The Market Ticker

.... so claim some people.

Oh really? Not so fast!

"Congress is starting to probe the Federal Reserve-backed agreement to sell Bear Stearns to J.P. Morgan Chase, examining the deal to see if it complied with regulations and trying to determine taxpayer exposure, The Wall Street Journal reported Thursday."

Gee, Congress giveth (The Federal Reserve Act) and Congress can taketh away.

Duh.

And not everyone thinks this will pass muster either:

"The Federal Reserve bypassed its own emergency-lending policies to let securities firms borrow at the same interest rate as commercial banks as the central bank sought last weekend to stave off a financial-market meltdown."

Hmmmm.....

Now this will be interesting. Congress should do its damn job, but whether it will is another matter. Nonetheless, the politics of this are certain to get interesting, especially given the historical feckless lack of regulation coming from The Fed and elsewhere.

At minimum the likely outcome of this little mess is forcing Investment Banks under bank-style regulation by The Fed and/or OCC. That would be amusing, as it would shut down the "infinite leverage" games and force these IBs into the 7:1ish maximum gearing ratios that exist for commercial banks.

Now if we can just get those off-balance-sheet games to stop at the same time, we might actually accomplish something here and come out of this stronger as a nation and market.

Oh, the Conference Board reported leading economic indicators, with the 5th straight decline.

While we're on the subject of distortions and lies, many people say "The Fed doesn't care about the equity markets", or alternatively, "The Fed is trying to prop equity markets."

The truth is a bit more obscure and obtuse than that; one must look into how bank capital requirements are determined in order to get to the bottom of it.

Here's reality - Bank Tier Capital - the measure of whether you are "well capitalized" or "dead" as a bank - includes common stock equity.

Specifically, Tier 1 Capital, the most important type for a bank, includes what is known as "Shareholder Equity" as well as retained earnings.

So consider this folks - you can sink a bank if you sink its stock price.

How? Simple - "Shareholder Equity" is not so simple as "stock price." However, the stock price has a major impact on it, because precipitous declines hit both intangibles (good will) and financing costs (in the other direction, raising them) which shrink Shareholder Equity from both ends of the candle at once.

Now do you get it? The Fed and the rest of the fools on The Street want to pump bank stock prices because if they sink sufficiently the bank can actually be declared insolvent as a consequence!

This also, however, means that our banking system is in fact 100% based on confidence and it is the clearest indication you will ever find on why we must have transparency in our financial markets, including an absolute and irrevocable ban on off-balance-sheet and other hidden crap, and forced mark-to-market.

There are many people who have recoiled in horror at the idea that everything should be marked to the market. Well, I think it should be. I think it should be precisely because the only way a bank survives is if there is investor confidence in its position in the marketplace and you cannot obtain and keep that confidence unless you have full transparency.

If I can't read a balance sheet and know that the figures there present an accurate and complete picture of that firm's exposure, good and bad, then I have no reason to trust that presentation of the firm's financial condition and as a consequence I have no reason to buy and hold that firm's stock.

It is absolutely essential that everyone - domestic and foreign - have this trust in our financial system.

Without it we run the risk of dislocations whenever that confidence is shaken, and those "shakes" can come absolutely without warning. The "run" on Bear Stearns was able to be initiated and sustained precisely because of the opacity of Bear's balance sheet - but for that anyone could read their balance sheet and KNOW whether or not there was real risk to investors and customers or not.

We are now living in the dislocation. And despite the claims that "its all ok" and "we're at a bottom" (the calls of which are nauseating) the bond market says otherwise - check this out:



That is the IRX, or the interest rate on the 13 week T-bill in the open market, measured in 10s of basis points.

In other words the current trading price is 0.4% annual yield on the 13-week T-Bill, a level lower than that seen at any time in the last 50 years and in fact you can earn a positive carry borrowing those and buying JGBs - short term Japan bonds - which currently have a higher yield! Can you say "Carry Trade in Reverse"?

What does this mean? It means that people are willing to "park their money" with the government at a rate far less than price inflation and in fact for all intents and purposes ZERO because they do not believe that they will get it back from anyone else.

Now if you remember, I and others have commented that once we reach a "zero interest rate" policy The Fed is out of bullets in terms of policy actions. Well, we're at zero kids. 0.4% effective interest rate is for all intents and purposes zero.

No, the FFT doesn't matter - what matters is real interest rates, and for short-term cash it is now zero, as is confidence in anyone except The Federal Government.

Congratulations Ben; you've failed in restoring confidence because you have failed to force banking and other institutions to cut out the horsecrap and instead have continued to enable it. As a consequence irrespective of your meddling the market no longer trusts ANYBODY with their money EXCEPT for the folks with 6,000 nuclear weapons as backing - that would be the US Federal Government.

This is why I have continued to rant and rave about transparency - given our banking system and how it is capitalized, without transparency and trust the system and our economy will collapse.

I know, I know, the market was up big today with Options Expiration. Its all ok, and you should buy bank stocks. All of them. So says Dick Bove, and lots of people are today, with all of them up 5%, 10% or more.

You did not hear the truth about the Treasury complex on CNBC today, not even from Rick Santelli. Why not?

The Truth: The people with a working brain in their head know what's coming and that it is going to be extraordinarily ugly. They are prepared for it and have moved their billions of dollars into cash where they know they will get it back - the short end of the US Treasury Curve.

The Truth: In the last recession at the depths of it in the summer of 2003, just before the market turned, the lowest the 13-week bill yield reached was 0.774%. We are now trading at 30-50% below that level.

The Truth: People who know this for a fact including CNBC won't tell YOU because it is critically important to them that they get through the door before the fire starts burning the curtains, as the door is only so wide and there are a lot of people in the room. If you don't get your butt through the door your financial assets will be consumed in what's coming.

The Truth: CNBC should be SHUT DOWN as NOTHING MORE THAN A CONDUIT FOR INSIDER TRADING AND ILLEGAL MARKET MANIPULATION. Their "commentators" from various funds who are almost certainly trying to unload shares they are stuck with into YOUR HANDS should be locked up and/or sued into oblivion AS THEY ARE WELL AWARE OF WHAT IS GOING ON AND ARE USING CNBC AS NOTHING MORE THAN A WAY TO SCREW YOU WHILE THEY PROFIT. THERE IS NO BALANCE AND NO DISCLOSURE BY THESE COMMENTATORS OF THEIR POSITIONS, INCLUDING PIMCO, BOVE AND OTHERS. CRAMER IS THE WORST OF ALL OF THEM, telling people to leave money at Bear Stearns (if you believe that was about "deposits" when Bear isn't a Deposit Bank, you're dumber than a rock) and alternating between a "Caution" sign when we're down 300 and then "BUY EVERYTHING" when we're up 400 - only to see you lose 3/4 of the gains the next day! We do not have "financial TV" in this country. We have blatant market manipulation in the guise of "news" on a daily basis, 12 hours a day, AND THE SEC DOESN'T GIVE A DAMN.

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

The Truth: All you hear on CNBC is "positioning for an early-cycle rebound", while in fact some $5 trillion in "value" expressed in the price of houses is permanently GONE, and that is assuming we use Freedie's and Fannie's estimates of home price decreases. If we use MY estimates the number is closer to $10 TRILLION dollars. To put this in perspective our Gross Domestic Product (GDP) is about $14 trillion annually. This will have a permanent effect on the standard of living of over 100 million households in the United States and thus our economy. It is unavoidable and as a consequence MUST have a similar impact on the earnings power of United States corporations when 70% of our economy is consumption by people just like you.

The Truth: At minimum your house is going to fall in value by 15% from 2005 numbers. In coastal and other high value areas the loss will be at least 50% from 2005 values, and may be more. It is absolutely not a time to buy real estate unless you can literally get it for at least 30% off the asking price - period. Why should you take the risk of being early? Let someone else have that risk - don't be a sucker!

The Truth: You must raise cash. NOW. Not commodities, not gold, not "solid stocks", not anything of the kind. CASH, defined as actual CASH or Short-Term United States Treasuries. Again - up to $100,000 in FDIC insured banks with the rest in short-term US Treasuries - either directly (Treasury Direct) or via a Treasury Money Market fund such as VMPXX (Vanguard).

If you don't, and what The Bond Market is saying is coming happens, don't say you weren't warned - because you were - by the only voice that matters - the market.

I am unlikely to warn you again about this in this sort of detail; I have been calling for exactly this sort of event in print since last April and now we have irrefutable proof in the form of the bond market telling you that if you don't pay attention you are going to get slaughtered in what is to come.

I may be wrong and so may the bond market.

I wouldn't take that bet if I were you.

Here's reality folks - Paul McCulley of PIMCO has finally told the truth - 10% of all Americans are underwater on the price of their house.

Of course then they go on to say that "this has to be fixed", because their book of business requires that it is, or PIMCO is going to get the Chrysler building somewhere that hurts. A lot.

There is in fact where the problem lies - and it can't be "fixed."

That's reality, whether people like it or not.

And lots of people don't like it.

You're now seeing some real "reporting" from the media, with the truth coming to the fore - maybe.

Today's banner should have read "nobody wants risk of any sort, including interest rate risk" as the IRX - the 13 week bill - was bought HARD across the board. This speaks very poorly to the potential for the future, and if you look at the WSJ's "Market Data Center" you might see a reason for it - P/Es on the indices are higher today than they were a year ago, despite the plunge in prices. Why? Because earnings are sucking and in fact are likely to suck even worse than what we've seen thus far!

Now add to this that the trade isn't just into TNX (long end of the bond curve) but is REALLY into the short end, which speaks to a raw FEAR that we are about to provoke capital flight and/or massive government bailout attempts which will spike the long end of the Treasury Curve higher.

What's going on beyond all the crooning for government intervention? Simple - the death of the hedge fund. Leverage is being forcibly taken down. 20, 30, 40:1 is no longer acceptable to the prime brokers that fund these Hedgies. They're being told to cut back to 4:1 or less. This is a serious problem because with the 2 and 20 compensation system they use there is no reason for them to exist unless they can gear up 20:1 or more - their return to the client will approach that of Treasuries!

If this keeps up, and I believe it will, there will be effectively no hedge funds in a year or two - there will be no way for them to make money any more. This is a major problem for equities because at least half of all volume in fact comes from these institutions and its even worse in commodities!

This augers very poorly for both equities and commodities - the "hot money" is being forced to cut out their wayward ways, and the result is going to be serious pressure in both the equities and commodities space.

Those who think the market is going higher because "money on the sidelines will come in" are just dead wrong because the money is gone!

Fannie and Freddie were out pumping their "liquidity change" today on CNBC, but they also said something that should give you pause - they expect at least 15% in home price declines on a national basis, with most of it to come.

Now look at what this does to foreclosure rates and their capital ratios.

Oh, and they're talking about deploying this new liquidity "opportunistically" (that would mean a bit of risk being taken eh?) - that could end very badly for them. One thing they did say though - repeatedly - is that they will be "conservative."

Hmmm... what's "conservative"? Why am I reasonably sure its not 20% down and a maximum 36% "back end" ratio?

If this doesn't make you nervous, in my opinion it should!

Oh, here's the real ugly from today - Merrill is apparently suing one of their CDS insurers (you know, one of those "monoline-type" companies?) that they bought swaps from (which are supporting the credit quality of some of their book) and which they allege are now defaulted under the terms of that purchase. The company refuses to pay.

This is huge news; if there is an explosion in one of these firms the cascade effect of "exposing" the supposedly-wrapped investments in one of these investment banks is likely to cause cascading cross-defaults in other places. It is possible that this could cause a cascade of capital ratio violations across various institutions with disastrous consequences, and unlike Bear Stearns, this one can't be stopped by The Fed.

Pay attention folks - things are quite likely to get very interesting in the coming days and weeks.

The truth is now leaking out on these "wraps" - they are all worthless as the money to pay is simply not there. As the demands for payment start to line up people will soon "get it"; the wise man is now making damn sure he's standing right near the door, as there's a whiff of smoke in the air.

There is a certain brand of insanity that is on display from time to time in the markets, and today is one of them.

Sunday night Bear Stearns was literally forced by The Fed and Treasury to accede to a buyout offer that was basically a zero ($2/share is, for all intents and purposes, nothing.)

Yesterday afternoon people started buying ahead of an allegedly-priced-in 100 bips FFR cut today. That is, they started bidding stocks ahead of something that allegedly was already represented in market prices!

This is not unusual, by the way - it happens all the time, and is always good for chuckles - after all, why only price something in once when you can lose the same money three, four, five or even ten times over?

PPI came in moderately hot - given that the CPI print said there was no price inflation at all, one has to wonder how you reconcile these two numbers. Answer: you don't.

The pumpers are out once again on CNBC saying that "valuations are reasonable." Really? They are? Perhaps you can tell me how earnings estimates are "reasonable" when on the S&P 500 current earnings estimates are actually above last year's, when we are now in a recession and weren't last year. Isn't the definition of "recession" a contraction in economic activity?

This morning's open was an all-out buying panic, with internals being monstrous - 20:1 up to down volume on the NYSE! Short covering? Probably to a large degree, but it doesn't matter for now, in that people believe "The Fed will save us."

Hint: Look at their balance sheet and the commitments they have made against it. The Fed is running out of bullets in their gun and what's worse, Treasury can't backstop them without going to Congress as they're up against their mandated debt ceiling!

To add even more foolishness there is not a hint of foreign interest in keeping this charade going. The last T-bill auction was horrifyingly bad in terms of foreign interest, as I've catalogued here. This is an all-on buyer's strike as foreign governments and interests have (correctly) come to the conclusion that our government and Fed has zero interest in discovering who has done imprudent things and forcing them to eat their bad loans, but rather is solely interested in seeing if they can engineer another bailout or six so they can keep up the deception.

Then we have CNBC. One guy with a clue talking about The Fed running out of balance sheet, and a whole host of pumpers claiming that "The Fed has a printing press."

Well yes they do. But as I have noted before, there are severe consequences should they choose to turn it on, and those consequences are entirely outside of their control, unless our government is prepared to literally force foreigners to buy our Ts at nuclear-missile-point.

Since I rate the probability of that happening as zero, I remain unconvinced by any claim that "The Fed has an unlimited balance sheet and can do whatever it wants."

Sir Isaac's laws are indeed laws, and the Third Law is particularly appropriate here.

Ben Bernanke is many things, but dumb isn't one of them. Naive, perhaps, but not stupid, and he has exactly one desire here - to maintain his "air of invincibility".

Oh, and before you go out and say "oh its all ok, The Dow was up nearly 300 points within an hour of the open", you might want to watch this..... yes, this is in America:



Betcha you don't see that on CNBC. While the BBC is often considered "far left" by some (and not undeservably either) facts are facts eh?

So let's see - pumping the housing bubble and then blowing up huge parts of our society - literally - so some guys can make $200 million or more a year is just fine, right?

Now look - I'm all for capitalism. After all, I ran a company for over a decade and made my money by being a capitalist.

But to make money in the way some of these people did was unethical at best and illegal at worst. And with our economy being 70% dependant on consumer spending, with S&P earnings estimates above last year's while any economist worth a nickel in salary agreeing we're in a recession now, the fact remains that earnings estimates are far too rosy for the reality going forward - and so are stock prices.

If you adjust back for that you find that the S&P is currently trading at well north of 20x earnings, which remains about 25% overvalued on a historical basis.

In addition anyone who argues that "there's lots of liquidity" has a little problem explaining volume. As in "where'd it go?" The answer is simple -all that "ample money" that was flying around last summer is now gone. It has been lost to the idiocy in the marketplace, and is no longer around - its not "on the sidelines", it has evaporated as the electrons representing it have extinguished in the implosion of our housing market and the credit mess that enabled it.

While the market cheered Bear's "bailout" and today traders are actually buying Bear's stock at over $7.50 a share, betting in effect that the price is too low by nearly three hundred percent, the fact remains that Bear is unlikely to be the last implosion in that sector.

Now some reality for Ben and company, not that I expect he'll listen.

There is exactly one way out of this mess.

Housing prices must come down to the point that an average person can afford an average housing using a 30 year fixed mortgage, 20% down, and a 36% DTI.

Period.

NOBODY - and I do mean nobody - is talking about this in the media. NOBODY is telling us that we must start being responsible. NOBODY is talking about anything but giving more booze to the drunk, yet there is a major trap-door ahead for the United States on the path we are following with "let's have more booze", in that once an effective zero interest rate is reached nothing further that The Fed does matters as there is no more ability to earn via the carry!

You need only look at JAPAN to see what ZIRP gets you. Zombified banks who are reduced to "loaning" money out that immediately leaves the country seeking a positive return somewhere else! That's all they have left, and 20 years later, they have failed to restart their financial and industrial engines of growth.

Investors and institutions have not been saved. They have in fact been screwed raw, with the worst of the screwing reserved for people dependant on fixed incomes - savers, those on Social Security and retirees in general who cannot afford to speculate in the stock and commodities markets with their money.

Even if you accept the "official" price inflation figures (I don't) this enormous portion of our population is getting repeatedly screwed by what amounts to our version of ZIRP.

There would be an argument for liquidity injections if there was a liquidity problem. But there isn't. There is a solvency and trust problem which can't be fixed by liquidity, as I have repeatedly noted.

Ben, the administration (including Paulson) and Congress (including the Demoncrats) are all conspiring to screw every senior citizen and prudent person in the nation, while rewarding those who speculated on ever-rising tulip prices, er, home prices, and now are losing their shirts.

Up and down the line, from "investment banks" to house flippers to mortgage executives to "hot money" that bought all those supposed-AAA bonds, The Fed and Congress' only concen is insuring that their flow of campaign contributions is maintained - its perfectly ok with them if Granny is literally reduced to eating catfood as her savings rate falls to a literal zero and her price-adjusted return is NEGATIVE ten percent a year!

Just remember folks - eventually, you will be Granny, and Japan's version of this little Hell has lasted 20 years and isn't over.

Oh, and while you're at it, don't forget that Japan had a very high personal savings rate when they started.

Our nation, and our people, are in debt instead, which means that we're going to get it far worse than they did in terms of real economic impact.

FOMC Cut the FFT 75 bips, but said quite a few things that ought to wake people up rather "smartly":

"Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.

Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.

Today's policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability."

That's a very strong statement both on inflation AND risk to the downside on growth, and the actual projection on resource utilization is an outright recession call!

Well, no kidding.

Oh, they had two dissents too - Fischer and Plosser wanted a smaller cut in the FFT. Hmmmm.....

Equities? They liked it, finishing up over 400 on the Dow, with no small part of it, I suspect, being Pimco and others ranting that The Fed will buy Mortgage securities.

In a word - bull! That is explicitly ILLEGAL folks. Against the law. Barred by The Federal Reserve Act. For that to happen there would have to be a bill introduced into Congress, pass both House and Senate, and be signed by The President.

Until that happens just tell people talking about that to shut the hell up because they're lying!

Nonetheless, I suspect half of the pump today was on exactly that sort of nonsense out of Pimco and others. Yet not one of the crooners on CNBC pointed out that this is explicitly barred by law at the present time.

Nobody read the "money sentence" in the release - once again:

"The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization."

TRANSLATION FROM FEDSPEAK TO ENGLISH: The economy is in a recession, and as a consequence of demand destruction commensurate with a decrease in economic activity pressure on resources such as factory capacity and labor will decrease, as will energy and commodity prices as there will be fewer dollars spent on them due to the slowing economy.

The Short Bus rides again, and if you buy into it, you deserve exactly what you get.

Short-term this bounce may have some legs. Intermediate and longer-term we are less than half way through the average equity price loss in a recession.

Invest accordingly.

"It begins."

CNBC started running their Asia coverage last night as the markets pretty much literally fell apart. For once, Americans got to hear some truth - from people not in America.

This morning we're back to lies. Specifically, claims that "its all the shorts fault", and "The Fed could actually make money on the BSC backstop", along with all sorts of other nonsense.

Uh huh. And I might - just might - find a lucky shamrock and some fair Irish Maiden may suddenly appear next to me this evening and ravish me all night long.

Of course it is far more likely that this will happen in my dreams.....

Can I just watch Asian and European CNBC coverage all the time? At least they tell the truth some of the time, instead of being a cheerleading squad herding Joe Six Pack straight towards the cliff, below which there is...... Lucifer.

The futures trading last night was impressive. Exciting, dangerous, and for some (myself included) insanely profitable. Thanks for the money Boyz. Not my best day ever in the futures, but in the top 5 - and it was the overnight session. I quit chasing it around 10:00 PM as the odds of yet another "surprise" started to go up to unacceptable levels.

The Fed is out lying again too, although yesterday they were playing the part of Bully instead. Never mind that the right move was clearly to let Bear go down. But that would expose the truth - there are trillions of dollars in interlocked derivatives, none of which have been marked to anything but dreams and lies, and were they to be forced to actually have to be paid off via specific performance the dominoes would begin to fall.

Not that The Fed can stop this event. The final "washout" will eventually come, and by delaying this day The Fed is in fact doing much damage to our economy and nation.

This "washout" should have come in August. They "sticksaved" with the surprise "Burn the Shorts" OpEx morning discount cut. Then the "shock and awe" change in the FFT. And on and on and on.

In point of fact none of these "sticksaves" will solve the problem because the problem is that there is no truth in the balance sheets of these financial institutions and until there is, we will not find the bottom, nor be at the end of this mess.

As I have repeatedly said we can do this the difficult way or the easy way. The easy way is for The Fed and regulators to force all these banks to mark their "assets" to the market and eat whatever may come, take all off-balance sheet games back onto the balance sheet, and clean house.

The difficult way is for confidence to continue to evaporate and these "bank runs" - what dumped Bear Stearns into the Hudson - will continue, firm by firm, until we find out the hard way.

The problem with "The Hard Way" is that if The Fed and regulators choose this path we could literally see most of our large financial institutions taken to the woodshed and cleaned out just as Bear was, because there is no reason for investors and creditors to trust people when they have reason to believe they are lying!

A warning to those who think this is a "buying opportunity" - what happened to Bear Stearns could quite easily extend to virtually EVERY SINGLE MAJOR INVESTMENT AND NATIONAL BANK WITH "MARK TO MODEL" AND "MARK TO LIE" EXPOSURES.

This is precisely why what The Fed has been doing since AUGUST is foolhardy and ultimately self-destructive to its own balance sheet. Had Bernanke stood up in AUGUST and told The Street that he was NOT going to keep providing whiskey to the drunks having DTs until they DETOXED we would have had a huge washout in the equity markets back then, but we would know where the bodies are and confidence would be orders of magnitude higher than it is now.

The Fed now has hard proof that their strategy - that is, every time the market starts to collapse there is some sort of "sticksave" intervention, rather than addressing the root cause of the problem, has FAILED.

It CANNOT SUCCEED because the fact of the matter is that this is not about liquidity. It is about solvency and LIES, which The Fed is ENABLING, just like a drunk's spouse continues to enable the boozing by refilling the fridge with beer whenever it gets empty!

You'd think that "Mr. Student Of The Depression" would know that the root cause of The Depression was precisely this - that people lost confidence in the system and simply said "no mas!" across the board. Once those with REAL MONEY - not credit - decided they were not going to lend until they knew where the bodies were the bankruptcies began and continued relentlessly until everyone who might have gone broke actually did!

The reason is simple - the question is capitalization - NOT LIQUIDITY.

Without KNOWING what the VALUE is of these "things" are which are on bank balance sheets there is no way to know what sort of capitalization a bank or other institution actually has!

And since Bear Stearns has now proven to either (1) not known itself or (2) lied just three days before they blew up, until we get clarity nobody is going to believe anyone else's pronouncements about THEIR capitalization!

Congress should step in and exercise its lawful right to force The Fed and regulators to do the right thing here and now, but it won't until and unless you, and hundreds of thousands of people like you, step up and start hollering loudly at our lawmakers.

I have written three separate petitions on this matter and spent a couple of thousand bucks faxing lawmakers. If we are to stop this before we have a re-run of the 1930s everyone reading this needs to make it their personal mission to get no fewer than 100 signatures on the petition at http://financialpetition.org/.

I'm well-aware that people are, in general, apathetic. But this is more than just about you - your 401k, your IRA, your retirement, never mind that they're all going to go straight in the toilet. WHEN, not if, the providers of capital say "no mas!" to our government, as is already becoming apparent via failed treasury auctions, our government's ability to spend beyond its means - $400 billion worth in the current fiscal year - will instantly evaporate.

It is also about your children and grandchildren, and what is likely to be served up upon them as a direct and proximate result of apathy by those who can speak up and stop the madness.

To put this in perspective there is roughly $8 trillion in national debt that requires service every year. If the cost of that funding is 5% a year the cost is $400 billion. Should foreign investors continue to flee that cost could more than double, instantly wiping out the ability to fund 15% of The Federal Budget - for instance, all of Medicare's funding ability could disappear overnight.

Is that enough to wake you up?

http://financialpetition.org/ folks. Or even better, spend $500 and go out to Washington DC, or to a campaign event, and tell all of them up front that this issue must be addressed right now, not after the election. We absolutely must force transparency into our financial system - today.

Get the "stagflation" or "hyperinflation" nonsense being paraded about by many "pundits" out of your noodle right now. We are in the middle of a huge deleveraging and all of the excess credit that has been created over the last 10 years is disappearing in a poof of electrons. That is the definition of DEFLATION and The Fed is powerless to stop it so long as they continue to allow the lying and obfuscation to continue.

If not, I hope you like living in this sort of fashion, because its coming - for a second time, and for the same reasons it happened the first time - to a town near you.



PS: The March Empire State index came in at a record low today - negative 22.2, .vs. expectations of negative 7.4.

See that picture just above? Here it comes folks - time is running out.

Undoubtedly you have heard about Bear Stearns blowing up Friday morning.

If you haven't, you've been living in a cave.

If you remember way back when I was talking about how this mess would not be over until we had a major Investment Bank either fail or be forcibly absorbed.

I never thought it would happen this quickly!

And no, this doesn't mean we're done with the mess - not even close.

The danger has been foretold the last couple of months as Treasury Auctions have gone very poorly. Thursday marked the second time in a row that bonds were auctioned and the bid-to-cover (the amount of interest) was abnormally low, with "indirect bidders" (that includes foreign governments) wanting basically none of it.

This is ominous in its implications, as the "prime dealers" have had to take most of the supply down. They are structurally short these bonds and earning basically jack and nothing, but of course they can go to the discount window (or TAF) and borrow against those bonds, although the carry isn't there for them right now.

Ben Bernanke has a "playbook" for avoiding deflationary credit collapses (read: Depressions) and he's running it. He has, unfortunately, forgotten that The United States is not the only place that foreign nations and governments can invest, that those foreigners have been given an awful lot of our money (as we have "consumed" like good little packrats) and now we need those very same governments to recycle their dollars into our treasury markets to keep real interest rates acceptably low while our government continues to spend like a drunken sailor buying votes, with the latest budget being in the hole by some $400 billion dollars.

The issue we are about to run into head-first should be obvious.

A precipitously falling currency results from a loss of confidence in a nation's monetary and fiscal policies - nothing more or less. Ben Bernanke's famous speech literally threatening to devalue the currency to any degree he sees fit is a major part of the problem. It doesn't matter whether he actually is doing it or not; what matters is whether folks believe he will.

They do.

How bad is this confidence problem?

The key item is here:

"The immediate capital infusion isn't likely to restore enough confidence in Bear to stop the exodus. Robert Sloan, a managing partner of New York-based S3 Partners LLC, a financing specialist for hedge funds, said that two of them on Friday pulled whatever money of theirs still remained in Bear's prime-brokerage operation. "Once Bear started to come out with: 'Hey, this is why we're OK, this is why we're still liquid and you should keep your assets here,' they were basically telling you to move your business," Mr. Sloan said."

Indeed.

Now how many other corners of the investment world does this infest?

Answer: ALL OF THEM

Here's the bottom line folks - right now the preservation of capital dwarfs everything else. There are precious few places you can hide with near-absolute safety; among them are:

• Treasury Direct (buy 4, 13 and 26 week T-Bills directly, in your name, from the US Government.)
• Vanguard's VMPXX Treasury money-market fund (invests only in Treasury securities)
• Fidelity's FDLXX (Ditto, but run by Fidelity)
• A bank account (up to $100,000, except in rare instances - and be careful trying to "engineer" around the $100,000 FDIC limit!)

Note that none of these are run by major investment banks or have any tie to them.

There are many people out this weekend calling Bear Stearns' near-collapse "a sign of a bottom."

Don't you believe it for a second.

Today's stock market prices reflect earnings estimates that are radically too rosy; they have absolutely not priced in a recession. While many market callers are claiming that "earnings will be fine" and "the market is cheap" the truth is that they are using earnings estimates that assume that consumers will (can) continue to spend as they did in the years of 2003-2007, extracting home equity and using it to fuel consumption.

This, as I have written since April of last year, is clearly not the case. Further, deterioration in other areas of debt performance, including Home Equity lines of credit, credit cards and auto loans, is just beginning to be recognized.

As spending contracts so will estimates - and stock prices.

Now let's talk about the "supply pressure" problem.

As I wrote yesterday the government claimed that there was no price inflation last month.

Uh huh. Tell that to my Diesel Jetta, which now costs over $50 to fill - for the first time. This doesn't affect me greatly, since the car gets 50 miles to the gallon, but think about the truckers that bring your food - and everything else - to the store.

Their fuel costs have skyrocketed by more than 30% over the last few months. Diesel was under $3/gallon as recently as last October, and in the $3.25 area as recently as the start of February. Look at this graph:

Any questions?

This is what our policymakers cause when they provoke loss of confidence. Notice that the price was quite stable up until last fall, when it began a precipitous rise northward. When did Ben Bernanke start fiddling and claiming that he needed to "inject liquidity" by the truckfull instead of performing his legitimate regulatory function?

The price of oil is not just a function of our current dollar value, it is also a function of the expected future value, because the money you get from selling us a tanker-full of oil isn't all spent in a day - it is spent over several years' time!

And for those who question whether Ben has an actual hand in this, let me quote from The Federal Reserve's own web page:

".....supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers "

Really?

Does that include allowing their "regulated" banks to lend money to clients who are levered up 32:1 or more, as Carlyle was, along with other similar funds who have unknown and unknowable amounts of credit derivative risk?

Does it include providing loans against Fannie and Freddie securities, as announced Tuesday, when those GSEs have balance sheet gearing of some two hundred to one against their book, with an equity position of some forty basis points (0.4%) compared to their allegedly "AAA" securities, many of which are contaminated by manifestly-unsafe mortgages?

Does it include near-absolute secrecy via the TAF, so that investors cannot tell who is solvent and who is not, and we find out who has problems the same way that investors in Bear Stearns did - with their CEO on national television just two days before they blew up saying that everything is perfectly fine?

Ben Bernanke thinks he can "control interest rates" and thereby assuage what is wrong with our economy. He cannot, because the problem was that he, along with his predecessor Alan Greenspan, sat by and refused to perform their regulatory function while these institutions and their customers engaged in manifestly unsound and unsustainable behavior.

We face the worst credit environment in 100 years not because of external events but because our own government and its agencies, including but not limited to Congress, The President himself, bank overseers such as OCC and OTS and The Federal Reserve have stuck their heads in the sand and allowed firms to operate with no mark-to-market, no clean balance sheets and no supervision! Instead, every financial "crisis" is met with more liquidity, which is precisely the same thing as giving a drunk who starts to have DTs another bottle of whiskey!

Unfortunately The Drunk (that's us and our insane idea, both privately and in the government, that we can spend beyond our means of production indefinitely) is now having a SEVERE case of DTs.

Ben's "solution" is not another bottle of whiskey but a whole new barrel!

This weekend we learned that Canada has joined the party, as 20 of their Assset-Backed Commercial Paper trusts have now blown up and will seek bankruptcy protection.

The orgy of cheap credit was NOT limited to the United States and neither will the consequences of its implosion be.

There will be more "sticksaves" and "interventions." Count on it. Count on them coming as soon as Monday. If you are a "Bearish" trader you are faced with the most volatile markets we have seen since the 2000-2003 recession, and this is very likely to be far worse in terms of its impact economically, as the credit orgy that prevented the 2000-03 recession from running its course is much larger than the previous one was.

Don't think for a minute that our government can engineer another credit orgy. All the good collateral has been pledged; houses are encumbered, commercial real estate is encumbered, and all the good securities are too.

It is time for us to face the music.

I am updating expectations for this Bear Market; I no longer believe 1070 on the SPX will hold, and have now moved to the camp that sees the potential for the S&P to retrace all of the 2003-2007 Bull Market's gains, taking us back to around 800 on the SPX.

I also believe that this economic downturn will be called "over" later in the year yet prove in 2009 to be far worse than originally expected, with the potential for an outright depression ensuing in the 2009-2010 timeframe. If we elect a Democratic President, and I believe we are nearly certain to do so, the odds of this go from 30% to 75% overnight as the Democrats are guaranteed to spend even more in a clear vote-buying attempt, just as George Bush and Congress are doing now with their $150 billion "stimulus" package.

Many Boomers had their retirement portfolios utterly destroyed in the 2000-2003 bear market, and have just recently gotten back on their feet. If you are one of them and haven't protected yourself, please do so now.

The reality of the situation is best summed up by this article from The Wall Street Journal:

"The U.S. is at the receiving end of a massive margin call: Across the economy, wary lenders are demanding that borrowers put up more collateral or sell assets to reduce debts.

The unfolding financial crisis -- one that began with bad bets on securities backed by subprime mortgages, then sparked a tightening of credit between big banks -- appears to be broadening further. For years, the U.S. economy has been borrowing from cash-rich lenders from Asia to the Middle East. American firms and households have enjoyed readily available credit at easy terms, even for risky bets. No longer."

Yes, this includes you, Mr. and Ms. American Consumer, and if you're unable, you will be forced into bankruptcy.

You've been warned.

Want to act instead?

Sign the petition at http://financialpetition.org that references the letter I have recently faxed to The President and various members of Congress at http://www.denninger.net/letters/open-letter.pdf.

Or, if you'd like, create your own letter, or make a phone call or three to Congress and The President.

The contraction in home prices among other forms of financial "leverage" will continue until balance has been restored. We are far better served to take our medicine now and admit who is and who is not bankrupt than to continue to try to hide the damage from both the public and investors.

The choice is ours - we either act now or the market will do it for us, and the latter will be far more painful and prolonged than if we self-administer an honest look at our financial condition - both individually and as a nation.

What you saw Friday with Bear Stearns is just the latest - and strongest - warning about what we face if we do not "take our medicine" now.