The Market Ticker

Back in 2005 on Musings I talked about "The Coming Fiscal Meltdown of America", with a focus on the public debt which, at the time, was about $45 trillion, including Social Security and Medicare.

Of course we have now added to that materially, with the entitlement spending going insane, and now have a number that is closer to $62 trillion, all-in.

Yes, it is rising that fast, even though we only "count" $9 trillion or thereabouts.

Now let's talk about why it all matters.

The government debt (public debt) is only a small part of the problem. The far bigger one is private debt.

These are best expressed in terms of GDP, because that's what really matters. After all, if you have $1 trillion in debt that sounds awful, but if your GDP is $20 trillion, it is in fact trivial (5% of output) and easily serviced.

Unfortunately we have reached truly unprecedented levels in the United States.

Private debt is currently running at 170% of GDP excluding financial components, and 280% if you include them.

Past crisis incidents and recessions have featured much lower numbers. For example in 1929 it was about 150% (non-financial), and didn't reach over 200% until 1932, as the Depression induced tremendous asset deflation and output falls.

In 1980 it first started reaching for the 100% mark; in 2004 it was 144%.

To figure out how bad this could get you need to know the debt service costs; if we assume a conservative 8% interest rate on all such debt (remember, credit cards and car loans are included, not just mortgages!) we get a GDP "coverage ratio" of 22.4% of GDP.

That's right - you need 22.4% of GDP just to pay the interest on the debt.

This, by the way, is why Bernanke fears deflation so much. See, if we were to see interest expenses rise and GDP fall by, say, 10%, we would force coverage much higher, and set off a cascade of defaults.

Unfortunately we are likely beyond the point where this outcome can be avoided.

Many people complain about our national debt, which currently stands north of $9 trillion. That's a lot, and it ignores Social Security and Medicare (which isn't really fair unless you're prepared to tell Granny she can't have either!)

But that's about 80% of GDP, in rough terms. Bad.

What's worse is our household and financial sector debts. Household debt now stands at 120% of GDP, and includes both mortgage and other debt (e.g. cars, credit cards, etc.)

Then you add in financial sector debt its 280% of GDP, as mentioned above, and that's probably understated - after all, do you believe all the so-called "Level 3" valuations?

Of critical note is that the household debt number was about 85% of GDP in 2002.

Essentially ALL of the last four years of "growth" were in fact purchased with debt - the money now having been spent but the debt service remaining!

Worse, the financial sector has increased leverage - debt - at a rate twenty five times that of GDP since 1957, in what looks suspiciously like a parabolic blowoff.

And household debt is even worse - from 1975 onward it too has gone on what is darn close to a parabolic tear, and has almost doubled since 2000. But GDP is up only about 30% in the same eight years.

Now let's add in demographics.

As you probably know the Baby Boomers are starting to retire. Well, they think they will anyway. As they do, the 401k and IRA money they have in the markets will be removed and spent. This is money that will leave the market "forever" as it will be turned into food, shelter, cruises - in short it will be consumed.

The bad news is that the housing mess has "pulled forward" what I wrote about back in 2005 to a degree that I did not forsee. My original projection was that we had until about 2015 or thereabouts to get our act together, perhaps a bit longer.

I was wrong.

Those who think this will be some kind of "V" or even "U" shaped recovery are delusional.

We will not return to "trend" growth of 3-4% annually. We can't. Oh sure, we can play "goose the number" like the stimulus checks will for a month or so, but the facts remain what they are, and the underlying realities will not change. They will, in fact, get worse - much worse - as the months and years wear on.

Do not be suckered into believing that there is some rainbow at the end of this mess - not for a good long time to come. Absent some fundamental change (such as enactment of The Fair Tax) it is simply not going to happen.

Sales tax revenues for the first quarter are down. This is an ominous warning as it means that real consumer spending is in fact down, irrespective of what the government tries to report.

You can't get away from paying sales tax, and on a national basis sales tax revenues declined.

Note that taxes are paid with pre-inflation dollars, which means that adjusted for price inflation (that is, using the "deflator") its even worse than it appears.

Consumer spending is going off a cliff in real dollar terms - right here, right now, with the most precipitous declines being registered in March.

Short term the market is severely overbought, being driven in the last couple of months by delusional traders who have bought into the rotation out of commodities and the monstrous "stick save" tactics of The Fed, yet most of these people stayed when the "hot money bubble" that Bernanke has brought rotated BACK IN to those same places.

This is foolish beyond words, but that's how The Street works - it creates the maximum number of bagholders at the worst possible time.

In the 2000-2003 Tech Massacre there were multiple rallies just like this one, and they were not buying opportunities - they were opportunities to get short. Why? Because they inevitably turned and retrace all of what was gained, plus more. If you calibrated your bets so you wouldn't be forced out - that is, you used sound money management - you were ultimately richly rewarded.

So it will be this time.

If you've been dancing to the long trade do not overstay your welcome.

The music will stop and there will be no prior warning.

When it does if you're long - you're dead.

Look back at the summer of 2001 for what is almost certainly ahead. People think that 9/11 was a horrifyingly bad plunge. They're wrong. Most of the damage - a 20% decline from the local top - happened before the terrorist attacks.

20% from here is roughly 280 SPX points, or awfully close to 1070, which is major chart resistance, in the SPX.

The bulls are delusional in their belief that we can restart the debt-creation and spending binge and return to "trend growth", and thus earnings can be maintained and advanced.

It cannot be done.

The money does not exist to service the debt, and debt costs in the private sector are rising, not falling, especially among households. Real interest rates and terms, especially on revolving debt (credit cards) are going up at insane rates.

Single-payment misses now result in maximum interest rates going to 30% immediately, where they stay for a year or more, where a couple of years ago a single payment miss often didn't result in anything other than a $30 late charge. The issuers know you can't do a 0% balance transfer any more, and the low-fee transfers all disappear as soon as you have a late on your report, so that avenue of gaming the system has been slammed closed.

A new report out within the last few days suggest that 30% of all credit cards are under threat of default. With half of all cards paid in full every month, this is a particularly nasty trend, and one you do not want to see continue.

But it will.

The HELOC game is over. Lines are being cut back and will continue to be, as that debt is basically unmarketable today on the secondary market, trading for a nickel on the dollar - when it trades at all.

Contrary to Kudlow's claims 40% of all corporations have debt rated "junk", and in an economic slowdown these are the firms that will default. Default rates got silly low the last few years, which led to silly terms. That will come back and bite the buyers of that debt - hard - over the next few years, adding yet more contractionary pressure to GDP and the economy.

Nothing goes in a straight line folks, but the inevitability of what is coming down the road is a simple matter of mathematics. Our politicians do not want to listen, but the fact remains that they created this Ponzi Scheme at the request of the banks and other financial institutions and were warned that it would turn out like this.

They ignored those warnings, and now that day is here.

I have several times warned people to raise cash. I still mean it - raise cash, and do it now. Use this "rally" to prepare, because at the moment you are in the eye of a hurricane - and the other side of the eyewall is coming.

Soon.

I don't often post in "all caps."

This morning I had seen a third "notice" that there are widespread "critical shortfalls" in Union Pension Funds.

I put up a short video on the topic and am now getting emails telling me that this is more widespread than has been reported - additional funds have been sending these deficiency notices out.

Let me first state my bias up front - I am generally not very positive on Labor Unions, for the simple reason that I don't believe they do a very good job of protecting worker rights and finding solutions that work for both labor and management. There is also a long history of outright corruption. However, the counterbalance to this is that in the early 1900s there was clear corruption on the other side and Unions were one of the counterbalancing points that helped right that, so its not a "clear" win or lose.

With that out of the way, let me explain to you what, if you're part of organized labor, you need to do right now. Today.

You need to find out what your Unions' Pension status is as of this time. ERISA requires them to notify you on some sort of schedule but you have a right to know at the present time. Pick up the phone and find out where your Pension fund stands and what "unrealized" losses may be embedded in it. Ask for the answer in writing.

If you have received any sort of ERISA-mandated "deficiency" or "warning" notice, or receive one in the future, you need to act right now.

Specifically, any Union that has had this happen needs to get the membership together today and authorize a general strike until the Wall Street fraudsters who played their Ponzi finance games return all of your lost funds to you.

No ifs, ands, buts or maybes.

Yes, I am potentially calling for the Longshoremen to strike every port in the United States.

I am potentially calling for the Teamsters to strike.

I am potentially calling for every State Employee covered by CALPERS to strike.

You need to understand that under the law the PBGC can and will come in and seize these Pension funds if the deficiencies cannot be corrected. Once that happens your pensions will be permanently cut down to PBGC-payable levels.

Go ask the Airline Pilots how they liked what happened to their pensions when their funds were "transferred" to the PBGC!

You are at risk of losing half or more of your retirement income on a permanent basis.

If your pension fund was sold supposedly-safe securities that in truth are not (like, for example, mortgage-backed CDOs and bonds) without the fact that these loans were largely comprised of "liar loans" being disclosed up front to your pension-fund managers, you should not be the ones who eat those losses.

This is not an investment loss, it is fraud!

The banks that sold them to you, and those banks' management, should be the ones who eat it.

You can either act now or you can watch your retirement be shredded.

There is hundreds of billions of dollars of fraud embedded in these securities and if your union representatives do not act right now by the time you get the "bad results" all the money that is possible to recover will be GONE.

Here is a short video on the topic. Act now or you are likely to wind up working at WalMart handing out shopping carts for your "retirement."

If we lived in France you'd already see thousands of demonstrators in the streets and every port, train and other unionized labor body would be on general strike, with their employees pounding the pavement to demand redress.

You should not be the ones to eat these losses but if you do not step up and act NOW you will be!

Do our Unions have any "spunk" left, or are you, the workers, represented by sheep?

So yesterday we get the fabled "one and done", so called.

Anyone remember that we were told it would be "one and done" back last summer?

Do the "crooners" really expect us to believe it a second time, after being told the check was in the mail in the summer - and finding out that it was made out of rubber?

So what did The Bulls really expect yesterday? Something in the statement that said "its all ok, the economy is turning around"? You must be kidding, right? There's nothing in the economic data that suggests this, but it appears, from the market's reaction, that was exactly what it was demanding to see in order to produce a continued rally.

You know when the FOMC will have credibility? When it acts - and not before. So far Ben and the rest of the FOMC have not given a damn about the effects of their actions on the world economy, nor, indeed, on anything beyond their "humongous bank and brokerage" (HB&B) - hattip to Bill Cara for the term - buddies for whom everything is calibrated and done.

Far from being a watchdog of economic growth and price inflation, the FOMC has in fact one mandate that they follow - keep their buddies reporting bubble earnings as long as possible by continuing to run Ponzi Finance games one after another, picking up the pieces of one collapse with the fuel shovelled into the furnace of the next.

This whole "scam 'em until they all die and you all run out of food" game started with the repeal of the last pieces of Glass-Steagall, and the banks immediately recognized that they could lever up with wild abandon so long as they were big enough, then cry "too big to fail" when they got in trouble - and we'd respond by protecting them from the just desserts of their stupidity - at our expense.

This morning Sheila Bair is on Bubble TV talking about her plan to play "let's have Treasury recapitalize the banks with yet another hairbrained bubble scheme."

Her justification for this is, ironically, is that "if we just let them foreclose you'll have an empty house for 10 months due to the overhang in supply."

What is Sheila's background in economics?

There is one simple solution to inventory overhang that works every single time and works immediately.

That is to lower prices.

But see, Sheila doesn't like that answer. Why? Because, well, she wants her cake and would like to eat it too. That, unfortunately, is impossible. Distorting the market will actually make the problem of inventory overhang worse because, as I noted, it will drive the cost of money higher (thus driving the value of homes lower) and at the same time it will give sellers "hope" that they will not have to drop their prices.

As such it will push demand and supply in the wrong directions - simultaneously.

This is in fact eerily similar to the "stimulus check" stupidity that is now running rampant across the nation. We are told to go out and buy a new flatscreen TV with our $600, but what we're not told on Bubble TV is that its not a $600 "Gift" from Uncle Fed, its really just taking money out of your wallet, extracting the inefficiency of government, then sending it back.

As I noted in the video below the truth is far uglier than put forward



But nobody wants to talk about that eh?

That's because we don't talk about compound interest, compound earnings, and why you can't spend more than you make for any material amount of time.

So in fact this "stimulus" isn't; its yet another example of Ponzi Finance courtesy of our government, ladled up as yet another dollop of debt and having an actual net negative impact on the consumer's balance sheet. It is yet another attempt to "have a hamburger today that I will pay you for tomorrow", but like Wimpie, tomorrow, when the check is to be paid, never comes.

Personal income up 0.3%, spending up 0.4% last month. Was that real? Who knows.

But jobless claims were up 35,000 to 380,000. That's an actual counting function, so I guess we can trust those numbers. Maybe. Continuing claims exceeded 3 million, a benchmark not seen since the last recession ended in 03. Of course we know its really worse than that, right? After all, they don't count illegal immigrants, and who was building all those houses? Yep.

If you're not outraged enough about bank book cooking yet, here's yet more! A US Representative, one Gary Miller, is a real-estate developer. Guess what he got inserted into the House bill trying to "help" people refinance subprime mortgages?

Yep, you guessed it - another attempt to force people to NOT mark to market.

"In other words, let's see if we can get banks to lend more money by letting them show more capital than they actually have."

Niiiice.

The good news is that the media is finally getting it, and finally getting outraged. Bloomberg's Jonathan Weil's answer in the referenced column can be easily summed up as this:



Its about time we started seeing that response in the media. May we see much more of it.

The conference board's Help Wanted Advertising Index fell to 19, which is a leading indicator of the economy - and it ain't good. Declines were registered in all regions.

First Federal (NYSE: FED) may have been playing with the numbers in its earnings report. It appears that they used OFHEO numbers for Los Angelas, instead of ALTA - the official title folks. With the latter, the loss reported would have been materially higher. Will the games never stop? I thought that SarBox was supposed to stop this sort of nonsense?

Laws only work when they're enforced.

Kuwait is warning us that the Gulf States are likely to drop their currency pegs to the dollar. Well, duh. Bernanke has been exporting monetary inflation to these folks and they're (rightfully) pissed off about it. I'm sure they're real happy about the $200 billion in "bubble hot money" he has unleashed into the banking system that has immediately driven commodity prices to the moon too. I'm looking forward to some severe pushback against this stupidity; it appears that the only way to get the attention of these folks is to hit them upside the head with a 2x6 - a 2x4 doesn't have enough mass to make your point!

Oh, and if that's not bad enough, the recent departure of high-ranking people at pension managers - including big ones such as CALPERS, leads one to wonder - is something ticking out there in California? That would be bad, right?

If McCain wants any chance of winning in November, he's going to have to break from this stupidity here and now and start talking about these issues and what he's going to actually do to fix it. So far I've heard nothing out of any of the candidates that speak to meaningful changes in the "Ponzi Finance Everywhere!" schemes.

The problem is that every new bubble requires a bigger base of suckers as its foundation, and we're out of suckers. The Housing Bubble used a base of about $30 trillion, and there simply isn't a larger base available in the economy.

Game's up kids, and the candidate that faces this and starts speaking the truth - about entitlements, about our financial system, about living beyond our means - and who promises not "raise taxes and spend twice as much!" or "cut taxes and send deficits to the moon!" - but rather the truth - wins in November.

Bubblenomics has been the mantra of BOTH political parties but Grandma can't take any more of it, and neither can our middle class.

Do we need another political party focused on the truth?

Would America vote for such a candidate, or are the "free lunch now!" folks firmly in control?

One wonders.....

Next up - Dick Bove was once again on the air this morning and one of the sentences that passed his lips, if I heard it correctly, was that Citigroup (NYSE: C) was "up 22% this year."

Really?

Well, its up 40% from the bottom, but this year?

Here's a chart. You decide if Mr. Bove was playing games with the definition of when "this year" starts and ends, and what your performance would have been.



12/31/07 close, $29.44. Last night (to be fair, since when he was on the stock had not yet traded today in the "real" session) closing price, $25.27.

The math is left as an exercise to the reader, as is the veracity of his claim. If I get to retrospectively pick dates to make my calls work I can be accurate all the time too.

Of course trying to invest on that thesis without a HG Wells (or "Doc") style time machine might prove to be slightly more difficult.

For my part, I wrote the SEC at enforcement@sec.gov a nastgram about this, and I suggest you do so as well.

We also have rumblings flying around about deficiency notices coming into and going out of Pension Funds from both a steelworkers and longshoreman's unions.

This is an extremely serious matter and totally unappreciated in the market.

See, these funds were sold (and eagerly bought) a lot of this crap paper. CDOs, SIV "commercial paper" and similar trash. All served up by the Wall Street Boyz.

If you have a defined-benefit pension of any sort, whether you're a teacher, a union worker or otherwise, you may have a very serious problem that is not yet formally recognized by you - but it will be, and with disastrous consequences.

Anyone who was wondering if this "credit crunch" and "The Era of Fraud and Ponzi Schemes" was going to hit Joe Sixpack right in the wallet, or whether this was just another "LTCM" type of bump in the road, you should be aware that not only is this going to hit Joe, its going to flatten him.

Essentially NONE of these losses have yet been recognized and reported. Zero, zip, nada, nothing. Yet these losses will be ruinous for millions of Americans, who are having their retirement security destroyed outright while Wall Street has reaped billions of dollars in bonuses.

You who think that Joe "won't care" need to wake up and get off your duffs - and head straight over to http://www.house.gov/ or http://www.senate.gov/, look up your Rep and Senators, and get on the phone.

The message needs to be loud and clear - the fraudsters in our financial industry need to be indicted, prosecuted, and jailed, with the illegally-gotten profits that they gained recaptured via asset seizures to the maximum extent possible, including not only from the executives but from the firms themselves.

But heh, its only YOUR retirement (or your Teacher, Longshoreman and Teamster) buddies that are at risk, right, and Dick Bove says you should buy the banks - you know, those same folks who created and profited from this insane Ponzi Scheme.

Got it.

The Consumer is ok? Uh huh. Try again:

"Statistics show that about 35 percent of all credit card holders are already exhibiting signs of possible default. Late credit card payments result in fees many consumers can't afford.

Credit card debt accelerated to unprecedented heights since bank loans began to dry up due to mortgage defaults. Total U.S. credit card debt reached almost $800 billion in November 2007, up from around $680 billion in March of last year, according to the latest available government statistics. "

35 percent eh? Note that about half of all cards are paid in full every month, so if 35% of all cardholders are at risk of default, that means that about 65% of all who carry a balance are.

Let me guess - that's bullish, right, and it has been widely reported in places like CNBC.

Oh wait - that hasn't been reported on CNBC at all?

Why not?