The Market Ticker

Yes, the credit crunch is over, and the economy is not going into recession.

So said Kudlow last night.

Perhaps Kudlow would like to explain how roughly 20% of the United States economy, then, is going to have its underlying government instrumentality go bankrupt?

"While the state is more than $17 billion in the hole, Ingstad believes that figure will continue to rise. He also anticipates the state will be out of money by August. Bankruptcy for the state looms; a few counties and cities scattered around the state are close to declaring it or have arrived.

"The state treasurer is telling the state they will run out of cash this August if something isn't done. As a former member of a state Senate appropriations committee I know what that means. We could be bankrupt. They better stop the partisan games and deal with the crisis at hand," Ingstad said."

Well let me make a modest suggestion.

Stop funding education, hospitalization and social programs for illegal aliens who are paying no taxes and sponging off the government teat!

California has more of them than any other state and it is time for them to crack down on this crap. Moreover, those illegals are taking jobs that Americans will need as this economic dislocation continues onward.

By the way, I don't expect that Arnie will do that, or that such a plan would get through the California State House, say much less the State Senate.

That's fine. They can go bust. Just stay the hell out of municipal bonds.

Oh, if you are inclined to believe Kudlow, here's a nice quote from that article:

""Some experts are warning us this economy could last another two years," the CAO said. Others say it's the worst financial situation that's occurred since the Great Depression gripped the United States."

Those are people with adding machines. Kudlow doesn't own one.

The Fed is musing over the idea of keeping The TAF permanently and letting Wall Street investment banks continue to use it. Oh boy. Guess what one of their justifications is?

"Market functioning remains far from normal," Kohn said, pointing in particular to large spreads between overnight bank rates such as Libor and other short-term rates. Such large spreads indicate that markets still are in shock."

Why is the spread with LIBOR "not normal"? Perhaps this is the reason:

"Libor, the benchmark for 6 million U.S. mortgages and more than $350 trillion of derivatives and corporate bonds, has been called into question since the Bank for International Settlements said in March some lenders may have understated borrowing costs to keep from appearing like they are in financial straits."

Banks routinely misstated borrowing costs to the British Bankers' Association to avoid the perception they faced difficulty raising funds as credit markets seized up, said Tim Bond, a strategist at Barclays Capital.

In other words, they lied. Systematically, intentionally, and routinely.

The banks committed fraud on the instrument used to set rates and prices on $350 trillion (notional; there isn't really $350 trillion worth of assets around) worth of derivatives and corporate bonds, plus a sizable number of adjustable rate mortgages.

Of course nobody is calling for anyone to go to Bubba Prison, even though if you calculate the "vig" on $350 trillion dollars, assuming that the "intentional misquote" was as little as 10 basis points (1/10th of a percent) we are talking about $350 billion a year that some group of people got bilked out of, and some other group of people were unjustly enriched by.

That, by the way, is more than the total amount of the so-called "subprime losses" recognized so far.

So we have a financial fraud that has cost some participants $350 billion while making certain other ones that same $350 billion, and all we're talking about is whether or not we should "struggle" to keep that base rate tool around.

And The Fed's response to this is to ratify that fraud.

Mr. Fisher, are you reading this? Your buddy Kohn is prepared to facilitate the continuation of $350 billion in fraud annualized instead of forcing it into the open.

Last time I checked, that's fairly "in-line" with the amount of largess and waste that you were all over us in regards to government overspending, and you urged us to "vote the bums out", as it were.

Can we start with Kohn, Bernanke, and perhaps you?

The Fed, along with others, wonders why people might be stashing their money in things like oil, where you know how many gallons of gasoline you can refine from a barrel?

Or shall we talk about the Treasury Auctions the last two days, that could only be considered "horrible" in terms of their subscription rates (bid to cover) and indirect participation? Clearly, foreign governments aren't interested in this debt to any material degree, and neither is anyone else!

Might that have something to do with the fact that Treasuries have been contaminated by that very same Federal Reserve, and people are starting to think that the entire United States might follow California?

Hmmmm.

Speaking of Fraud, here's a grand-daddy - a former UBS banker is pleading guilty and going to squeal like a pig:

"A former UBS AG private banker, facing prosecution for participating in a U.S. tax-evasion scheme, is scheduled to enter a guilty plea next month in federal court, and people familiar with the matter said the banker will aid a Justice Department probe aimed at the Swiss-based bank."

Heh heh heh... Now we're talking. All those nice, wealthy clients who were screwing the IRS better be either warming up the G-IV engines or be prepared to bend over.

More importantly, isn't the proper penalty here to pull UBS' operating charters in the United States? We now have, it is alleged, a bank that actively worked with people to illegally evade United States tax laws, and yet this same bank has a federal charter and operates in the United States.

What's wrong with this picture?

As if that's not enough bilking going on, we now have companies pushing credit cards that draw on one's 401k as a loan! I thought I had seen every piece of possible stupidity in the world, but this takes the cake:

"Funds set aside for withdrawal may earn lower interest rates than other assets in the savings plans, and transactions can lead to tax penalties and a variety of fees, the Financial Industry Regulatory Authority said today in an investor alert titled 'Think Before You Swipe.'"

How about BAN that sort of idiotic "plan" in the first place!

Dell rocketed higher afterhours on a good earnings report, but their "beat" was almost entirely driven by firing 3,700 people (and thus lowering costs.) They also had cautious comments on US demand for their products, saying they saw "conservatism". Didn't matter - the market loved it. Oook.

The Economist published a nasty article in which they compared the drop in home prices over the last quarter to The Depression.

You want the good news or the bad news? Oh hell, here's the graph:



That's right. Your home price is depreciating faster than homes did in the depths of The Depression. And to make it worse, we have high price inflation right now too (they didn't then), which you have to add back in because, of course, you care about "real value" (or purchasing power, to be more direct), not nominal price.

So in reality you're losing almost 20% a year, not 15.

Or roughly double the depths of The Depression.

Still think this we won't even get a recession out of this, do you?

Personal income and spending flat, up 0.2% on both numbers. Inflation-adjusted personal income and spending? Zero. They're really bad. No momentum for growth in there.

Where's the beef? Well, the spending is in the beef. More specifically, in food (and of course in gasoline!) Wages are clearly not keeping up with price inflation, but heh, I've been saying that since, uh, when?

In fact, despite the pumping of the "better than expected economy" on CNBC, the truth is that since October real personal income, adjusted for inflation, has been negative, and that is using the government's intentionally-understated price inflation figures.

Since the folks in the top quintile have been responsible for an outsized contribution to income growth in the last five to eight years, guess what - those in the bottom brackets are really getting hammered.

CNBC's favorite "Jacker" (Mr. "GOP") was again cheering that we hadn't seen "Armageddon", and again, saying "The Fed's job is finished."

Really? It is eh? Then tell me Jack - why hasn't The Fed withdrawn any of their "fancy alphabet soup" nonsense? Why aren't we seeing income and (especially) spending ahead of inflation by a solid couple of percent on an annualized basis? Probably because you're full of something dark and stinky.

Note that GDP is 70% consumer spending; you do the math on what a negative income growth rate after inflation does to the economy over time.

'Nuff said - have a great weekend.

It was bombshell time yesterday afternoon, although the market didn't appear to care at first blush - Mishkin is "retiring" from The Fed:

"WASHINGTON – Federal Reserve governor Frederic Mishkin plans to step down at the end of August and return to academia, people familiar with the matter said, leaving the Fed further short-handed as it deals with the credit crisis, possible recession and sweeping changes to financial regulation."

Uh huh.

Let me translate this for you:

I came in here with my ivory-tower view of the world arrogant beyond words, believing that we could simply dictate what monetary policy would be and the world would bend to our will. We could throw around our $800 billion balance sheet without consequence beyond what we intended.

What I discovered is that the real world gives the finger to academics, and it really pisses me off. Why, we took $250 billion and threw it at the markets so The Fed wouldn't have to admit that it had been a total asshat for the last ten years, intentionally blowing bubbles in anything we could find and ruining the balance sheets of American Households while allowing our best buddies to make billions in ill-gotten salaries and bonuses.

But in response, instead of making more crappy loans with that money those traitors instantly plowed it into the only thing with stable value left in the world (since we intentionally debased everything else) - OIL! Those bastards! How DARE THEY defy the ever-powerful Ivory Tower Fed!

Now, recognizing that "the gig is up" and the American People are getting close to the point where they just might pick up pitchforks and torches (not to mention those other nations where the pitchforks have already come out - starving people will do things like that), I've decided to go barricade myself back at Columbia University, where I can deadbolt myself in the Ivory Tower and hide behind the "Piled Higher and Deeper" after my name (oh, and my tenure.) This way when the consequences of my idiocy become apparent to those foolish Americans who let me out of my cage in the first place, including the speech I gave in Jackson Hole in which I basically advocated throwing any pretense of caring about price inflation to the wind, I can point my finger at Bernanke and say "see, it was all HIS fault - ha ha ha!"

Yeah.

Good riddance Mishkin. You go back to teaching at Columbia, where you can give "A"s to "students" who parrot your nonsense (not to mention dangerous) economic theories. Never mind that you had a two year leave of absence, those are routinely extended, and your appointment was for fourteen years.

A rat scampering off the ship as it slowly settles into the depths of the sea? Hmmm.... Oh Mr. Smith, er, Bernanke? Have you locked yourself in the wheelhouse yet?

Oh, and look what The Cat dragged in last night? The following speech by Dallas Fed President Richard Fisher:

"I am also not going to engage in a discussion of present monetary policy tonight, except to say that if inflationary developments and, more important, inflation expectations, continue to worsen, I would expect a change of course in monetary policy to occur sooner rather than later, even in the face of an anemic economic scenario. Inflation is the most insidious enemy of capitalism. No central banker can countenance it, not least the men and women of the Federal Reserve.

Tonight, I want to talk about a different matter. In keeping with Bill Martin’s advice, I have been scanning the horizon for danger signals even as we continue working to recover from the recent turmoil. In the distance, I see a frightful storm brewing in the form of untethered government debt. I choose the words—“frightful storm”—deliberately to avoid hyperbole. Unless we take steps to deal with it, the long-term fiscal situation of the federal government will be unimaginably more devastating to our economic prosperity than the subprime debacle and the recent debauching of credit markets that we are now working so hard to correct."

Really Richard?

Readers really ought to click that link up above and read the entire treatise. Its good, and lays on the table, without BS or games, exactly what America faces if we don't cut the crap out with entitlement spending - and deficits in general.

To be blunt, he points out that we could cut all discretionary spending (including the military), increase tax revenues (not rates, revenues!) by nearly 70%, or cut benefits by a net aggregate of nearly $100 trillion dollars.

That's right, we're in the hole as Americans to the tune of one hundred trillion dollars.

But see, Richard Fisher also talks about how "we (the Fed) are working so hard to correct" the recent debauching of the credit markets in that speech, and I'm going to focus there first.

Either Mr. Fisher suddenly had a "come to Jesus" moment, in which case this Ticker is an open, public challenge to him to prove it, or he's lying.

I intend to find out which is the case.

See, Mr. Fisher is well-aware that these credit markets were "debauched" as a direct and proximate consequence of the policies of The Federal Reserve and he is a Fed President (The Dallas Fed, to be precise.)

Specifically, the policies of The Federal Reserve have, over the last twenty years:

1. Created the Tech Bubble by providing bailouts to LTCM and other market participants from the time Alan Greenspan took office.
2. Held liquidity far too loose for far too long after 9/11 and the Tech Wreck, allowing the housing bubble to occur, and even recommended that consumers take ARM mortgages at the bottom of the interest rate cycle, an insanely destructive suggestion.
3. Refused to rein in the BANKS, over which The Fed has control (Countrywide anyone?), while they were making demonstrably unsound and even fraudulent loans.
4. Refused to force the BANKS to either prove the capital adequacy of their "counterparties" in swap agreements OR reserve under the base, underlying credit quality of their instruments they were allegedly "covered" on - both of which are within The Fed's power.
5. Prodded Congress, by one Ben Bernanke's speech and questioning under oath just a few months ago, into even more deficit spending to "bail out" the housing crisis, a speech that was followed in less than two months by the very deficit spending recommended in the amount of $300 billion dollars.
6. Refused to stop the banks from continuing to play the "swap" game, the "sweep" game, to run negative depository reserves and to not only claim "Level 3 assets" but to even swap that used toilet paper for Treasuries rather than be forced to recognize their losses!
7. Continues to on a daily basis flood the system with over $250 billion in "extra slosh", thereby creating the commodity bubble and $130 oil; extra liquidity which The Fed could withdraw at any time, forcing those who are swimming naked to recognize their losses and come clean along with solving both the $130 oil problem and the dollar problem.

So Mr. Fisher, is this REALLY a sea change in your thought process and that of The Fed? Or is this one of those speeches where someone throws out all sorts of prescriptions but refuses to act on any of them, thinking that this will provide them cover when the inevitable Category Five fiscal Hurricane comes through town - a storm you're afraid the people will hold YOU to account for?

If its the latter, you won't get that pass from anyone who has read this Ticker.

Some of us, myself included, are well-aware that The Federal Reserve has and continues to debauch the credit markets, including all of the above and the flatly-improper, if not outright illegal, "bail out" of Bear Stearns.

I challenge Mr. Fisher to show we, the people, that this is not just smoke - a speech, correct though it is, that is not and will not be backed by action, for talk is cheap.

If Mr. Fisher really means what he said, he needs to stand up RIGHT NOW.

Carrying a sandwich board, if he must.

Asking for hearings in Congress to address this, whether Bernanke likes it or not.

IN FACT, SPEAKING ON EVERY PODIUM WHERE YOU CAN FIND A MICROPHONE AND AUDIENCE - UNTIL AMERICA WAKES UP AND TAKES THAT BATON FROM YOU.

Guess how much airtime CNBC gave this speech?

ZERO.

The entire morning was spent with bullish market callers ignoring the 900lb Elephant in the room. Marketwatch butchered their report on that speech, twisting its meaning beyond all recognition.

IF this is not just a bunch of BS, after nearly a year of inappropriate and in fact deeply damaging words and actions from our Federal Reserve I want to see the evidence.

Talking out both sides of one's mouth has gone on long enough.

Either you mean it, Mr. Fisher, in which case I expect to see action - today, now, and going forward - or your "tough talk" will be discounted by myself and the rest of America just as has been the outright lying that Bernanke and others have participated in over the last year with regards to the state of our economy and capital markets.

Let's talk about what is really going on here in the markets today - namely, that the Treasury is printing up Bills and Bonds like a Mad Hatter (Bernanke did challenge them to in that recent testimony referenced above), which is driving up the long end of the yield curve. Oil and energy in general, along with agricultural products, are exploding higher in price as the "excess liquidity" The Fed is providing, now north of $250 billion, is looking for anywhere it can go that hasn't been debased.

That money is finding a home in things that have actual value.

See, The Fed and Congress can't debase the inherent value of a gallon of gasoline. If your car would go 30 miles on it ten years ago, it will today. And tomorrow. And 20 years hence. The utility value can't be destroyed, unlike the "paper value" of a Treasury Bond if The Fed takes $400 billion worth of trash on its balance sheet in alphabet-soup swaps!

This is extremely dangerous because when utility commodities start being treated as a currency you're done as a Central Banker. Your ability to control that market becomes a literal zero - unlike Gold and (to a lesser extent) Silver, where you could buy "reserves", the central banks are not empowered to buy oil, wheat, corn and soy, nor could they do jack with if they did - the value in these things is in their utility, and they cost real money to store, unlike bits on a disk somewhere!

This is the worst sort of "crack-up-boom" scenario but contrary to some of the "inflationistas" it is not necessarily a matter of monetary inflation that causes this result - it is debasement of the credit markets such that people stop trusting supposedly-safe short-term credit instruments like Treasuries to have stable returns that at least meet if not exceed price inflation.

The Fed didn't have to (and didn't) "print money" to cause this - all they had to do was destroy the credibility of Treasuries as "money good" instruments by taking $400 billion worth of toilet paper onto their balance sheet instead of forcing insolvent institutions to confess their sins and be shut down.

The ivory-tower idiots who thought they could jawbone people into accepting whatever they said without question or evidence - so typical for those who have never had to make an honest living and justify their actions - have now found out that the market has no duty to respect such pronouncements and it won't.

At some point, when you lie incessantly, your credibility falls to zero and the market ignores you, pricing things on its own.

At that point you may as well go find a blowup doll to play with because your effectiveness in setting policy has been eliminated, and now the people take the hit. All at once, and not in a way they can deal with easily.

Oil has doubled in price in under a year. Dow Chemical just announced a 20% across the board price hike, effective in June. There will be much more of this, as the incessant and intentional understatement of price inflation by our government through the CPI and The Fed's willful use of statistical data it knows is fraudulent has led to yet more excess liquidity being added at the precise time when liquidity should be withdrawn.

The Fed has now reached a critical juncture and absent actual, concrete action by its Presidents and the FOMC in the immediate time frame the market has demonstrated that it will "discount The Fed's speech", much like a CDO, to zero.

This combination of events and intentional actions of The Federal Reserve has sent the dollar into the ditch, the price of commodities through the roof and the bond market is waking up and not liking what it smells.

The TNX broke the 4% ceiling (10 year yield) yesterday, which is particularly ominous - last June, when FedFunds was 5.25%, the 10 was less than 100 basis points higher than the FFT - now its 200 basis points higher. Oh, and Treasury is going to keep issuing supply to fund the very deficit spending that Bernanke urged on Congress!

We've got a nasty problem on our hands folks.

We have a severe currency imbalance with China that will resolve with them revaluing their currency, probably after the Olympics, in order to stem the inflation we have exported to them for 20 years and tamp down their balance of payments problem (none of the other things they've tried, including tampering with reserve ratios, has done a thing to help.)

This will result in an insane price inflation problem in Chinese imports coming directly back at us. We already have a nutty problem with oil that was caused by The Fed's policies over the last nine months - add to this Chinese import prices and things are going to get very interesting for The United States. We could easily see 30% price increases on goods coming in from China - across the board. Go walk around your house and look for the "made in" tags - tell me how many aren't "China" among your common household goods. Now consider what happens to your budget if every one of those items goes up in price by 30% - pretty much all at once.

In the meantime inflation expectations in the latest consumer confidence report came in at nearly eight percent for the next year, a doubling over the last few months.

"Well-anchored"?

Like hell!

American Consumers have figured it out and "discounted The Fed's notes and words" severely. The Fed runs the risk of that discount being extended to ZERO if it doesn't cut this crap out right here and now and take decisive action to arrest the spiral!

There are many in this country, apparently extending to Congress and certain members of The Fed, who believe that America "sets the rules" on the International Stage when it comes to matters of economics and the rest of the world will do whatever we want, "making adjustments" as required or demanded (by us.)

Uh, yeah, ok.

Tell that to the guys who actually own what we need to buy (oil, for instance), and those who we've given a trillion or more of our money in exchange for $30 DVD players that also would like the same barrel of oil.

This little game only works until those who we are buying from come to the conclusion that we might not pay, at which point they very well may turn on us.

That day is now here!

All of this comes as American Household balance sheets are at their weakest since the Depression, with debt service-to-income ratios at all-time highs, and unemployment hasn't even begun to bite yet. It will. What happens when we can't buy any more $30 DVD players because Joe Sixpack's credit card is maxed out and gas is $5/gallon?

How do we get out of this?

The liquidity swamp must be drained now. Rates must be allowed to rise to where they provide a positive rate of return for investors or we risk them fleeing entirely.

Those who are insolvent and hiding it must be forced into the open now.

The "alphabet soup" games must end immediately.

The Fed and the rest of the banking regulators must stop allowing "insurance coverage" via OTC swaps that have absolutely no margin supervision or documented ability to pay, along with the "off balance sheet" securitization facilities such as SPVs and VIEs. The entire lot of this is fraudulent, as we discovered when ENRON blew up, and it has to cease NOW.

The brokers, bankers, Realtors and appraisers involved in the fraud of the housing bubble must be prosecuted and sent to prison. We must send a strong signal that cannot be misinterpreted - fraud will not be tolerated.

I am not going to try to tell you that this will be "easy", or that this prescription won't have bad side effects.

It will have very bad side effects.

Specifically, there will be plenty of corporate and personal bankruptcies, housing will correct back to its historical 3x average incomes, unemployment will go significantly higher as wasteful and superfluous positions are eliminated (like, for example 90% of mortgage brokers) and the markets will tank as the "E" in their P/E gets severely damaged. We will be forced to spend less than we earn, both individually and as a nation, which means both huge spending cuts and tax increases. We will ultimately force more production back onto our own shores as much of the "offshoring" will prove uneconomic without the ability to get someone to sew your jeans for 20 cents/day.

But the risks if we don't take this action are much worse.

A full-on "crack-up boom" in commodities is the sort of event that destabilizes governments, and when it gets going there is literally nothing that can be done to stop it as the credibility of those in power has been destroyed.

We are perilously close to that sort of spiral getting underway in other nations and there is the very real possibility that it could happen in the United States.

We have crippled if not outright destroyed our ability to "get by" without foreign oil sources; should a literal bidding war result from significant supply disruption we would be in serious, perhaps even critical trouble as a nation.

Consider that China has more than a trillion dollars worth of our money and could decide to outbid us for scarce resources should geopolitical instability start removing oil supply from the market. Those reserves are their surplus; they already "paid" for it with $30 DVD players shipped to the United States. We, on the other hand, have a huge deficit and are absolutely dependant on foreigners being willing to plow $2 billion a day back into our government debt.

What happens when, not if, that support disappears?

We are not alone in this box either, and as a matter of history resource-constrained nations typically choose to try to shoot their way out of trouble. In a world chock full of things that make big "bangs", this is not a good thing at all.

It is time for America to take its medicine while we are still able to do so voluntarily.

Mr. Fisher, I challenge you to put your words into action and force The Fed to act in a responsible manner, right here and now. If Bernanke and the rest of the FOMC refuse then I challenge you to speak from the rooftops, in the Halls of Congress, on the steps of the US Capitol and in every forum where you can find a keyboard or microphone until you are heard.

I further challenge all who read this to fax it to every one of their elected representatives and every newspaper in their town and state.

We must, as Americans, stop this nonsense before it consumes our nation.

It is time to put action behind words.

America's future hangs in the balance.