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.

I'm going to start today's Ticker with something I've touched on but a Bloomberg article yesterday poked at the scab and made it bleed again - military members caught up in the foreclosure mess:

"In the midst of the worst surge in mortgage defaults in seven decades, foreclosures in U.S. towns where soldiers live are increasing at a pace almost four times the national average, according to data compiled by research firm RealtyTrac Inc. in Irvine, California. As military families like the VerSteeghs signed up for the initial lower rates and easier terms of subprime mortgages, the number of people taking out Veterans Administration loans fell to the lowest in at least 12 years."

Alright, I'm going to dissect this piece by piece, and probably gore everyone's Ox, including the brass - that is, commanding officers and above.

First, background - I live in an area with a very dense military, both active and retired, population. There are four major military installations within an hour's drive of my home; Eglin, Hurlburt, Pensacola NAS and Tyndall. Many military individuals and families, along with civil-service folks attached to the bases, are very close personal friends of mine. I, however, have not served, and I will not make excuses for it - when I was young enough to do so I was not disciplined enough to volunteer. So there you have it.

Now let's talk reality. Active-duty military members are typically "PCS'd" (that is, "permanent change of station") once every two years. That is, you are typically reassigned to a different location on a permanent basis every 24 calendar months. Of course with the War On Terror going, you could be deployed at any point in time, but that doesn't change your station and where your family, if you have one, resides - but a PCS order does.

Now let's think. The commonly understand rule for buying real estate is that you must be prepared to live in the home for five years to have a reasonable chance of recovering all of your costs and expenses on both sides of the transaction.

This is simple mathematics - the typical real estate commission is 6% on each side - that is, 12% for a "round trip". The typical and sustainable long-term home price appreciation is in the 3-4% a year range, exactly in line with salaries. You also have other transaction costs associated with buying and selling a home, such as deed stamps, title insurance and various other fees and expenses (e.g. mortgage doc stamps in some jurisdictions, etc)

It is quite clear that if you buy and sell a house every two years you are likely to lose very significant amounts of money.

In fact the only way you can profit from that transaction is if housing is in a bubble and appreciating very rapidly.

Further, anyone in the armed forces must expect to be PCS'd every two years - even if you aren't, that's the "base case" expectation.

So what are military families doing buying - instead of renting - in the first place?

I can see it if the member of the family is on his or her last tour and is not going to "re-up", intending to settle wherever their last location might be. That makes sense. But if you're in and staying, tell me how it does?

Ok, that's part 1. And guess what - I bet the military does a piss-poor job of educating people as to the financial realities that are associated with this.

But part 2 is where I get really angry, because lack of knowledge is one thing, but intentional exploitation is another. And when it comes to the Realtors and Mortgage Brokers involved in this "trade", they know good and damn well what I wrote above.

They are professionals in the housing industry and in my opinion have an absolute duty to inform service members that this sort of transaction is highly speculative and fraught with risk. I can tell you with absolute certainty from my conversations with service men and women in this area that they did not and do not.

Furthermore, what is this subprime over representation among people in the service? There is already a program for servicemen and women to buy homes, its called "VA", and it features zero down payment provisions, no mortgage insurance requirements and no piggybacks or games such as prepayment penalties. Furthermore, most VA loans are assumable, which means that when you go to sell your house, provided the buyer meets eligibility requirements they can assume your mortgage instead of getting a new one! This is a MAJOR feature in that virtually NO ordinary mortgages can be assumed.

This is the program that veterans and active duty service folks should be using!

So how come there are so many subprime mortgages held by active-duty servicepeople and why did VA loan volume fall to the lowest level in 12 years?

Good question. Laziness? Ability to play games like cash-back at closing? Fees? Who knows. What is known is that the VA loan volume went off a cliff, and obviously, it wasn't in the best interest of the buyers (or the ramp job in foreclosures wouldn't be happening.)

In short servicemen and women were in many cases railroaded.

Now to be fair, not all servicemen and women were jacked around - in some cases they jacked themselves, or simply got greedy and decided to try to play "house roulette."

Some of the stories that I've seen in the media are simply not believable. And for those who knowingly tried to play the game and lost, I have little sympathy.

But the fact remains that in a lot of these cases lenders did in fact steer these people into other products when they would have qualified for a VA mortgage which would have been more suitable, and I know that the "sales job" was in high gear during the bubble years with servicepeople (as opposed to renting a residence) because I saw it here myself.

This sort of exploitation of the men and women who serve our nation in the name of freedom - whether you agree with the war on terror or not - is wrong. There is absolutely no excuse for it and this underlines in bold, black letters why brokers and lenders must be held to fiduciary standards in terms of borrower's interests. This sort of conduct needs to be criminalized for everyone, but if we're going to start with one group of people, it ought to be here.

Now let's talk a bit about the "back end" of those risky mortgages. See, it is now starting to come out that auditors inside some of these companies - the investment banks on Wall Street - were intentionally overridden by supervisors when they attempted to flag fraudulent or questionable mortgage applications.

"Warren thinks her supervisors didn't want her to do her job. She says that when she would reject, or kick out, a loan, they usually would overrule her and approve it.

"The QC reviewer who reviewed our kicks would say, 'Well, I thought it had merit.' And it was like 'What?' Their credit score was below 580. And if it was an income verification, a lot of times they weren't making the income. And it was like, 'What kind of merit could you have determined?' And they were like, 'Oh, it's fine. Don't worry about it.'""

What have I been saying? That these fraudulent loans were intentionally packaged up and sold to investors. It was not so simple as "ignorance", it was in fact knowing misrepresentation, that is, fraud.

Well, now we've got people who actually worked inside these firms blowing the whistle.

Its about time.

This gets legs and I predict that people will go to prison.

"Bubba loves you" style prison.

Good, says I, and hopefully some investment bank CEOs will be on the list of those who get the perp-walk.

In the "just desserts" department we now have a new twist on the monoline-cum-CDO-hedge game - banks having to obtain approval from the monolines to unwind CDOs, and being unable to secure it, as doing so might risk the monoline's solvency:

"For the past several months as the credit crunch has pummeled mortgages and other forms of debt, a lot of collateral used to form CDOs has triggered defaults due to rating agency downgrades. As a result, if the banks begin dumping these problem securities, financial guarantors would be forced to pay default claims almost immediately - a tall order for companies whose financial future is already murky.

Typically, monolines pay out claims on losses over a period of 20 or 30 years, but the types of sales that the banks are looking to score would accelerate those payments and further hammer companies already hurting.

The banks appear to recognize that the insurers are unlikely to be able to cough up the cash needed to pay off these losses."

Aha! Now we see the truth of what I've been hollering about for a very long time.

The monolines don't have the money to back their so-called "insurance"; that is, the banks in fact bought used toilet paper and not actual swaps on those CDOs!

This ought to trigger intervention to force these banks to recognize the worthless nature of these swaps and mark the underlying instruments at their "native" credit quality immediately.

It is simply unacceptable to allow institutions to claim they have credit "enhancement" in the form of these insurance products once it is recognized that the counterparty cannot pay. These instruments are considered "money good" with no (or very little) reserve against loss specifically because they are allegedly insured - but the insurance is now recognized as worthless by everyone involved!

Your mortgage company would not let you claim your homeowners policy was "good" when your insurer had declared itself unable to pay claims. You would be forced to immediately secure replacement insurance from a company that can pay in the event of a loss, or pay off your note.

So why do we not see the SEC immediately do the same with the investment banks, and The Fed, OCC and OTS do the same for the commercial banks under their governance?

Are these banks are intentionally concealing the true value of these instruments (or lack thereof) while being well aware that they are impaired?

Why are our regulators allowing what appears to be an intentional violation of Sarbanes-Oxley as well as just good old fashioned common securities law?

THIS SHAM HAS GONE ON LONG ENOUGH AND MUST STOP!

Next up, we've got McCain. You know, the Presidential Candidate? Actually, the news is his Economic Adviser Gramm - and his ties to certain firms that have a problem with the United States Internal Revenue Code.

That'd be one Senator Phil Gramm. Most people don't remember Mr. Gramm, but you should. He is one of the architects of the Gramm-Leach-Bliley Law that repealed the last pieces of Glass-Steagall.

That's the pesky little law that led indirectly to both the Tech Bubble and the Housing Bubble by taking the last pieces of Depression-era protection off the banks, allowing them to play their games and rape the public. And let's not forget that three days after the ink was dry on that bill, one Bob Rubin (remember him from Clinton's administration?) went to work for Citibank - as co-chairman.

Nice eh?

Well now to be fair, these banks have spent plenty of money lobbying with both political parties. But that's not the real issue. No, that's the fact that Mr. Gramm has been recently on the payroll of UBS as a lobbyist - as recently as December 2007!

"'Countdown with Keith Olbermann' reported Tuesday night that lobbying disclosure forms, filed by the giant Swiss bank UBS, list McCain's campaign co-chair, former Texas Sen. Phil Gramm, as a lobbyist dealing specifically with legislation regarding the mortgage crisis as recently as Dec. 31, 2007."

But my outrage isn't just directed at the fact that UBS had Mr. Gramm lobbying on the housing bailouts (specifically, against for homeowners and one would assume "for" the banks), although perhaps it should be, given that Mr. Gramm worked tirelessly to (successfully) kill the bill that would have allowed bankruptcy judges to "cram down" modifications on delinquent mortgages - a right that judges used to have before bankruptcy "reform" removed it.

Oh no. My ire is directed at the fact that UBS has apparently directed its staff not to visit the United States:

"UBS has told members of its former private banking team responsible for rich US clients not to travel to America.

The Swiss bank has also made lawyers available to the more than 50 bankers involved, many of whom have left UBS since it decided last November to wind down its cross-border private banking business for US ­customers."

What's this about? Oh, its rather quite simple. You see, UBS is alleged to have helped some very rich clients of the bank evade (illegally, it would appear) the Internal Revenue Service. You know, tax evasion?

Yeah. See, according to US law you are subject to tax no matter where you stick your assets. But many wealthy people have been known to establish offshore bank and brokerage accounts in places like Lichenstein and Switzerland, which have rather solid bank secrecy laws. They then trade or otherwise make money using that money, and don't report it. The IRS, having no means to compel a bank or other institution in a nation beyond the United States to produce records, is stuck.

But whether you can get away with it or not doesn't change the law, which is that as a United States Citizen you have a duty to report all your income and pay taxes on it.

UBS is alleged to have helped a significant number of very wealthy Americans evade paying those very same taxes by hiding income offshore. That's a serious federal offense, if its true.

But heh, it all seems to be ok, right? After all, UBS still has regulatory authority to operate in the United States; there are still plenty of UBS offices all over the land, including one near me.

Yet the company is directing its executives not to travel to the United States.

Oh, and Gramm, who is McCain's economic adviser, is taking money from this very same company as a lobbyist.

How very nice.

As I've pointed out, if we elect Senator Obama in November (as I believe we will) as President your taxes will go up. That's a foregone conclusion. But Senator Obama at least has been honest enough to tell you that your taxes will go up.

Senator McCain, on the other hand, has as a chief economic adviser a guy who is lobbying on behalf of a firm that is alleged to have helped a certain very few, very rich United States citizens evade paying those very same taxes, which of course means that you and I, who aren't so wealthy and aren't inclined to felonious conduct, get to pay extra taxes. That very same advisor has put a significant amount of effort into insuring that when you are ripped off due to unfair or even deceptive loan practices, and you go bankrupt as a result, the judge can't modify the terms of that loan - a right that he used to have before it was stripped from him as part of bankruptcy "reform."

Now I accept that taxes are going to go up one way or another after the November elections. It is inevitable that Bush's tax cuts will expire, given the composition of The House and Senate. I accept that.

But Senator Obama is honest enough to tell us that these outcomes will be headed our way, and, at least as far as I can tell, the very wealthy who are inclined to take their money and stick it in an offshore account won't be exempt.

McCain, on the other hand, has as his chief economic adviser a guy who is doing lobbying work for a bank that is accused of helping some very wealthy clients illegally evade paying those very same taxes, along with (successfully) lobbying to insure that if you got screwed by one of those very nice bankers the bankruptcy judge can't help you.

And people wonder why, for the first time since I first gained the franchise at the age of 18, I'm inclined to vote for Obama for President come November?

(PS: And lest you think this is simply a Democrat thing, its not. If Hillery were the front-runner I'd have to vote for Mickey. After all, it was her husband that led to this unprecedented financial rape of the public in the first place with that same Senator Gramm's bill in the late 90s....)

One final thing. While the market liked the Durables report, have a peek inside and look at defense and non-defense. Defense orders up 4.8%, non-defense down 1.4%.

CNBS, of course, made a lot of noise about the fact that "ex transport" durables were up, but they said nothing about the non-defense decline, nor the fact that inventories are at the highest level since the series tracking them was started in 1992.

In other words manufacturers are building a lot of "stuff" but it ain't getting sold, and the civilian economy continues to slow significantly. The entire "improvement" this month was on the back of defense spending, presumably to replace the bullets and bombs that our boys are expending over in Iraq.

Our national lie-and-spin "bubblevision" network, of course, said the exact opposite this morning - that the civilian economy is stronger than expected and "there are no signs of a recession."

CNBS has become Goebbels-Vision at its finest, sucking the American Investor in through blatantly and intentionally omitting key pieces of information from their "reporting."

Dow Chemical (NYSE: DOW) is hiking prices 20% come June 1st. Price inflation? Yeah, you got that right. Why? Duh. Huge increases in their costs for energy, transportation and raw material. Twenty percent folks. Read that before you go get the next can of "Scrubbing Bubbles" for your bathroom.

The crooners and screamers are out again over the weekend decrying "speculation" in oil futures.

Rick Santelli did a pretty good job of destroying that argument this morning on CNBC, surprisingly enough. He brought up the "inconvenient truth" that on the last day of a given contract, as the day winds down, all speculation must (by definition) cease on that contract, as anyone holding a long at the bell must take delivery, and anyone short at the bell must provide delivery.

He's right of course, but don't expect people to pay attention to the inconvenient thing called "facts" when emotion rules the political landscape.

See, here's the bottom line - if speculative distortions were the "primary drivers" of price, then we would see tremendous distortions in the price of the front month .vs. longer contracts on that last day. $10, 20, 30 or more. That is, if the "actual delivery price" of oil is really $100/bbl, and the speculative premium $30, one minute before the bell on expiration day only those people who will deliver (or take delivery) have open contracts. That last trade is going to take place at the actual delivery price - it simply must, by definition, as these contracts do not cash settle - they settle with actual barrels of oil changing hands for money!

Now is there a "speculative premium" in oil? Well, yes and no. The $250 billion in excess liquidity that is flying around has found a "safe haven" in oil and other commodities.

But this is not "speculative premium" in terms of market manipulation or "evil people", it is people buying oil and oil products as a stable store of value!

And what, pray tell, is wrong with this? We've got Bernanke running around literally shredding The Fed's balance sheet, deprecating US Treasury Bonds as a safe place to hide. He has turned what were pristine credit instruments into used toilet paper with wild abandon, stuck in the Ivory Tower world having made his speeches that "The Fed has a device called a printing press and can always arrest a deflation by using it."

Well Ben? This reminds one of Greenspan's speech when asked about FDIC insurance many years ago, when he said that "we can guarantee that you will receive your dollars, but not what they will be able to purchase."

The truth is that The Fed has not been hyperinflating anything. Liquidity is a loan, not a gift nor printing. Loans have to be paid back, with interest.

But - credit quality is credit quality, and at the end of the day the question for the markets comes down to asset allocation.

Since Bernanke has shown his willingness to shoot off his mouth with statements that call into question his sanity, in which he has stated outright that he will protect insolvent institutions and homeowners by destroying the credit quality of The United States, we should not be surprised if the market, over which Bernanke in fact has no control (his delusions of grandeur notwithstanding), decides to allocate assets away from those things which he has and can wipe his butt with!

So if you're talking about "distortions" and who's to blame, go talk to Bernanke. He has single-handedly created this mess and the responsibility lies with him. You cannot blame people for allocating assets in a way that they perceive as safe.

You cannot fault market participants' perception that US Treasury instruments are fundamentally unsound when your own Central Bankers make public statements and take actions that demonstrate their willingness to destroy the credit quality of same!

The simple fact of the matter is that everything that Bernanke (and before him Greenspan) has done over the last eight years has been fundamentally bankrupt. Willfully turning a blind eye to knowingly-fraudulent lending practices, from appraisal fraud to ratings agency fraud to intentionally-overstated incomes to insane leverage ratios within our investment and commercial banks, all of which has occurred with the explicit approval of The Fed and our Government, has led to an incredible debasement of the credit quality of United States Treasury paper.

Now that the bubble in housing has burst we have seen three quarters running of so-called "kitchen sink" losses from the banks and brokers, yet each quarter proves that the banks lied in the previous one when more losses are unearthed. Financial statements continue to show proof of "cooking" the numbers, with assets moved from one bucket to another in a vain attempt to avoid recognizing and reporting losses.

Yet The Fed, OCC, OTS, OFHEO and Congress continue to allow this nonsense to go on, with ZERO in the way of enforcement actions against these firms, while allowing them to backstop their balance sheets by exchanging illiquid and potentially worthless securities for The Fed's Treasuries. Even worse, all of this is being done in secret, from the contents of Bear Stearns' so-called "backstop" to the participants in the various alphabet soup credit facilities.

Even worse, Congress continues to spend hundreds of billions it doesn't have, thereby putting even more pressure on the bond market by forcing issue of more Treasury Bills and Bonds into a market that is increasingly treating their credit quality as something akin to used toilet paper.

This, in turn, has led people searching for a reasonable return to shift their bets to commodities on the premise that The United States will ultimately collapse under the weight of the fraud; that is, The Fed will choose to debase the debt of its host nation while Congress issues even more trash paper rather than force its patrons to recognize their losses and deal with the potential insolvency that may result.

So far this has proven to be an accurate bet.

In addition, consumer confidence continues to fall and inflation expectations are no longer "anchored" in any meaningful way, with the one-year expectation now over seven percent as of the Consumer Confidence report this morning.

If Congress and we the people don't like the outcome of this path of action - sky-high oil and other commodity prices along with ramping inflation expectations and sinking consumer confidence - then it is incumbent upon us to force these agencies to put a stop to the fraud, remove the backstops, and force the recognition of these hidden losses, restoring the credit quality of United States Treasury debt and The US Dollar!

When you look at the Case-Schiller housing index and Consumer Confidence numbers you see the truth - away from the fraud of Wall Street, The Fed and Congress, reality cannot be hidden. Home prices continue to decline at record rates. The worst areas of decline mirror the places where the fraud was most widespread - Florida, Nevada, and California. No sign of a bottom - at all. Foreclosure sales are finally starting to take off, moving the market from "denial" and "bargaining" towards "acceptance", which is necessary for the market to clear.

Consumers continue to expect that prices will rocket higher, with our consumer expectations now reaching those of CHINA.

Nobody believes the CPI numbers any more; the lies have continued for too long and consumers have literally given up on the government, assigning anything coming from a government mouthpiece ZERO credibility.

Time to choose America. Are you going to sit still while our politicians from both parties scream about "speculators" and "Oil Barons" when in fact the real problem is your Congressional Representatives and Senators and The Federal Reserve, who have personally and through proxies allowed the costs occasioned by the fraud of the last 10 years to be shifted into your gas tank?

80% of Americans neither participated in or profited from this scam.

Why are you tolerating being saddled with The Bill?

I thought I'd put together a "5 month review" of my previous "Year In Review" and update anything that needed updating.

Let's start with the predictions from the "Year In Review"

• The US will enter a recession, if it has not already done so. It will be consumer spending driven, with its genesis found in the Housing market. The slowdown will become evident once the “real” holiday sales data is posted, and accelerate into the first quarter. CHECK; real income has been negative every month since October, and real spending has been negative all year thus far.


• Unemployment will increase significantly, rising to north of 5% by the middle of next year. This will of course cascade back into consumer default rates (mortgages, credit cards, auto loans, etc) and cause yet more layoffs. The “virtuous cycle” will turn vicious. Getting there - sitting right on the 5% level.


• Housing will not turn in 2008. The total damage to prices will exceed a cumulative 15% from 2005-2008, and it will not be over. At least one, and probably several, national home builders will be cut to the single digits on their stock price or go bankrupt and be reorganized. Residential Real Estate will NOT be a buy in 2008; you’re still at least one and probably two years too early. CHECK - we have several home builders in single digits and the 15% cumulative decline is pretty much there.


• The story in the housing space in ’08 will be the defaults on “prime” mortgages – which in reality were nothing of the kind (e.g. “Option ARMs”), and on the piggyback seconds and HELOCs behind them. “Jingle Mail” will become common as homeowners that are deeply – 20% or more – underwater simply mail in the keys and say “screw the credit rating.” This will result in a near-total overhaul of the “FICO” system in the next couple of years, as these people will have defaulted on mortgages but nothing else, essentially forcing risk premiums higher for consumer credit and decoupling FICO from actual consumer credit (other than mortgage) behavior. I expect there will emerge a “shadow” FICO system which ignores mortgages but rates everything else. NOT YET; I may be a year early on this one.


• The stupidity in the rest of the consumer lending space (rollovers in auto loans and 0% balance transfer hell for plastic, primarily) will come crashing down on these companies and bring a crushing wave of defaults there as well, along with yet more downgrades in the asset-backed paper market. Starting, but not yet evident to a large degree.


• Recreational sectors (e.g. boats, RVs, etc) will get smashed. If you’re in the market for high-dollar recreational assets and have cash, late ’08 and into ’09 will present some incredible buying opportunities. CHECK - boat and RV makers are in trouble and resale prices are tumbling on both. YOU ARE STILL EARLY if you're shopping - wait!


• Government will, as is usual, try to meddle in the market’s adjustment of risk and price. The depth of this meddling will be the determinant on whether this is a deep but sharp and reasonably-short recession or whether it morphs into something far more serious. With 08 being an election year the temptation to engage in SEVERE tampering will be significant, and if they do, the risks rise materially. There is a serious risk of an all-out deflationary depression, and if we get one, it will almost certainly be the government’s fault. Whoever wins the Presidency may wish they had lost come '09 and '10. $450 billion spent on stupidity and counting; this looks on-track.


• Buffett just announced he is setting up a Municipal Bond insurance company. This will put a stake into the Monolines' hearts, taking all their business away that is profitable, and leaving them with structured finance which has huge embedded – and unrecognized – losses. The announcement, which showed up on the 28th, didn’t send shockwaves through the market – but it should have. Effectively, Warren threw a grenade (minus pin) into the magazine of structured finance. This is the death knell for the few trillion in CDSs that are out there can’t be paid; there is no longer any reason to believe that the companies writing these things will be able to be recapitalized off 'profitable' sides of their business! This is how fortunes are made (for Warren) and lost (for everyone who did imprudent things.) The 'big story' in the financial markets for 2008, and the likely trigger for major turmoil, will be the implosion of the CDS marketplace and how Buffett profited from it. This will stabilize the municipal bond marketplace which has been positively hammered. Kinda. I may be proven wrong on the outcome here in that munis may get positively destroyed due to tax base destruction.


• Equity prices will be choppy in the first couple of months and will experience a peak to trough swing of at least 20% during the year in total. I expect the S&P 500 to at least touch 1220 in 2008 and my current downside target is 1070. Note that should we get a 'parabolic' sort of move in the first quarter, which is possible, the potential for an even louder 'boom' (collapse) goes up dramatically; in that case I would not be surprised to see a three-digit handle on the S&P 500 sometime during the 2008-2010 time period. Check on the "choppy"; targets still open.


• Return OF capital will be far more important in 2008 than return ON capital. Ha! The stupidity of the pump monkeys and the public when it comes to equities is unparalleled. Nobody remembers 2000-03 - but they will.


• I do not expect the central banks to “hyperinflate” anything. Metals, in a protracted, serious deflationary selloff will get smashed. (If you're a "Gold Bug", read below for why I think you're nutty to hold metals - there's a better play if you believe in hyperinflation.) Unresolved. Gold, I note, hit $1,000/oz and has come back in - there are many predicting $1600 "imminently" but they've been doing so since January and so far, are dead flat wrong. We will see.


• Debt will be paid down when possible and when not, defaulted. This, of course, prevents deploying capital towards consumption and production. Expect this to show up in the first quarter in ways that cannot be refuted, and for the market to “get it” some time before the end of the second quarter. Looks like the "get it" has just started. CHECK.


• Commercial Real Estate will collapse. The leverage in these deals has actually exceeded that in residential, if you can believe it. This will prove to have been totally insane and the losses taken there will be immense. It will also put a fork into the “this is contained” thesis, and validate the fact that generally, commercial R/E lags residential by 12-18 months. Guess what – time’s up! Price declines reported for the first time on these; this is starting!


• Business CapEx will slow precipitously and may go negative. This will be “spun” for the first quarter or so, but by the middle of the second quarter it won’t be able to be spun any more, and the truth will have to be faced. That “truth time” will likely mark the start of the second big leg down in the equity markets. CHECK; see Network Appliance (Nasdaq: NTAP) and others. This story is just getting started.


• The Dollar will bounce all over before starting to take off when it becomes apparently that the rest of the world is going to get it worse than we will. Not yet and may be way early; I now think we may see the 60s before this occurs.


• The “market callers” who are (almost to a man!) calling for big moves northward in 2008 will be coming to the public “hat in hand” as we get into the latter part of the year. These people will be roundly discredited and yet another wave of so-called “analysts” will disappear from the scene, along with all the money the chumps who listened to them lost. Dick Bove anyone? Check; first of many.

I count six "Checks", five unresolved, and a couple that look at this point to be clean misses. I'll take it, given where we are. We'll do this again in December as a full recap; it should be fun.

How about these two video segments from CNBC Friday? Argue with these folks at your considerable peril - Mr. Walker is the former Comptroller General of the United States; he resigned earlier this year due to our government's refusal to deal with these issues.

http://www.cnbc.com/id/15840232?video=751583439
http://www.cnbc.com/id/15840232?video=751573252

Now let's take a look at Financial Sense and their article flow this weekend. Virtually every article there is now crowing about how Gold and Silver are going to the moon and complaining about blatant market manipulation of the price. Uh huh. Ok. Tell 'ya what - you buy a futures contract for delivery of either Gold or Silver, hold to expiration, and when the time comes, take delivery.

Come talk to me if the delivery fails. Until then I refuse to entertain this nonsense about how "there is some great cartel suppressing the price."

I'll tell you what's going on - the great "market callers-cum-dealers" were buying with both fists as Gold went to and through $1,000/oz, expecting to see the much-promised $1,600 immediately.

They intended to profit from an engineered squeeze northward as their "news articles" continued to pump the price, then sell that stock to you instead of acting as an intermediary. The spread wasn't good enough - greed got involved just like it did with real estate.

Now that the price has come down suddenly supply has "disappeared" from dealer shelves. But is it really gone?

Or is the truth that having failed in their prognostication and stuck with the inventory, now at a mark-to-market loss, the dealers are trying to provoke a buying panic among retail customers to drive the price back up?

Gee, I wonder.

The Commodities Futures market tells the truth, because it is a regulated entity and fails there get immediate attention. Show me the fails and I'm all ears. Until you do I call horsecrap on the "manipulation" claim.

Oh, and don't bother with the claptrap about the singular nickel failure on the LME a while back. Yes, it happened, but there was a penalty rate impose of 1% per day on the failure to deliver until you made good. I don't know about you, but an annualized return of 365% sounds pretty damn good to me, and those failures resolved essentially immediately because that sort of punitive "fail" rate has a way of making that happen. I'll take a "fail" that results in an annualized 365% return any time you'd like to "impose" it on me.

How about oil? As anyone who hasn't had their head firmly buried under a rock for the last month knows, oil has surged in price over $130/bbl and there are market calls for anywhere from $150-200 over the next months. There are many who claim this is all about speculation and more who claim it is about "peak oil."

Peak oil, by the way, doesn't mean we're running out. It simply means that we have more demand than supply at the current price.

When you have this situation the price shifts to the right on the classic supply/demand curve until either demand is suppressed or supply comes online.

But what if supply can't come online? Then the only equilibrium force is demand destruction, and until it takes hold, prices continue to rise.

Now let's think - does the circumstance exist where supply can't (as in physical impossibility) come online? NO.

We have oil off the coast of Florida, we have oil off the coast of California, we have oil in shale on federal land out west and we have oil in Alaska (and not just in ANWR; there is also a second large field, completely untapped, outside Prudhoe) and we refuse to go get any of it. The cheapest and easiest method to get the shale oil is strip-mining, but we refuse. We can also convert coal to oil but its very expensive.

Back in the early part of 2006 I penned an article at my primary blog of the time called "Musings" in which I talked about the coming oil panics, in which I saw the potential for Iran to cause a rocket shot higher in oil prices. Iran didn't act at that time, but the facts remain. We have, in the interim two years, squandered two years worth of drilling effort, nuke plant construction effort and biomass (specifically, construction of the blue-green algae aquaculture on non-arable lands out west, utilizing that nuclear power to pipe the water, from the sea if necessary) of course.

Note that the path forward advocated requires burying all the "Greenies" that stand in the way.

These very same "Greenies" have not only stood in the way of oil exploration in the United States, they have also blocked all nuclear deployment for the last 30 years, have blocked large-scale reflective solar plants, and have blocked the installation of large-scale wind generation capacity, most notably and recently off Nantucket.

They have also blocked the use of compression-ignition engines until their "ecology standards" were met, and kept moving the goalposts to guarantee that (until this coming model year) they couldn't be in enough states to severely discourage their sale to the public. In the process they also guaranteed that flex-fuel diesels would not be deployed, never mind that the military had them in the 1960s and they would run on nearly any commercial liquid hydrocarbon, including gasoline, diesel fuel, JP9 and Jet-A.

There is no solution to be found in hydrogen or land-crop-based biofuel. Hydrogen is not an energy source, it is a chemical energy storage mechanism and is inferior to hydrocarbons in energy density. Land-crop based biofuels cannot provide more than 5% of our road-based fuel needs; this is a matter of mathematics.

If we are serious about energy independence and security we build breeder reactors until we have 100% of our electricity covered by nuclear power, we electrify our rail system so we can get the diesel engine out of our locomotives (which is being used to generate electricity anyway), we use that electricity to power both extraction of existing hydrocarbons and the production of biofuel from aquaculture and we drill for all the petroleum resources we have to run this nation until the transition can be completed.

As a consequence if you are in the "don't drill/mine/refine/blow/nuke HERE" camp then you have absolutely no right to complain about the current price of gasoline, heating oil and natural gas; YOU EXPLICITLY ADVOCATED FOR EXACTLY THIS OUTCOME AND NOW YOU ARE GETTING IT.

It is time for you to either change your point of view or shut the hell up and enjoy the outcome you advocated for.

Now let's look at home prices.

They have declined. They will decline further until balance is restored. The Home Equity ATM machine is and will remain closed. Consumers have an all-time high in debt service requirements .vs. disposable income.

We have played "ugly American" and "as long as my credit card has room on it I can buy it" for too long. Now the check has to be paid, and its not going to be pretty. There is no escaping this reality, whether we want to or not.

There are no classes of assets that are both unpledged and large enough to support another round of debt bubble creation. The end result is that this debt must either be paid down or default - there is no other outcome possible. At the same time, consumer spending must and will contract as this occurs.

Those who think there will be a "mid-cycle slowdown" are either intentionally spewing falsehoods, delusional, have the brain power of a flea or all of the above.

We are in a recession now and it will be both longer and nastier than is being expected by virtually everyone. This is reality and it is most certainly NOT "priced in."

My expectation is that despite the crooner's call for the "election cycle" to work its magic its too late, just like it was in 2000. We are going to go into that deep and nasty recession as we are coming into the election, and it will lead to tremendous losses for The Republicans in November. The Republicans will get tagged for this irrespective of whether its their fault or not - this is just how politics works.

In the end everyone votes their wallet.

I see no evidence whatsoever that the Republican Party even recognizes this; they are literally whistling past their own graves in the coming election in terms of representation. I fully expect a monstrous Democratic sweep in all three branches of Government, despite the fact that such is inherently contrary to the interests of the American People (you want a divided government to keep them out of our hair to the maximum possible extent!)

Finally, this is a weekend for thanks to those who have put their lives on the line so we are able to maintain the freedoms we enjoy in this nation. Whether you agree with the war or not, the fact remains that without the hundreds of thousands of Americans who have, over the last 225 years, been willing to support our nation in the most personal and final of ways, we would be speaking German or Japanese right now.

Something to think about......