The Market Ticker

It appears that Pimco's Bill Gross is finally willing to blow the whistle on the fraudulent CPI statistics that I've been harping on for a while. Of course I doubt his motives, as it has been disclosed that he's shorter than a midget in the US Treasury market right now, but that doesn't make him wrong:

"Changes in the way the Bureau of Labor Statistics measures prices over the past 25 years have led to the understating of inflation, Gross, co-chief investment officer of Newport Beach, California-based Pimco, said in a commentary on the company's Web site today. The Federal Reserve's focus on 'core' instead of 'headline' inflation has also helped understate the increase in prices, he said."

"Join me in lobbying for change in U.S. leadership, the attitude of its citizenry, and (to the point of this Outlook) the market's assumption of low relative U.S. inflation in comparison to our global competitors."

What took you so long Bill? Had to get "maximally short" before you blew the whistle eh?

I guess he's given up on the idea that he's gonna get his bailout in the MBS space.....

But despite my intense personal distaste for Bill Gross and his incessant "book talking" even a blind (or disingenuous) squirrel finds a nut once in a while, and it appears Bill has been reading The Ticker.

His urging of people to get out of the United States and into other nation's stocks and bonds is, unfortunately, exactly what people are likely to do as confidence in our financial system and reporting continues to erode.

When the world's largest bond fund manager, based in the United States, says that people should move away from United States investments because of our incessant book cooking you had damn well better listen up!

(You can read Bill's full missive here)

Even better though is the fact that now all the stinky garbage that was pulled in the wake of ENRON - this time by the banks - is coming to light, as the stench can no longer be hidden under a couple of wraps of "newsprint" from the Wall Street Journal:

"'They never got the real problem fixed after Enron,' said Lynn Turner, the chief accountant for the Securities and Exchange Commission when the Enron scandal was exposed. 'When people find out how little FASB did, they're going to be shocked. FASB needs to be taken out behind the woodshed and given a good whoopin.'

Variable interest entities, or VIEs, are a post-Enron version of special-purpose vehicles, the term for the investments Citigroup created that led to the demise of the energy-trading company. The lack of disclosure about VIEs is adding to concern among investors after financial institutions reported $382.6 billion of writedowns and losses from subprime-contaminated debt since the start of 2007."

But remember, we have to bail these banks out.

Never mind that Citibank was the organization that created ENRON's nuclear off-balance-sheet vehicles, and guess who was doing it this time? Banks - the same folks who did it the last time.

FASB would be a good start, but it can't end there. We the people must insist that this goes much further, and extends to those who not only enabled the fraud but are now trying to prevent the impact from being felt by those who committed it.

That inherently includes The Fed and Congress, both of which have not only enabled these games but have tried to cover it all up so "we the people" don't know the full extent of the damage, while at the same time causing a great deal of that damage to be offloaded to us through the commodity markets.

It must also extend to these bankers and we the people must stand up and raise hell until it is stopped, the people responsible are held to account, including forfeiture of bonuses, civil fines and, one would hope, prosecution for fraud.

This sort of game will not stop until we all turn up the heat on CONgress and insist that they stop taking money from their clowns via their PACs and instead of shaking their hands start issuing subpoenas. Hiding exposure off-balance-sheet is not done because it "benefits investors"; it is done so that the public and banking regulators cannot figure out how much exposure someone has and leverage can be increased without disclosure.

This is great only as long as the economy permits continued expansion of the game; as soon as the default statistics turn and instead of being "way below trend" they rise to "above trend', as all cycles must, then the boom goes "bang" and someone gets stuck with the bill.

It is then that we discover the true purpose behind these "off balance sheet" vehicles - it is to prevent the responsible parties from being saddled with the losses, while they benefitted from the profits!

Oh, and according to S&P we've already seen more corporate defaults in 2008 than in all of 2007. So much for the "permanently lower plateau of corporate bond defaults and problems in the debt markets."

So make sure you say "Thanks Ben" every time you fill up your tank and pay an extra $25 for gasoline, as it is precisely due to his machinations to shield those who made these bad bets from the consequences of the bust that it has happened.

Wednesday the BLS released the actual job report from the third quarter of 2007. You know, the one minus all the "doctoring" in their preliminary numbers? It got zero press attention and in fact I missed it until a Forum Member linked it, and I went and had a look.

Gee, I wonder why CNBC didn't talk about it?

Remember, we didn't lose jobs according to the original data. But what does the actual data show, now that we have it in public?

"From June 2007 to September 2007, the number of job gains from opening and expanding private sector establishments was 7.2 million, and the number of job losses from closing and contracting establishments was 7.5 million, according to data released today by the Bureau of Labor Statistics of the U.S. Department of Labor"

That would be a net loss of 300,000 jobs, or 100,000 per month, on average.

Still think we're all ok on the job front eh? Hmmmm.... I wonder what the 4th quarter and 1st Quarter 2008 numbers will show when the real data is released?

Yes yes, I know, government jobs aren't included in that survey. And exactly how much GDP does a government job add? Zero - government consumes GDP as it is funded wholly from tax receipts. The degenerate case should make this clear - if everyone was employed by the government, all salaries would inevitably spiral down towards zero, as the government taxes only a portion of income (which is all there would be to pay those salaries.)

This morning we had an interesting change in tone on CNBC. I woke up to see a couple of "gurus" from the LBO/PE world (Peterson, one of the founders of Blackstone), plus David Walker (former Comptroller General of the US), talking about, of all things, the economic challenges facing America.

They were talking about things I've been discussing in my blogs for years - the fact that we have a negative savings rate, our debt, both personally and as a nation, has gone parabolic, that entitlement spending is totally out of control and that we have essentially exported all of our research and development through our unwillingness to save and invest rather than buy Hummers.

I was shocked; the "pump monkey" games were put away for one morning, and the truth was told, at least in part. Art Cashin from the floor was speaking truth too - that the consumer is getting hit with a 2x4 in the face from food and energy price inflation, and that the market will, and must, eventually respond to this.

There is typically a bullish bias to the days going into a Holiday Weekend, if for no reason other than people start smiling and thinking about the boozing they're about to engage in and are more inclined to buy than sell. Of course Goldman comes out this morning with a "goose job" on one of the Horseflies, Apple, in what certainly looks like yet another desperation move given that the Qs have dropped off by $1.50 in the last three days.

Will it work? Well for the day, I'm sure it will. But think folks before you follow that trade - Apple is a consumer discretionary purchase virtually across the board. Their computers are mostly consumer (rather than business) purchases and their iPOD is of course the ultimate consumer discretionary device.

The P/Es on stocks in this sector are insane and to the extent that there is exposure to either US corporate or consumer purchases, you're begging for trouble just as you were in the early summer months of 2000 after the "first swoon."

Tech is a horrible place to play with the consumer softening and credit standards tightening. The LBO machine has been strangled and the consumer's balance sheet is constrained. Those two elements spell multiple contraction, which is exactly what you can't have happen when P/Es are up in rarified air territory, as they are today.

For 'Da Bulls, that is.

Well it appears that Moody's "mistake" is garnering more than a bit of attention. First, from US lawmakers:

"U.S. lawmakers on Wednesday urged the Securities and Exchange Commission to investigate a reported coding error that may have led Moody's Corp to incorrectly assign triple-A ratings to some complex European debt products.

Sen. Charles Schumer, a Democrat from New York, and Rep. Paul Kanjorski, a Pennsylvania Democrat, said the matter deserves close scrutiny, especially if U.S. investors were impacted."

US investors were certainly impacted. Whether US investors bought the products or not the failure to contemporaneously notify the marketplace when the "error" was discovered extended the credit bubble and had an impact, irrespective of whether one can assign a specific dollar amount to it.

Connecticut's AG, in the meantime, isn't asking "if", he's looking at this from a more "ordinary" perspective - that is, whether there was fraud involved either originally or in covering it up:

"'We have been aware of allegations that, in effect, there was a cover-up of these ratings inaccuracies and defects in the models applied to these complex structured securities,' Blumenthal said in an interview today. 'The question is whether the defects were purposeful' and whether Moody's subsequently sought to hide the errors, he said."

Funny how a State AG office is interested in the facts, while the US Congress plays footsie.

Let's hope that Mr. Blumenthal hasn't visited any high-priced hookers, lest his reputation and investigation get short-circuited as Mr. Spitzer's recently did.

The "let's investigate this as a criminal matter" meme appears to be gaining ground:

"On April 30, the SEC sued Larry Langford, the former county commission president and now Birmingham's mayor, for fraud in allegedly accepting $156,000 from a local banker while refinancing the sewer debt. Langford denies any wrongdoing.

JPMorgan spokesman Brian Marchiony declined to comment for this article.

The Federal Bureau of Investigation has raided financial advisers in California, Minnesota and Pennsylvania to get files. In January 2007, Charlotte, North Carolina-based Bank of America Corp. agreed to cooperate with federal prosecutors in exchange for leniency. Bank of America spokeswoman Shirley Norton declined to comment."

Price fixing allegations... I guess that making money the old-fashioned way (that is, stealing it) may have made a comeback - and these are the very same bankers that Bernanke and Company are "trying to help."

Sounds great, right?

Stocks went in the toilet yesterday due to The Fed releasing minutes that said what everyone already knew:

• Price inflation is way above desired levels, and threatens to become "expected" (that is, "inflation expectations" are becoming unhinged.)
• The Fed policy rate is a blunt instrument that can't fix insolvency problems, nor make bad loans into good ones.
• GDP growth is slowing if not outright negative.
• Unemployment will likely be significantly higher than it is now.

Now go back and read my "Year In Review" ticker again.

Is any of what The Fed said "news"?

No.

So why did the market sell off by more than 200 points - for the second time in a week, based on "news" that wasn't news, and was in fact what people have been saying now for several months?

Simple - "the slope of hope."

That is, you have pump tards all over national television and in print trumpeting how its a "generational buying opportunity" in various sectors, "the market has bottomed!" and "buy buy buy or be priced out forever!"

Speaking of which, Dickey Boy Bove was on "Fast Money" last night and he admitted he might have been "a little bit early" on his "generational buy" call.

Uh huh. Here's the video if you want to watch it (its part of the way in.)

As some of you know I savaged Mr. Bove a couple of months ago in The Ticker here; he got very testy with me in email and we subsequently spent quite a bit of time going back and forth via email and well north of an hour on the phone.

Well, I'd have called him again today, but you see, I can't. Punk Ziegel was acquired and the email address I had for him no longer works. Oh well.

In any event the bottom line is that now he seems to think that many of these "generational buys" in fact have more (hidden) losses that are going to blow up in their face.

Gee, isn't that what I've been saying now for quite some time? I heard "I was early" on Fast Money but what I didn't hear is that myself, Merideth Whitney and others who have consistently said that he is absolutely full of crap were in fact right.

Funny, that.

Oh, and "early" on Wall Street is code for "I was wrong", but its the coward's version of that phrase.

The latter you never hear from so-called "analysts."

Oil blew off Wednesday while Treasuries blew up, at least to a minor degree.

Is the new flight to safety into commodities? It sure as hell wasn't into Treasuries!

Would anyone be surprised if that was the case?

At least when you buy a barrel of oil, you know you're getting a barrel of oil! When you buy a Treasury Bill or Bond, are you getting that, or are you getting a cyanide-laced balance sheet at The Fed that threatens to detonate and take down the value of your holdings?

The Fed has intentionally contaminated its balance sheet, debasing the stability of US Treasury debt, and then Congress is surprised when, instead of flying to safety in Treasuries, people look for a different option?

I'm not surprised at all - the obvious dislocation this can cause in things like oil prices ought to be clear to anyone with an IQ larger than their shoe size.

Congress spent another day attacking "speculators" and generally making lots of noise about high oil prices, but none of these idiots has bothered to think for more than 30 seconds about what is really going on here.

This is not about speculation.

It is about the fact that Mr. Bernanke, aka "The Wizard", has debased the former "safe haven" for money, that is the Treasury market through his "alphabet soup" games, and Paulson and Congress have done their part by blowing $450 billion in stimulus checks and housing bailout proposals. The result of all of this is that people are now looking for somewhere else to run to when threatened by fear in equities, and right now that "somewhere else" is OIL!

This is what happens when Ben and Congress try to save their banking buddies from having to take their marks and eat their losses. You generate yet another problem; you simply can't toss around nearly $1 trillion all-in without seeding horrifyingly bad consequences throughout the economy, and to think you can do this sort of thing without creating dislocations far and wide is the height of arrogance.

To Congress: Get off your butts, go into the restroom, and look in the mirror for your villain in regards to oil prices. The reason we saw a nearly $5 spike in oil Wednesday is specifically due to your stupidity in passing the stimulus and housing bailout bills, along with allowing The Wizard to twiddle system liquidity by throwing $250 billion in extra cash out there while exchanging nearly half The Fed's balance sheet (to the tune of $400 billion!) for used toilet paper. Now add in Congress' $450 billion between the housing and stimulus bills and voila - $1 trillion of economic dislocation comes to the fore, all centered in the Treasury market.

The consequence of this is that when the equity markets get jittery the money can't go into Treasuries as it judges them unsafe.

The money thus goes into commodities instead.

Congratulations Senators and Representatives - you created the mess you are now bleating about, and not one of your so-called "witnesses" had the balls to stand up and tell you the truth.

You folks up in Washington DC better wake the hell up and listen to what the market said to you Wednesday about the relative safety of Treasuries .vs. Oil and the consequences of your actions.

Should the concept of "Treasuries are no good when in search of safe harbor" gain traction the bond market dislocation that I have been warning about will occur with cataclysmic results.

Vesuvius is rumbling and spitting smoke while Congress and Bernanke are living in Pompeii having a party.

Time may be running out to do the right thing.

... here's the wind-up, and the pitch ...

or is that....

... here's the wind-up doll behind the curtain ...

Tuesday we discover that Moody's made a, uh, "mistake" in their computer software that erroneously rated certain synthetic debt obligations (CPDOs), causing "AAA" ratings to be applied when they should have been four notches lower.

This apparently was discovered internally at Moody's in early 2007, but do you remember any public announcement of this error, any mass-rerating of these securities, or any, uh, compensation to those who were screwed?

I don't seem to recall that disclosure, do you?

Gee, you don't think that perhaps investors, the public, and oh my gosh, the buyers who overpaid for these CPDOs had a right to know that there had been an error made, do you?

I mean its one thing to make a mistake, but its quite another to cover it up!

Cough-Watergate-cough.

Never mind that the curtain appears to be slowly drawing back on The Great Wizard of Oz, otherwise known as the government's scam in how it computes and publishes numbers of all sorts related to our economy. Marketwatch ran an amazing article Tuesday, but they weren't the first. The St. Peterburg Times blew the cover off this a couple of weeks ago, along with Harpers, and Prudent Bear is now being quoted in Asia Times, all on the same topic.

I guess some people have been reading The Ticker at a few editors' desks.

We're now seeing mainstream media articles on silly little inconvenient facts like:

• Intentional understatement of price inflation....
• Which leads to overstating GDP....
• And screwing Granny in her COLA adjustment on Social Security....
• And convincing people that unemployment is low (which it is not)....
• And enticing people to buy government bonds (T-bills) at a negative rate of return....
• While intentionally throwing hundred of billions of excess liquidity into the banking system so that your "best buddies" don't have to fess up to their losses which....
• Empowers Wall Street to blow bubble after bubble, while offloading their trash and costs into pension funds and ordinary people's pockets so we will all eat it while at the same time they pocket billions in fees and bonuses.

Never mind the cover up of all of this, where the lies just keep getting bigger and bigger as the compounding of fraud and theft snowballs just like 30% interest on a subprime credit card.

And before you go lambaste Republicans for this, stop right where you are. Democrats are just as guilty. Did you hear either political party go after Bernanke on The Hill after Bear Stearns was "bailed out"? On price inflation over the last few years? On his and Greenspan's insane "monetary policy" which amounted to intentional and willful blindness to fraud throughout the financial system, offloading the costs onto all of us?

Oh hell no.

As long as they can pretend there's a Maestro behind the curtain, the show will go on.

Or will it?

Several mainstream articles over the last couple of weeks seem to suggest that perhaps the proletariat (that would be "us", you know, "we the little people") might be getting sick of this crap and are fixing to raise a ruckus.

Hope springs eternal......

The "game" of 3-Card Monte requires an endless supply of new "marks", or its all over. When the con-man and his "buddy", who of course is in on the scam but pretends to be "just a passerby" deduce that they might be discovered, or worse, the number of marks has simply dwindled down towards zero, they suddenly up and run - with all your cash, of course.

In other astounding news we had hearings in the Senate Tuesday in which it was claimed that "speculators are driving a commodity bubble."

"Benn Steil, director of international economics with the Council on Foreign Relations, testified that the value of commodity index investments has grown by about one-third since the beginning of the year to more than $250 billion.

"The sharp recent rises in global commodities prices, particularly in the energy and agricultural sectors, is undoubtedly causing hardship for many Americans, and is indeed threatening the health of many millions in developing countries," Steil said. "There is also no doubt that these price rises have been accompanied by a corresponding rise in interest from institutional investors in commodities as an asset class.""

That's a very curious number, $250 billion. It all seems to have shown up out of nowhere, like Dorothy in The Wizard Of Oz, starting right about last August.

How'd that happen, one must wonder?

Oh, don't look behind that curtain over there! Why if you do that you'll find one Doctor Ben Bernanke pulling levers to fiddle with the slosh in the banking system, intentionally tamping down interest rates and taking trash collateral in exchange for his pristine Treasuries and cold, hard cash so his buddies don't have to recognize their losses.....

Oddly enough, the amount of money that he's been tossing around, the excess liquidity that he has allocated to this nefarious purpose is.......

about $250 billion dollars.

Oh my.

I think we figured out where the problem came from.

Sssshhhhhh... don't tell anyone that The Wizard Bernanke (we retired the moniker "Maestro") is standing behind that curtain butt naked.

If you're upset about $4 gasoline go talk to Bernanke - you are paying $4 for gasoline because he is covering up the insolvency of his buddies on Wall Street.

All that excess "slosh" has to go somewhere, and the "somewhere" is oil, gold, and grains in a vile attempt to "earn" their way out from under the rockpile that collapsed on top of their heads.

The bill is not only going to come due for this nonsense in the future, you are paying it right now!

Of course The House today played perpetuate The Wizard of Oz instead, voting to pass a bill that will allow The Justice Department to sue OPEC over fixing oil prices and limiting supplies. Bush threatened to veto it, but it has a veto-proof majority.

One has to wonder - exactly how do you enforce a judgment against, oh, Saudi Arabia? Might they not decide to give us the finger instead?

Perhaps we should tell The Wizard to put some damn clothes on first?

The game-playing isn't limited to the commodities space either. Have a peek at the fun and games at Freddie Mac:

"Until then, we're left with a system in which the only reason Freddie Mac is now solvent is that everyone who matters has agreed to believe it's true. That can't last forever, either."

What's that about? Simple - Freddie, along with Fannie, are "ignoring" losses by claiming that the impairments are "temporary."

How temporary? In many cases for more than a year, in some more than two. The size of these "adjustments"? More than $30 billion - enough to wipe out shareholder equity and, quite likely, render Freddie insolvent.

OFHEO, the so-called "watchdog", thinks this is just fine.

More lies, all sanctioned by yet another branch in The World Of Oz.

Never mind the other piece of deception that The Wizard and Maestro enabled, that of hedge fund CDS-writing.

Writing insurance is not a bad thing, right?

Well we're about to find out, because this over the counter hedge fund "swap business" is what everyone was freaked out about with Bear Stearns and contrary to popular belief the problem has not gone away.

See, this is the problem:

"Investors can't tell whether the people selling the swaps - - known as counterparties -- have the money to honor their promises, Backshall says between phone calls."

Those aren't "promises" they are contracts and if you write one with no ability and intent to perform you've committed an act of fraud, pure and simple.

I think we can all figure out that if we buy insurance on our house against, oh, say, a hurricane, the time to find out that the company has no money to pay (and never did) is probably not after Katrina comes knocking on the front door (blowing straight through and out the back!)

Yet that is exactly what's going on here. But more than a year after all this started in early 2007, despite warnings from people as diverse as Warren Buffett and Mr. Satyajit Das going back several more years, there has not been one substantive move to force these counterparties to prove capital adequacy or repudiate these contracts.

NOT ONE!

Make no mistake - The Wizard is clearly empowered to do exactly that, at least as far as it pertains to the regulated banking system, including, now, the Investment Banks.

See, The Wizard could, if he decided to, proclaim that nobody gets access to any Fed Credit Facility until and unless they can document that all of the swaps they rely on for protection are "money good".

That would end the fraud in one day.

It would also probably result in a couple of big "booms" in the investment and commercial banking world, and a whole lot of booms in the Hedge Fund industry.

But no!

We have to pretend that The Wizard is in fact a great and glorious demigod rather than the shrivelled up old naked man behind the curtain that he really is.

If he bellows loud enough then he's really powerful, right?

The Great Wizard of Oz.

What happens when this all collapses under its own weight? It will, you know. These sorts of games only work until someone comes to the point that their counterparty either has to pay them or they can't make the electric bill.

Will we, the people continue to allow this to go on with our financial system? The one that keeps our paychecks and investments in electronic accounts as nothing more than flickering numbers on a computer monitor?

If Congress was serious about stopping this nonsense instead of masturbating for the public they could end it immediately.

Send a note over to The Wizard and his cohorts and tell them that they have 30 days to do all of the following:

• That The Fed must withdraw all of the "excess slosh", including the TAF, the TSLF and the other "alphabet soup" nonsense. If its not an actual government security The Fed won't take it. If this means you must sell it to raise money, then you sell it. Life's tough and we all make bad investments. Deal with it and take your losses.
• BLS is directed to publish actual price and labor statistics as the headline numbers, with no "black box" adjustments. All headline numbers shall be unadjusted. Any adjustment the BLS wishes to make in the "internals" as an "alternative" number must be fully disclosed as to the data set gathered, how it is collected, and the precise formula(s) used to derive it.
• All counterparty exposures must be documented as money good or repudiated within 30 days for any firm that has a Government liquidity guarantee of any kind. In addition nightly mark-to-market and margin supervision must be performed going forward to guarantee capital adequacy, with a central clearing agent (like the OCC) given plenary supervisory authority. This includes but is not limited to all commercial and investment banks.
• All swaps and other instruments held by any such government "backstopped" firm must trade on a public exchage. Chicago already has one set up but it is being actively boycotted by the banks as they love the ability to "massage" quotes to customers so as to skim off more spread. This, and the above, bring swaps and other "exotics" under the same sort of contractual and procedural framework that governs listed options. There has never been a fail on an OCC-cleared option. NEVER - not even after the 1987 crash.

The "or else" part of the letter is simple - you attach The Bill with your sponsors signatures on it to repeal The Federal Reserve Act of 1913 as amended, returning monetary control to Congress, and at the same time you place the Bureau of Labor Statistics (BLS) function (that compiles the statistical data) under the non-partisan GAO.

If Congress gets told to go stuff or is stonewalled, the Bill is filed, debated and passed.

This would instantaneously collapse any speculation in the commodity markets, radically strengthen the dollar immediately, and force recognition of the real rate of GDP and income growth.

It would also go a long way towards preventing the formation of future asset bubbles.

To be fair, it would also drive up interest rates to sustainable levels, complete the adjustment of housing back to sustainable prices, force both government and private industry to live within their means, and go a long way towards stopping the routine plundering of our people.

Are you, the people, waking up yet?

If so its time to call Congress.

Psst: You know that warning I've issued repeatedly about uninsured bank deposits over the last few months? My ears are ringing...... and a long weekend is coming up. Nuff said.

Well let me practice full disclosure here - I don't know if it will be terrible or not.

That's because I'm writing most of it Monday night!

But.... some things are terrible, and they are fraudulent.

In fact, it seems that The Ticker has become a chronicle of modern-day fraud.

Let's get right to it.

We start with Senator Shelby and his "housing bill", which he claims will not bill the taxpayer for any of its $300 billion cost. His claim on CNBC today was that this would be funded by the GSE's "affordable housing" fund.

That's a nice fantasy.

Where's the money going to come from?

Shelby says this is a $300 billion program with a $1.7 billion cost. Uh huh. Pull the other one. You're going to manage to pull this off with under $2 billion to support $300 billion in loans eh?

You really think so?

What is the current default rate in the FHA's book? Running north of 10%, right? And what's the severity (recovery) on those defaults? Well, that depends, but let's look at some possibilities.

Let's assume we "buy down" the $300 billion to 85% LTV, and what is picked up are underwater (otherwise you'd just sell instead of foreclosing, right?) So as a result we "haircut" 15% off the $300 billion right up front, which is $45 billion in up front costs. Note that I'm being particularly conservative in assuming that the "haircut" will be right at 100% LTV and not underwater.

And before you say "but someone else has to eat that", uh, no, that's not true. See, the majority of this paper is either guaranteed by Fannie or Freddie or is actually on their book! So this is a gigantic circle-jerk and the haircut will come from these firms.

It thus has to be counted against the total program size.

Now we have to look at what part of the $300 billion (once refinanced) will foreclose down the road. Let's assume that 5% does - which is hopelessly optimistic with current rates running about twice that, but heh, I'm being nice. With a recovery of 60 (about right in today's market) we've got another $6 billion in losses.

We're up to $51 billion, but Shelby said this program had a $1.7 billion cost.

Bluntly: He's lying, even if none of the original paper was on Fannie or Freddie's books; in that situation it would be around $6 billion in direct costs.

But since most of it is, the real number is closer to the full $51 billion!

Mr. Shelby, are you, like Ms. Landrieu, somewhat-deficient in your math - this time in addition?

After all, Ms. Landrieu failed at multiplication - that is a more advanced skill than addition, right?

Or were you intentionally lying to the American People on CNBC (like the rest of these fraudsters?)

Hmmmm.

This much is certain - if Fannie and Freddie have to eat $51 billion, they're almost certainly both zeros and we the people will eat it.

Oh, for those who say "we will never see 40% off houses from the bubble top" (including idiots like Kudlow and Kneale), what would you say if I replied "but we already have?"

"Median sales prices -- where half the homes sell for more and half for less -- are down to Feb. 2003 levels in Sacramento County. The county's median sales price in April fell to $232,000 -- down 32 percent from a year ago and 40 percent off its Aug. 2005, high of $387,000"

Heh, facts! Look at that!

This, by the way, means that anyone who bought from 2004 on is underwater.

And since houses, on average, "roll over" every seven years or so this means that about half of the homes in that area are in fact underwater right now!

How many foreclosures did you say you expected again?

As for the economy, I know, Goldilocks will rock and roll and The Bulls will rule.

Oook.

California is 13% of GDP. Now let's take a peek inside the state:

"For example in the areas of Modesto, Stockton and Merced the unemployment rates are above 10% while more than 60% of loans are close to being underwater, or larger than the value of the underlying house. Serious delinquencies in those areas are above 18%, while the national average is 3.6%, according to Barclays.

But beyond the implications for banks, California can really be seen as the testing ground for what the U.S. consumer looks like in coming years, and how he or she manages. If, somehow, the move from spending to savings can be done gradually, the downturn in the United States may be gentle.

If, on the other hand, it happens quickly, watch out. “Savings rates should probably have to rise to five to six percent in the next year or two to get us back to a stable position,” said Mr. Thornberg at Beacon Economics.“If you have a five or six percent rise in the savings rates, it’s functionally a five or six percent decrease in consumer spending."

Uh, actually, its worse than that.

See, most people were spending at 102-105% of their incomes. If we use a conservative "102%" ratio then the a 5-6% savings rate is really a 7-8% decrease in consumer spending, not a 5-6% one.

That, by the way, has never happened before - well, at least not since The Depression.

To put this in perspective since the consumer is 70% of GDP this is a real adjustment to GDP of about negative 4.9% from today's levels, which is enough to qualify as a "nasty, deep recession".

Never mind that one of California's towns has already gone bankrupt. How many more will follow? The answer is "lots", because falling home prices mean falling tax revenues, but you can bet these towns and cities have not planned for that.

Reality: You can't spend more than you make over long periods of time. This is true even if you're the US Government. We simply have to reduce spending until we run an actual (not fraudulently accounted for, where we steal Social Security "contributions") surplus in government, and we need to stop spending like drunken sailors as Americans. We can either choose to do it voluntarily or we will be forced to do it when our credit cards, both personal and government, come back "declined."

You think the housing market appraisal fraud is "yesterday's news"? Well don't read this, from today:

"The company said 91 percent of those surveyed said they’ve been asked to pump up the value of the homes they appraise, while 81 percent worried they’d lose repeat business if they failed to bring in the desired result."

91% eh?

If you happen to be of the mind to believe that this is all still "Subprime", or even "residential", think again:

" Retail properties are leading a drop in U.S. commercial real estate prices, which in March posted their steepest one-month decline since at least 2000, Moody's Investors Service said on Monday."

Right on cue; 12-18 months after residential turns down.

Funny how that works, and how many people said it wouldn't - and now get to eat crow.

As for the Credit Crunch, never mind the man behind the curtain. You see, Trichet, Soros and Buffett, you know, three guys who probably know something about this sort of thing, all said its not over and will get significantly worse, for exactly this reason.

Or, for that matter, Merideth Whitney:

"'The real harrowing days of the credit crisis are still in front of us and will prove more widespread in effect than anything yet seen,' analysts led by Meredith Whitney wrote in a research note today. 'Just as strained liquidity pushed so many small and mid-sized specialty finance companies to beyond the brink, we believe it will do the same with the U.S. consumer.'"

Better late than never.

Oh, and don't tell the stock market.

The PPI came in with the "headline" cool but the core very hot, at double consensus of 0.4%. Well, duh. But don't look inside; they claimed that energy prices were flat on the month. Flat eh? Gas and Diesel (with the latter being more important on the PPI side) didn't move on the month eh?

Who do these people think they're trying to fool?

BTW the seasonal adjustment for diesel should be downward, not upward in the spring. Why? Because heating oil is diesel fuel, and over the last, oh, 10 years, there has been a very solid correlation with an exit from the heating season and a drop of ~5-10% in the price of diesel. It happened every year - until last year, when it didn't, and then this year when diesel prices actually went up coming out of the winter. Talk about "fitting the adjustment to the desired outcome" eh?

That, of course, doesn't work for very long, as those energy costs bleed into the rest of the index (core) quite reliably when you try to misrepresent.

Presto! Now we have core over headline!

The amusing part of price action is that yesterday the selloff was blamed on Sandisk's comment that $120+ oil is causing consumer softness and that this will continue.

One thing to think about kids - is it really possible that the people buying the market for the last two months are so stupid as to believe that oil doubling in price over the last six months, and gas headed to and beyond $4/gallon, won't have a significant impact on consumer spending?

If you believe that, then do you really believe that the stock market is a "discounting mechanism", or do you think that the stock market is more like a ship of fools where the lookout has hollered "ICEBERG!" but the Captain has decided that the lookout is obviously blind, and he therefore willfully ignores him?

You can't make stuff like this up.

Mary Landrieu, the "illustrious" Senator from Louisiana, said the following in a letter to a constituent recently (which the recipient was kind enough to forward to me, and which you can read in full at the link):

"According to a report cited from the Federal Reserve Bank, it is estimated that a lender loses more than $50,000 per foreclosure. This calculates to a loss of more than $1.4 Quadrillion dollars thus far if foreclosure becomes inevitable for these 2.8 Million homeowners."

Oh really Mary?

Let me guess - you failed 5th grade Math?

See, I gave this problem to my 5th grade daughter, and this was her answer:

      2,800,000
     x   50,000
===============
140,000,000,000

That's $140 billion, not $1.4 Quadrillion (there's a bunch of missing zeros to get to that result.)

Now let me ask - did someone TELL Landrieu this, is she really that deficient in the mental department, or is she flat out lying to a constituent that she believes lacks the mental acuity to call her on it?

How do you get to be a Senator if you can't do basic 4-function mathematics? Or is it really much simpler - being a Senator has one qualification above all others - you must be willing to blatantly lie to your constituents, including doing so in writing, and hope they are too stupid to catch you?

More to the point, what does this say about our Congressfolk's estimate of We The People's intellectual capacity?

To run such a clear, crass and obvious load of crap in a written communication smacks of absolute incompetence, arrogance, intentional fraud or all of the above.

The intentional misdirection isn't limited to Congress. The banks are doing it too:

"Banks and securities firms, reeling from record losses resulting from the collapse of the mortgage securities market, are failing to acknowledge in their income statements at least $35 billion of additional writedowns included in their balance sheets, regulatory filings show."

And we as investors and members of the public (who should be shouting at regulators) are allowing it.

Speaking of liars, here's another group - "business economists":

"The U.S. economy will probably exit from a recession by the end of the next quarter as credit markets improve after a year of turmoil, according to a survey by the National Association for Business Economics."

Uh huh. Let's note that one of the identified "economists" is employed by Bank of America, who of course has a hell of an interest in you keeping your money in their bank (and their stock!) even as they play "let's absorb the Subprime King", Countrywide Financial. Never mind that non-performing loans are going parabolic over there and there is no sign that this is going to slow down any time soon.

Again, 5th Grade Math seems to be beyond these folks. The simple fact of the matter is that consumers, over the last four years, have been prodded to "spend spend spend" by withdrawing equity from their homes. We have engaged in the worst sort of intentional deceit upon the American Public via the so-called "trade groups" in the banking and real estate industries, and have prodded people to "buy that IPOD" (or Hummer!) and charge it to the house.

Now the house has stopped going up in value and is in fact declining. Desperate to maintain one's standing of living, consumers have turned to credit cards to feed their addiction to one of America's most powerful drug, the shopping mall.

This is great if you can pay the bill, but in fact Americans can't. Revolving credit outstanding grew at double-digit annualized rates last month but personal income on an inflation-adjusted basis has been declining in every month since October of last year.

The collision of these two realities is obvious and totally ignored by Bubble Television, which is, of course, heavily invested in getting you to that mall to spend more than you can afford - after all, those are the folks who buy advertising on that very same Bubble Television.

Oh, and those fantastic Realtors who were part and parcel of the bubble? They've now turned to, well, trying to make money in a horrible market.

Now that isn't a bad thing, is it?

Well, how about if you do it in this sort of fashion?

"We've been finding an increasing number of "hidden listings" of REO properties. A hidden listing is when a broker lists the property in such a fashion that it cannot be found by local agents working with buyers. This might be unintentional, due to gross negligence, or it might be fraud. The fraud end is clear. If the listing is hidden, eventually the REO owner will keep dropping the price until it is sold. At some point, when the price is low enough, the listing agent can call a friend to buy the property, which they will flip after closing. "

So now, having no more bubble houses that they can sell, we have "businesspeople" in the real estate sector turning to intentional obfuscation and robbery of the GSEs who have an allegedly implicit taxpayer guarantee. By the way, if you read the link you'll find that Mr. Morgan has attempted to alert Fannie to this - they ignored him despite being provided with proof.

You ignore Mr. Morgan at your own peril. Of the analysts in the Real Estate sector, he's the only one I've found that actually analyzes. You know, gets off his ass, travels, talks to people and looks? What all analysts are supposed to do, but essentially none actually do, including a few who have attempted to lambaste those of us who say "yes it really does suck and it really is getting worse."

This is fraud but nobody cares. We have fraud in our banks, we have fraud in our regulators, we have fraud in our GSEs, and we have fraud in our governments. The entire system is now one great big scam from top to bottom and we're supposed to believe that Obama or McCain is going to do something about it?

Like Hell. Both of those crooks are 100% invested in making sure that the people committing the fraud are allowed to continue doing so. Show me one shred of evidence otherwise. McCain was hip-deep in the Keating Five - or have you forgotten that, America?

Obama? He lambastes McCain for his involvement in the Keating scandal but show me ONE initiative he has put forward or pushed to stomp on the rampant fraud throughout our financial and housing systems.

You can't, because it doesn't exist.

NEITHER candidate gives a good damn if your pocket is picked, and in fact both explicitly and implicitly support you being robbed blind by these fraudsters, as every one of their proposals to "help the housing crisis" does exactly that - it steals from you via the tax system so the fraudsters can keep their ill-gotten gains and go on to plunder you again!

It will not change until and unless you get off your butt and tell your Congresscritter that you simply will not tolerate this any longer. That you will act in whatever fashion is necessary, up to and including organizing "mortgage payment strikes" among those who have been responsible, until these fraudsters, all of them including the investment bankers, are indicted and brought to trial. You will not shut up nor stop taking action until the money stolen is returned, the guilty punished, and the government stops coddling and rewarding those who have ripped off Americans to the tune of more than TWO TRILLION DOLLARS.

But you won't act, and as a consequence, your pocket will continue to be picked.

Of course you could simply join them! As is pointed out here, in some states you can simply stop paying your second mortgage if you have one. The lender won't foreclose because they will get nothing if they do; the house isn't worth as much as the first!

In fact, I am beginning to think that this sort of "retribution" is exactly what we need.

If the government isn't going to prosecute fraudsters in the system, then you may as well play the game their way. Go as far towards the edge as you can manage to without ending up behind a cell door, and screw everyone on the way you can find. Why not? The bankers have done it, The Fed is doing it, Congress did it to you already and the Realtors have been and are continuing to do it.

I see no reason for the people to act in a manner that is more ethical than the "paragons of business", Congress and our Central Bank do. None whatsoever.

This weekend Deutche Bank's CEO took his turn saying that the credit situation had "turned".

Ok, if that's true, then under the law The Fed is required to remove all their "special facilities."

Those facilities are only authorized under times of declared extraordinary stress.

If every bank CEO in the land says that its over, then Bernanke must be forced to remove these so-called "special" facilities as under the law they may not be maintained except in emergencies.

Hello Congress? Are you awake? Are you going to force The Fed to follow the law or are you as bad of a joke as they are?

Never mind the call this morning that sent Amazon rocketing higher by more than 10%. The call? Goldman put it on its "conviction buy" list with a $98 six month price target.

Ok, then what of the rumor (which I cannot confirm) that Goldman sold 11% of its holdings of AMZN on the 15th of this month - four days ago!

Why would you sell a company's stock that you think is going higher by 20% within the next six months? That makes absolutely no sense.

How about this as a proposed rule for broker/dealer/analysts? If you publish such a call you are required by law to disclose all affiliated positions by any part of your firm for six months on both sides of the publication, on the Internet, updated daily. This way if you are trading against your recommendations then everyone can see what you're up to!

We have one little piece of truth out of the media this morning. Bloomberg said:

"May 19 (Bloomberg) -- A normal U.S. economy is likely to look a lot different, and worse, after the credit crisis is over and financial markets settle down.

Companies will continue to struggle to raise cash for expansion and innovation as investors and lenders remain focused on conserving capital. Workers, too, may have less flexibility to go after new opportunities, because many will be stuck where they are -- in homes worth less than the balances on their mortgages."

So maybe someone can explain to me why the Dow Jones is less than 10% off its all time high, which was recorded just as the Credit Bubble was starting pop?

Or perhaps you can explain the S&P 500, which is 10% below all-time highs, again, form the top of the credit bubble?

The fact of the matter is that Bubble Television continues to paint the pig with lipstick on a daily basis but nobody pays attention to the economic fundamentals, which make the case quite clearly that you can't justify the sort of P/Es that are being sported on the indices right now with tighter, non-bubble credit conditions.

As the WSJ's Data Page shows, the Dow Jones is trading at a P/E of 87, the S&P at 23.8, the Nasdaq at 31.5, the Russell 2000 at 66 and the Nasdaq at 23.

To put this in perspective a year ago the Dow was trading at a P/E of 18, the Nasdaq at 35, the Russell at 42 and the S&P at 18.

Take these facts and then tell me if you think its a good time to buy equities - or houses.

Oh, and if you listen to people like Kudlow, they'll tell you the P/E on the Dow Jokes or S&P is much lower than the actual figures. How come? He ignores companies with negative earnings.

Speaking of intentional fraud you do know that they have changed how P/Es are calculated, yes, so as to show a lower number than is actual. How? They removed interest expense.

That's right, price/earnings ratios no longer include the impact of your debt if you're a corporation, which means that you can trade at a very reasonable P/E ratio even if you've got one foot in the door of the bankruptcy court due to an inability to service your debt!

Earnings are down 17% on the S&P 500, which is three times worse than predicted by analysts in January.

Explain multiple expansion under these circumstances. Good luck with this one; you've got three quarters now of the analysts being dead wrong as to how earnings were going to come in, and yet we continue to see people out there claiming that "equities are cheap."

In order to hit the estimated earnings for the S&P 500 on a full-year basis we would now have to have earnings expansion take place at a level never before seen in the history of the United States.

Good luck folks......