of the last pieces of Glass-Steagall, our banking system has intentionally and willfully ignored both the letter and spirit of the law when it comes to regulatory requirements and just plain old fashioned good conduct.

The stress imposed by the collapse of the subprime lending space has exposed the truth – banks and other institutions have employed Enron-style financing vehicles to keep liabilities hidden and assets unvalued by the market, literally inventing valuations as they go along.

Ratings agencies, paid by the seller of securities, have admitted to using flawed computer models – specifically, the assumption that house prices would never decline – in their rating of these securities.

The Federal Reserve has been complicit in this game of “Hide Waldo” by first issuing “23A Exemption Letters” starting in the spring of 2007, and now, through the use of the “TAF” facility, it is preventing the investing and depositing public from learning who is under stress and to what degree.

What is clear from the market, however, is both that this stress is real and that it is dangerously close to a breaking point. The expansion of the TAF facility on March 7th, 2008 is rumored to have been prompted by a potential collapse of one or more major financial institutions. Other institutions, including Thornburg Mortgage, have disclosed that they are restating earnings for the December quarter and may have to file for bankruptcy protection. If December’s earnings are being restated, that means they were aware of – but did not disclose – the level of stress they were under when they originally filed those reports. The secondary mortgage market, six months into this mess, remains almost completely frozen.

In addition, Hedge Funds and other unregulated entities have been met with increasingly stringent capital demands and margin calls, with the latest two to fall being Peloton and now, it appears, Carlyle. Peloton has collapsed outright while Carlyle has been suspended from the public exchanges in Europe. These margin calls, along with a lack of trust and the ability of the market to absorb forced sales, have caused spreads on Fannie and Freddie paper to rise to historic wide levels.

Mr. Bernanke and The Fed have lowered the Fed Funds Target from 5.25% to 3% over the last few months and the “slosh”, or free funds available in the Fed Banking System, has nearly doubled over that time. Yet this additional liquidity has done nothing to address the problem and won’t because the issue is not one of inadequate liquidity; rather it is a desperate move to hide the fact that a significant number of financial institutions in our nation are, if forced to mark all their paper to the market and recognize their exposure to off balance sheet vehicles, insolvent.

At the root of the matter, Mr. President, is a lack of trust caused by the intentional acts of these institutions, and lack of regulatory enforcement by both the Federal Reserve and other agencies such as the OTS and OCC.

As a direct consequence, those who lend money have literally taken their ball and gone home, either parking their funds in the Treasury market (irrespective of the yield being under the rate of price inflation) or sending their money outside the United States entirely.

The Fed’s attempt to manage this crisis by injecting liquidity has only forced the dollar lower, which feeds a perverse cycle of price inflation in our economy. Oil is over $100 precisely because the dollar has been debased by 18% in the last two years. But for this intentional debasement, oil would be under $80 right now. Instead, the dollar continues to decline, and all goods and services priced in other currencies continue to increase in price.

The economic impact of these actions on American Families has been catastrophic. Food and energy price inflation has destroyed the purchasing power of those on fixed incomes and families just starting out, such as Senior Citizens and our legal immigrants. Real purchasing power of the American Family has declined for the last three years while, according to the Federal Reserve’s latest documents for the 4th quarter of 2007, so has Americans' net worth.

That outcome is due to the lack of trust, which is the root of the problem – banks and others simply do not know who is bankrupt and who is not, because nobody is able to get an honest look at these institutions’ financial condition!

I have been writing since last April in my Blog at http://market-ticker.denninger.net/ about this matter, and have continued to chronicle on a near-daily basis the insanity that is being allowed to continue in our financial markets. This beast was created through intentionally making unsound loans in the belief that the risk could be sold off and therefore quantity was the only metric that mattered, while quality was immaterial. This in turn drove up the price of houses to unsustainable levels. More than 100 years of history tells us that the maximum sustainable home price is approximated by a median home in a given area selling for approximately three times the median income in that same area.

Today, most markets have home prices that are well in excess of this figure with coastal areas frequently running in excess of five times incomes.

Proposals floated by various parties that attempt to prevent the correction of home prices to historical means will not work. Such price levels cannot be sustained, and it does not matter whether this is politically palatable or not.

This is a matter of mathematics, not politics.

Home prices must be allowed, and in fact encouraged, to contract until they reach economic equilibrium with household incomes. Government must not interfere with this process!

Today, on the 7th, we had printed the second consecutive negative jobs figure. Since this statistic has been kept, two consecutive negative prints have, 100% of the time, indicated that a recession has begun within the last two to three months.

We are in a recession, and it is incumbent upon our public officials to admit to our economic situation.

I, and those who have signed this letter, call upon you Mr. President, the members of the House and Senate Banking Committees, and the members of the Joint Economic Committee, to immediately act to address this issue before we find ourselves in a fully-developed deflationary credit collapse – that is, a re-run of either Japan’s experience or worse, ours of the 1930s, both of which were caused, at their root, by the same abuses and lack of government oversight and regulation.

In short, if we are to avoid the worst potential outcomes, it is imperative that the following actions be announced immediately as public policy by our Government and implemented without delay:

All securities and instruments traded and held for investment by regulated financial entities must have a CUSIP assigned and be traded on a public exchange or their value must be established by independent appraisal (in the case of a house or other real property.) All real property already has a tax appraisal available; properties carried by banks and other financial institutions must not be “marked” at values in excess of those appraisals, and appraisals must be updated whenever ownership changes hands, including via foreclosure actions. We must stop ‘mark to model’ and ‘mark to myth’; if you cannot obtain a bid for a thing, today, its value for today is zero! These marks must be taken nightly for tradable instruments and no less often than annually for real property.
Margin requirements must be enforced against all market participants. It is simply obscene that we have firms rated “AAA” who hold less than 1% of their exposure in actual capital. That is not “AAA” credit irrespective of what anyone tells you, and when the bond market is trading their debt at 70 cents on the dollar, the market is saying that this firm is rated “C” – or just above default – at best. In addition, the idea that a bank or hedge fund can write a credit default swap without having to prove capital adequacy for the duration and reserve commensurately is an outrage – these are forms of insurance and must be regulated as such.
All off-balance sheet vehicles must be banned and existing ones immediately brought back onto the balance sheet of the firm involved and disclosed in full. Enron collapsed in no small part because these off-balance-sheet vehicles allowed them to hide their exposure until it was literally too late to do anything about it. We cannot afford a repeat of the “Enron experience” on an even larger scale, one that threatens our banking system!
We must either get rid of the NRSRO label for ratings agencies, allowing free and open competition, or we must hold those certified agencies to their ratings. Hiding behind a free speech disclaimer while enjoying oligopoly protection is an outrage; either all are free to speak or there must be no protection. In addition, as BASEL sets reserve requirements for banks based solely upon ratings, the systemic risk of a “gamed” ratings system should be obvious. That the current environment has been systemically gamed for years is now obvious for all to see. This must be cleaned up immediately.
All credit instruments must be subject to “Regulation FD” disclosure requirements. It is outrageous that bond rating agencies are given details on the mortgages and other instruments inside “CDOs” that are not available in the prospectus to buyers.
Fraud must be aggressively prosecuted in all instances. There were many homeowners who lied on mortgage applications but there were also just as many financial institutions who literally made up data for their models when it was missing instead of rejecting the loans outright. The worst abuses were in the “stated income” or “liar” loans, but the problem is not limited to that area of the market. The FBI must go after not only homeowners who lied but also the banks that deceived by omission or commission the purchasers of these securities, and those who continue to deceive with improperly booked capitalized interest earnings on homes which have declined in value below their mortgage balance.
Fannie and Freddie’s capital adequacy must be investigated and stringently monitored. If either of these institutions were to collapse the results would be catastrophic. The Federal Government cannot bail them out as that would cause a rocket shot in treasury yields which in turn would greatly increase the cost of government borrowing – which we cannot afford given the national debt and current budget deficits. Therefore, it is critical that OFHEO be extraordinarily diligent to insure that this does not happen, and that Fannie and Freddie ONLY buy fully-documented loans with no more than a 36% back end ratio and no more than an 80% LTV. This is a material tightening from current guidelines but it must be put in place immediately as it represents the benchmark of sound mortgage lending for more than 100 years.

I recognize that these changes would cause some institutions to fail immediately. Nonetheless, the consequence of not taking these actions will be far worse, and the probability of that outcome is extremely high.

Mr. Thomas Hoenig, President of The Federal Reserve Bank of Kansas City, said during a speech on March 7th in Brazil (available at http://www.kc.frb.org/SpeechBio/HoenigPDF/HoenigBrazil3.7.08.pdf) the following:

"I believe there may be merit in considering formal liquidity requirements, and perhaps loan-to-value ratios for banks and other financial institutions, especially the large institutions that provide liquidity and risk management products to other financial institutions and to financial markets. I also think that it is time that we extinguish some of the off-balance sheet fictions that have developed to excess in recent years."
"In conclusion, let me stress again my belief that the response to this crisis should be fundamental reform, not Band-Aids and tourniquets. "
"I believe a central bank must have the legal authority to require this information from the supervisory agency on terms set by the central bank. A voluntary exchange of this important information is no more likely to be effective in a financial context than it was in the U.S. intelligence community prior to 9/11."

This, of course, was not widely reported in our "mainstream media", but Mr. Hoenig is correct on all points.

These actions need to be taken right here and now.

I call upon you to act today in order to prevent the economic catastrophe which looms over our nation due to the artifice and outright fraud of the last ten years.

I look forward to a public response from all recipients of this letter, addressing the points herein and announcing policy initiatives immediately. Our capital and credit markets cannot wait for the election or for long cycles of public hearing and comment. We must act now or our credit markets will remain seized as market participants cannot be forced to either lend or borrow.

Our nation is in grave economic danger and requires your immediate attention.

Sincerely,

Karl Denninger