The Market Ticker

Buy buy buy!

Oh really?

"First-quarter net income declined 77 percent to $1.21 billion from $5.26 billion a year earlier, the Charlotte, North Carolina-based bank said today in a statement. Results included $1.31 billion in trading losses and $2.72 billion in costs for uncollectible loans. Earnings per share shrank to 23 cents from $1.16, falling short of analysts' estimates and sending the bank's stock down as much as 2.2 percent in today's trading."

'The decline in housing prices has to be solved for things to get better,'' said Chris Hagedorn, portfolio manager at Fifth Third Asset Management in Cincinnati, in an interview before earnings were disclosed. 'In terms of the maximum point of pain, I don't think we're there yet.' Fifth Third manages $22 billion and owns Bank of America shares.

Hmmm.... $3 billion in uncollectibles eh? How long before those uncollectibles swamp the balance sheet and Tier Capital?

Decline in housing prices has to be solved?

See, this is the problem folks - there is no "solution" to the decline in housing prices.

Yet the delusional bulls like Dick Bove in the financial sector keep refusing to face reality. This morning he was on CNBC claiming that "its all about cash flow."

Well, yes and no. Obviously so long as you bring in more cash than you spend you could technically keep the doors open but the problem becomes this pesky thing called "Tier Capital" when we are talking about banks, and if you go under 6%, you go "boom."

These firms - virtually all of them - are playing games with their balance sheet to avoid marking to the market and recognizing losses. 25% - 50% increases in "held for sale" and/or "Level 3" assets, coming from other buckets, instead of actual new business? Enough of a change to wipe the market cap of these firms, in some cases more than once?

Example? Right here:

"The same was true at Merrill. The broker had $6.6 billion in write-downs, leading to a loss of $1.9 billion. But Merrill took at least $3.1 billion in other write-downs that didn't count toward its loss.

So, where did those other charges go? Into a special bucket in shareholders' equity called "other comprehensive income." The beauty of this bucket is the charges land on the balance sheet, but don't dent the companies' bottom line."

This sort of balance sheet trick is legal under current accounting rules, but its still a trick and it remains unsustainable and ill-advised. The "wish and dream" that these "assets" will magically go from declining in value to rising in value, recovering the entirety of the currently-unrecognized loss, is pure delusion when we are talking about houses.

The "bubble" values are at least 20 years in the future before wage inflation rates catch up with them, and yet the carrying costs over those 20 years exceed their net present value.

This sort of "reclassification" is, for that reason, a sham. A fraud. A legal fraud, but a fraud nonetheless, and one that should be absolutely barred.

Don't believe for a second that this is over. Here are some recent stats - from today - on the deterioration in HELOC credit lines from S&P, as a measure of total delinquency:

2005 issued HELOCs - 6.49% increase February to March, now at 9.19%.

2006 issued HELOCs - 6.51% increase February to March, now at 11.45%.

The credit crunch is "over", the consumer is "fine", and the economy will turn imminently?

With those statistics?

Nobody wants to talk about the truth here. There are a lot of very, very delusional people in the markets nowadays, and they're out pounding the table about various stocks screaming "Buy".

Why?

Have they forgotten basic statistics? It appears so. The consumer remains 70% of the economy in the US, and 20% of global GDP. Consumers have spent beyond their means - beyond their incomes - for the last ten years.

This is the same sort of delusional horsecrap that was run during the housing bubble - "buy now or be priced out forever" screamed the Realtors.

This sort of Ponzi Finance violates the basic laws of mathematics, but that doesn't seem to bother these market "callers."

It should - and in fact, I would argue that there should be criminal sanction applied to those who argue on national television for positions that are mathematically impossible.

This is one of them.

Simply put, the consumer cannot continue to spend beyond his income for long periods of time. Once the consumer does spend beyond his income for any material period of time they must then spend below their income level for a longer period of time in order to pay down the debt they have incurred plus interest, or they must default on that debt (in which case the creditors get to book a nice fat loss.)

Since our GDP is $13 trillion, give or take one, overspending leads to some serious problems for these institutions that granted that credit, and for the economy in general.

This is a matter of mathematics, not prognostication.

Every year or two someone comes up with what amounts to a perpetual motion machine. It always turns out to be crap, because the laws of physics, thermodynamics and mathematics are not subject to negotiation - that's why they're called "laws."

Well, all this financial "alchemy" is just as fraudulent as that practiced hundreds of years ago in a futile attempt to turn lead into gold.

It can't be done, and 1 + 1 = 2, no matter how much you'd prefer it to be 6.

Arguing that "it will all be ok", "the consumer will be strong", or "we'll rebound and be healthy later this year" is in fact a fraud. Until the excessive debt unwinds we cannot fix this. It is not mathematically possible for debt-to-income ratios to rise on a perpetual basis; you eventually reach the point where cash demand to service debt exceeds cash flow, and at that point the game is inevitably over irrespective of what anyone wants.

Arguing otherwise is fraud, not disagreement over the direction of the economy.

Yet this is the premise of every single one of those who are calling for a "quick turnaround" or a "short and shallow recession."

Fact is that either the debt must be defaulted, the debt must be paid down, or incomes must rise dramatically.

The first two slam earnings and spending, and the latter slams price inflation and forces huge amounts of monetary inflation ala Zimbabwe. None are good for equities and earnings.

The Bank of England has joined our "turd sandwich hiding party" initiated by our own Ben Bernanke, now trying to play the same game in England that was played here in taking crap paper and exchanging it for Gilts, British Treasuries. This sort of insanity as a means of "liquefying" garbage paper is a disastrous practice that ultimately leads to the sort of zombified "lost decade" that Japan suffered under.

"'There is no arbitrary limit on this so it could well go higher,' King told reporters in London today. He said the plan aims to restore confidence to the banking system and the most important aspect is that 'everyone needs to know this is there for them to access as needed.'"

Yeah, ok. The problem with this sort of scheme is that it will backfire, because contaminating Treasuries by taking this sort of crap in at the windows of the Central Banks ultimately drives debt costs for government debt higher, which then flows through to all private debt.

This in turn tightens the noose on the neck of those who think they "benefited" from this debt swap arrangement, driving even worse quality collateral to the window, because the base against which spread is computed is driven higher.

That in turn hurts performance of that private debt, which then needs to go to the window too, which.......

Yeah.

Folks, there is no solution for overpriced homes other than for home prices to fall and there is no solution to a consumer who has spent beyond his or her means other than for their consumption to fall below income for a period of time to pay down that excess debt, or for that debt to default. Either way you get losses in the economy.

Real losses.

I know that everyone wants to search for the "magic financial elixir" to bring back the housing bubble and both the prices and orgiastic consumer spending that came with it, but it is mathematically impossible for this ponzi scheme to continue on indefinitely.

If we are not very careful with this nonsense we are going to find ourselves in a re-run of either Japan's "lost decade" or worse, trigger a bond market collapse. The latter will result in a re-run of the 1930s worldwide - this is not a problem limited to the United States, and its effects will not be limited to the US either.

Before you go out and buy equities, ask yourself - given the precipitous rise in debt-to-income ratios in the Untied States - rising over 1.0 in 2000 and now over 1.2 - how can the game be continued?

The simple answer is that it can't be and until credit quality begins to turn upward in a meaningful fashion there can be no economic record of significance either.

A long-term sustainable debt-to-income ratio for American Consumers is somewhere between 0.6 and 0.8. From the 1960s until 1995 we managed to hold our consumer debt ratios in this range, coming off the historical lows from the exit of the Depression (where debt-to-income ratios were under 0.2 in 1945.) Note that the period from 1960 to 1995 included both historically low and very high interest rates, and coincided with "good times" during low interest rate periods and "tough times" when rates were higher.

If our banking and financial system attempts to "reflate" the economy without first working down the level of debt held on consumer balance sheets we will inevitably wind up with one of two outcomes - either a failure of the policy, leading to an immediate "explosion" across the board, or worse, we will wind up with a speculative blow-off in some other area of "investment" that will simply suck even more of American's money and wealth into an unsustainable bubble where it will be vaporized.

Let's look at the record of rampant consumerism and Greenspan's "I never saw a regulation that should be enforced" policy, which Bernanke has adopted wholesale:

• A few million Americans had their wealth vaporized in the Tech Market crash.
• This time around every American has been impacted significantly via high oil and food prices as a result of bubble-blowing-finance and willful ignorance of rampant fraud and deception, along with tens of millions of Americans who will either lose their homes or have their wealth significantly damaged or destroyed.

Haven't we had enough of this nonsense?

Wasn't the fraud of the 1990s with the "Internet Bubble", then "The Housing Bubble", enough to convince you, dear reader, that this sort of Ponzi Finance ought to result in prison terms for all involved instead of billion-dollar bonuses for a few while everyone else in America gets screwed?

Or will you sit on your collective hands until you need them to hold your tin cup in a soup line?