Wilderness Wednesday

Yes, wilderness.

Barren, at least in the context of economic data today, unlike yesterday (which printed three recession-level indicators!)

Today we only got one. But boy, was it a doozie!

Existing home sales for September came in down 8% in September, down 19.1% from September of 2006. Inventories up 0.4%, to 5.04 million units. Prices fell 4.2% year-over-year. And this is from the "cheerleaders in chief", the National Association of Realtors - those who were complicit in the game right up front!

The gig is up kids!

What's even worse is that they're still building into the oversupply of inventory! INSANITY!

What was the market reaction to this? It priced in more rate cuts! As if that's the solution to whatever ails the market. Here's a hint kids - you can't clear this sort of inventory overhang by making money cheaper when the prices are still being at DOUBLE the affordable maximum!

Overnight we saw an interesting dichotomy; Asia opened up bright green but ended with a far more mixed picture with most indices closing down modestly in what was a fairly surprising (to some) reversal of fortune. It didn't surprise me; the press is calling it "risk aversion" but let's be straight with people here - this isn't about "risk aversion" at all and never was.

It has been about intentional mispricing of risk so you can make money by fucking the poor dupes you sell your shit sandwiches to. After all, is a shit sandwich worth anything at all? Even though you start with perfectly good bread, which does have a value, once you apply the shit the bread becomes just as worthless as what's inside.

There are a few other people who have picked up on this, talking about how "CDOs" and "CLOs" and such are only "of value" to issue if you can misprice them. Well, duh. It also flies over the average person's head, which is why I like the shit sandwich analogy instead. After all, that's one that's graphic, easy to understand, and impossible to play "spin" with.

This much is for certain - you have no doubt about the "value" of such a thing once you've taken a bite!

Merrill reported an $8 billion loss on writedowns. Yes, they said $7.9 billion. That's a lot like your local gas station - "$2.99/9", claiming loudly "under $3!" Horseshit. As an aside, do you realize that in the days of mechanical gas pumps the "9/10" was actually built in to the mechanism? Yep. Intentional mispricing by design. Kinda like what's going on now, eh?

Indeed, its the oldest game in the book; make a bad number look smaller so people will buy, and make a good number look bigger so people will be enticed to sell. So when its what you're "given" for your used car, its $13,000. When its the price of the car you want to buy, its $12,999. Uh huh. And before our government's intentional misstatements on inflation, the other buck would have actually gotten you a cup of coffee - but now the Latte at the Green Mermaid not only tastes like a shit sandwich but costs $4 on top of it!

Now let's talk about cops and robbers (again). Where are the cops? Just a couple of weeks ago Merrill said this loss was going to be 30% - or more - less! And let's cut the bullshit kids - the quarter had already closed. So the idea that this was some sort of "surprise" in the last two weeks is utter horseshit. I ain't buying that, but heh, even in this day of SarBox which allegedly forces CEOs to either shut the fuck up or tell the truth, it appears that nothing has - in fact - changed.

And yet today the deception continues in "structured finance" land. Yes, we've seen downgrades - but has anyone truly "marked to market"? No. Why? Because if they had, the fact of the matter is that there is no such thing as a "AAA" mortgage written to a consumer. Huh, you might say? How can that be?

Simple - AAA credit has a risk profile similar to that of the United States Federal Government. Yet not even Bill Gates has credit that good. Excellent, yes. As good as the "Full Faith and Credit" of the world's largest economy? Bollocks.

So what's going on here?

What's always been going on. What was going on during the 1990s. What's still going on now. Today.

Intentional deception for profit.

The common word for this is FRAUD. Yet it is, in fact, what this entire decade has been built upon, and most of the tech boom before it.

In the 1990s it was all about intentionally overstating growth forecasts ("The internet is doubling in size every 3 months"), allegedly supporting multiples that were stratospheric and business plans that, when all the bullshit was distilled out, could be written in one sentence: "We're an internet company - give us $500 million for our stock in an IPO."

In the 00s it has been all about intentionally mispricing complex financial instruments - the more complex the better, as it makes it essentially impossible for "the sheep" to figure out that you're going to fuck them (and charge them for the privilege!) 100+ page documents describing the "subordinated classes", alleged "credit support", claimed "models" which assumed that houses would never go down in price but instead would rise at 2, 3, or even 5 times the rate of wage growth.

This is, in fact, nothing more than a complicated Ponzi scheme! Those schemes have been highly illegal since Charles Ponzi assfucked a bunch of "investors" 75 years ago!

Huh? How's that you say? Certainly not ALL of the mortgage and housing mess is fraud, is it?

Yes it is.

Here's why.

While it is certainly possible for some people to make a lot of money in real estate, on balance housing must be a net cost - not a net profit center - for the American Homeowner.

Why?

Because prices cannot rise faster than the rate of wage growth over longer periods of time. It is simply impossible for that to be a sustainable situation; as prices rise in order to keep up with the last year's "growth rate" the required increase in price goes exponential due to the "curse" of compound price growth.

And, since every house has expenses, such as replacement of roofs and appliances, lawn care, taxes, electricity, water, sewer charges, trash hauling and the like on balance housing must be a net cost - not a net profit - on American's balance sheets.

It simply is not possible for what we've been told over the last seven years to be true! Mathematically it cannot happen.

The financial "alchemists", including the "smartest people in the room" such as Hank Paulson and Ben Bernanke, are fully aware of this. They KNOW that this entire house of cards is fraudulent. So does Greenspan. So does every last one of the "investment bankers" on Wall Street, all the ratings agencies, and all of the regulators involved in actively looking the other way.

Yet all of the above continue to insist that this was just "accidental mispricing of risk."

That claim is a total, unadulterated load of bullshit.

Now, let's get back to the facts, and the simple question - where are the cops?

See, this is really just garden-variety fraud. An asset cannot grow in price at a rate which exceeds the earnings power acceleration of its purchasers for very long. Oscillations around the mean can and do happen - the very concept of "buy low and sell high" comes from this, and it works.

But over time the price of a house is limited by the financial ability to pay for it. Therefore, over time, houses cannot grow in price at a rate which exceeds the growth in wages.

This is so blatantly obvious - and immutable - that each and every one of those "merchants" who have sold "investors" on the basis of a contrary claim should, under the law, be under indictment for fraud!

How do you get away with putting together a model that is based on house prices rising at more than the rate of wage growth - indefinitely? And then you use that model to rate debt securities! How do you get away with telling people that you have "AAA" credit quality in these securities (whether you bought that rating from someone or not) when in fact you know that you loaned money to people who likely lied about their income and thus have a totally-unknown debt-to-income profile? Then, we allow people to come up with a computer model and trade these things over the counter with no recording of prices paid or surveillance, instead of forcing them to be traded on an open, public exchange with a public bid, ask and mark!

Yet as we've seen time after time, you get the best "justice" you can buy in this country.

Nowhere have we seen the cops actually show up to break up this merry band of fraudsters and send them off to the hoosegow where they can experience some of the assrape they've served up to their "investors" and the American Public.

Chinese banks, German Banks, Pension funds and other investors are all shaking their heads at the enormity of our regulatory failures and complicity!

Indeed, we now have Hank Paulson, a US Government Official, participating in trying to paper over the deception with even more deception by setting up a "super-SIV" in a bald attempt to stop the market from pricing these alleged "assets" at their true market value - that is, for many of them, ZERO! And even better, "an unidentified Fed Official" last night said that The Fed "was not opposed" to this plan!

Imagine that - our central bank isn't opposed to intentional hiding of liabilities off company balance sheets and intentional mispricing of securities? In short, did I really read that The Fed isn't opposed to FRAUD?!

No wonder it was an "unidentified Fed Official."

Oh, and by the way, obviously this sort of Fraud isn't illegal, or people would go to jail, right? Why isn't it? Well because those very same pigmen influence folks like FASB that write the accounting standards and they specifically allow you to keep liabilities in these SIVs and not report them transparently!

So we have a law called "Sarbanes-Oxley" that says a CEO is supposed to sign a statement that his financials are honest and complete and then we have FASB that gives you ways to avoid producing financials that are honest and complete!

NOW do you see why I say we get the best cops "money can buy"? We just pay them to sit in the fucking donut shop instead of busting the bad guys!

This is beyond ridiculous and yet these are precisely the sort of actions that trapped rats take when the ship starts to go down.

Unfortunately for "the pigmen" they are ultimately doomed to fail, because in the end analysis when the payments can't be made the cashflow stops and those "credit default events" grow precipitously.

You can only sustain the deception until people stop paying - just like Ponzi and his "postal coupon" scheme when the money simply can't meet the cashflow requirements you're no longer able to lie to people and the whole scheme comes apart in your face.

The absolute stupidity on display in the equity markets in holding up these companies is testament to the fact that we don't teach math any more in our schools; even a fifth grader can, with a paper and pencil, figure out what happens when you assume 10% growth rates in prices on an annual basis yet wages only advance at 5%!

What's even more stupid is how individuals continue to "spend spend spend" well beyond their means. Oh we hear how "the consumer's balance sheet is strong" yet that's a lie too. It is predicated upon a house "value" that is fully double what reality is. Take that back out and account for true debt load - debt that exceeds in many cases by half the value of the underlying assets - and suddenly you find that the consumer is functionally bankrupt!

The truth is showing up in things like credit card chargeoff reserves. American Express, Capital One Financial and more are all reporting dramatically growing delinquency rates. And of course the delinquency rate on mortgages is growing at a ridiculous rate as well.

"The worst is behind us"? Oh bullshit. "The worst" has not even yet begun to be talked about! We face an absolute tsunami that is now just starting to curl over as it approaches the shore, while all the locals are scurrying out on the exposed seabed collecting fish and chatting about how smart they are while raking in their "hoard", totally blind to what is about to happen to them.

We learned absolutely nothing from Enron.

Enron exploded due to these very same sorts of financial games.

Ponzi finance at its best.

This morning the dip buyers came out right at the open and started bidding up stocks.

Bidding them hard? No. Heh, a few people got smart - margin contraction scared a few people and Spamazon got sold off hard, being driven to an 8 handle almost immediately.

But in general the "mark to market" has not yet occurred.

So here's my question to "The Market" - when are you going to display more than a shoe-sized IQ? Will it be before - or after - your portfolio gets shredded?

You don't remember 2000?

Really? You sure?

I sure as hell do and I know what happened to friends of mine who were "true believers", forgetting their fifth grade math skills before they pushed the "buy" button in a speculative frenzy to bid up stocks to 80, 90, 100, 1000 P/E multiples.

Will you ever hear CNBullShit talk about this? Oh fuck no. Never mind that every one of those people behind a desk know the truth. Never mind that Hank Paulson sounds like someone has a cattle prod up his ass every time I see him on TV. He knows he's lying but he also knows that if he tells the truth about these "compounded rates of return" and that they are not only unsustainable but in addition that the promise of these returns were an act of intentional deception that the financial markets would implode 30 seconds later!

I know, I know, the solution to every problem is a share buyback, never mind that this is just another example of levering up at unsustainable rates as inevitably debt is used to pay for it, and when losses come you get buttfucked twice - once by the loss taken over a smaller number of shares (making the "EPS" loss much larger) and by the demand on your capital in the form of interest payments.

You want to know what will force "Mark To Market" on all those CDOs? Here's a hint - whisper "Acceleration Event" to a CDO manager and see how white his face turns.

What's an "Acceleration Event"? It is a deterioration in the underlying credit quality that causes all of the subordinate tranche coupon payments (the "regular" interest payments) to be cut off. This is usually an incurable event; once it happens only the "super senior" tranches - which typically are NOT traded - get interest payments. Everything else, including the so-called "AAA" tranches DO NOT.

How close are we to that starting? Pretty close! Exactly how close? I don't know, but I'm hearing whispers about it here and there, which means its bad - real bad. If one of those happens to a CDO then ALL of the tranches become effectively "D" rated (for "Default") immediately, because there are no more coupon payments! So much for "AAA".

When does this whole house of cards come crashing down? I can't give you a date. But what I can tell you is that as certainly as the sun will rise in the east tomorrow that day will come. I call it the "Cold Sweat" moment - when you wake up at 4:00 AM and suddenly realize that the math simply doesn't work - and can't.

Beware.

Oh, in the "Peak Bullshit" department here we go again with totally ILLEGAL market manipulation. Today it was a rumor that hit the Blackberries RIGHT ON SCHEDULE AT 2:15 claiming there was a "discount rate cut" coming.

The result? TWENTY FIVE HANDLES on the Spoos in less than 30 minutes, with the first 15 being STRAIGHT UP.

One way or another - whether this is "rumor" or a "leak" - people need to start going to fucking JAIL for this shit!

And let's be straight here guys - there is no distress in LIBOR, no distress in interbank lending and no reason for an emergency action, especially with a scheduled meeting ONE WEEK AWAY!

This is a big part of why The Petition exists, AND WHY YOU MUST SIGN IT.

This sort of thing simply MUST STOP.

And Maria Cuntface Bartaromo? SHE'S FUCKING CHEERING THE RUMORMONGERING! No mention ANYWHERE by ANY of these media fuckheads that this shit is a FELONY!

Gee, Enron was a felony though too wasn't it? This is fucking rediculous.

Here's your rant, er, technical.