The Market Ticker

Virginia Republican Tom Davis has pretty much set forth reality for the Republican Party in November, and its not pretty. While there are some annoying typos reminiscent of some of my writing when I'm in a hurry to get something out there, the facts remain what they are, and they're not good.

Why the doom and gloom among Republicans? Let's look at some of the "internals" from this memo:

• Jobs and economic growth have emerged as the #1 issue, at 23%.
• Iraq is #2, with 18%
• Energy and fuel prices, at 16% (note how far up the ladder this one is)
• Health care (11%)
• Terrorism (8%)
• Immigration (8%)
• Environment (5%)
• Housing (3%) (that's an odd one)

Take #1 and 3 and you've got almost 50% of the electorate's "#1 issue".

But #1 and 3 are the same thing. Both are in fact caused by exactly what I have outlined repeatedly in The Ticker!

In fact, if you look at the last week's five tickers you will see that this theme and meme is right there in front of you. Start at the top at http://market-ticker.denninger.net/ and read down to "Credit Crunch Over - All Clear".

All of them.

This is not "my view." It is a compendium of reported news and lays out for anyone who gives a good damn the outright fraud that has become pervasive in our government and capital markets.

The Republican Party is not only complicit in this fraud they are egging it on at this point, desperate to see it continue through November lest it blow up in their face. Tom Davis is well-aware of this but he doesn't put that out in public in his paper, because should he sound the "siren call" the collapse may occur before the grenade can be passed.

What Tom Davis should understand is this:

The Republicans have no winning position that can be formed from trying to placate people with "happy talk" instead of facing reality. The economic impact of this fraud is going to happen and happy talk will not change the outcome.

If McCain wins (which I seriously doubt) then he will preside over the blast and that will be the end of The Republican party.

If Obama wins the blast will occur in early '09 as the current administration will stop being able to act when the July recess comes along, yet Obama won't have done anything yet before it all comes apart. The Republicans will still get the lion's share of the blame and be a minority party for 40 years, just like they were before the Gingrich Revolution.

If the economy and markets totally come apart before the election (the most likely outcome) then The Republicans are doomed as we will have a filibuster-proof Senate with certainty. If you doubt this outcome, look at consumer sentiment - that is a documented leading indicator of behavior over the next six to twelve months, which just happens to coincide at this point with the period leading to the elections. The sentiment numbers have never been wrong in predicting consumer behavior over the next six to twelve months.

80% of Americans did not participate in or benefit from the fraud and yet ALL AMERICANS are paying for it right now and will in the future.

The ONLY winning position for The Republicans is to force ALL of the fraud out into the open RIGHT NOW and thus force The Democrats into a corner - do they "pile in" or do they try to obfuscate and stall in which case you can pin the tail on THEM as the ones that are ripping off The American Public.

The answer for the Democrats to such a challenge will be to obfuscate, as they are the ones in power in Congress. Chris Dodd and Barney Frank are insanely vulnerable on this point right now, as housing is front-and-center in this crisis but The Republicans control the executive and thus can bring the hammer down on the fraudsters whether Dodd and Frank like it or not.

This means that The Republicans must do all of the following right here and now if they want to win in November:

• The Executive must indict all of the fraudsters they can find. Look back through those tickers at http://market-ticker.denninger.net/ and count 'em up. All the investment bank CEOs who put together toxic mortgages into securities knowing they were going to blow up would be a good start. Angelo Mozillo is, of course, the poster boy for this and indicting him (while largely symbolic in terms of real impact) would really get the ball rolling. Homeowners, brokers, appraisers and Realtors who participated in the fraud must be indicted and prosecuted, both civilly and criminally, with the intent of both restitution when possible and punishment for all involved.


• The Republicans in Congress must refuse any bail-out package that helps anyone, directly or indirectly, that participated in this fraud or benefited from it. The solidarity behind this position must be absolute. If it is not, you will be picked off one at a time. This means that you must be prepared to filibuster in the Senate, and actually do so.


• Any housing-related bill or amendment that goes through Congress must include forcing Fannie and Freddie to only underwrite sound mortgages and must force all their bad paper off their books. If that doesn't happen these two institutions will blow up. In "More On The Banking System" I detailed Freddie's exposure to just the self-identified ALT-A and subprime paper and showed how it exceeds their available capital. Freddie also has a huge amount of "Fast and Easy" exposure they are calling "prime" but it really is not; this is a ticking nuclear financial device. If you don't get it off their balance sheets it will detonate with disastrous results, and anyone in Washington who voted for their "modernization" without fixing this will get tagged for it.


• The Republicans must take the public position that home prices on average must contract to sustainable values, which means no more than 3x incomes on an average basis. Yes, some homes will sell for more, and some for less. The easiest and soundest way to accomplish this is to push for a Federal Law that bars any mortgage written with less than 20% down or greater than 36% DTI. Exempting FHA/VA from the down payment limits (but not DTI caps) is appropriate if both of those programs are limited to homes that sell for no more than 75% of the average price. This fulfills the FHA and VA program mandates to provide affordable housing to the lower tier purchaser while not allowing them to be abused by speculators and the more-wealthy.


• The Federal Reserve must be pressured to stop the fraud perpetuated by their programs in the banking system. The House and Senate both have the ability to issue subpoenas and force hearings, and you must exercise that power liberally until all of the bad paper is forced out into the open and the losses are taken. Put these bankers under oath and find out exactly what paper is in the TAF, the TSLF and in Bear Stearns and how it has been valued – in public hearings.

The 80% of Americans who did not participate in or benefit from the fraud form the voting block that can win this election - if they can be coalesced.

You can only do that by showing that 80% that you are not only stopping it now but will continue to after November has passed.

Either The Republicans take this approach here and now - before the July 4th Recess - or they will lose in November.

This is the only voting block that is both big enough and that Republicans have a way to coalesce which can change the outcome.

Lest you think I'm some Democrat "hack" trying to throw Republican election chances, here is proof that I am not:

I want to vote Republican in November. Give me a reason to do so, and I will. Fail and I will vote for change, because The Republicans have presided over the worst fleecing of Americans in 225 years. Arguments that "they'll be worse" are not going to work; you have to show us, here and now, that you will in fact stand for "law and order", not just make promises that will be immediately broken after the election is over.

There are millions of Republicans just like me out here, and we're the people you need, not the corporations who have robbed us all.

Me thinks you doth protest too much.....

"The European Central Bank on Thursday voiced its 'high concern' at growing evidence that banks are exploiting its efforts to unblock the frozen funding markets by using its liquidity scheme to offload more risky assets than it envisaged."

"Investment bankers who work in securitisation say that their main business is structuring bonds that are eligible for ECB liquidity operations. Some analysts have concerns about whether the bonds being created will ever be saleable if markets recover."

What in the Sam Hell did you think was going to happen?

Bernanke, by the way, did the same thing you know.

Both The Fed and the ECB set up these "liquidity conduits" to take collateral that nobody else will loan against and provide "liquidity."

Well, now suddenly there's a problem with swapping that garbage for perfectly-good treasury bonds?

Who'd a thunk that when you advertise that you'll take used toilet paper and treat it like its "money good" that you will get, indeed, used toilet paper?

And if its toilet paper (that is, nobody else will buy it for any amount of money) then is it really an "asset" or is it, in fact, a zero that someone is hiding? What sort of capital position do you think these banks might have if they were forced to value these things at what they could get for them in the open market?

Hell, there is evidence that Lehman has put together synthetics (e.g. CLOs, etc) especially for presentation to these facilities in the United States. That is, they took securities and created a synthetic specifically for the purpose of swapping it for treasuries!

What is with the ECB and Bernanke?

I am absolutely stunned that anyone would expect anything different out of these bankers.

You put together a system that is just screaming "scam me!" and then you complain when that is exactly what happens?

Three, four, five, eight years of these very same bankers claiming that "liar loans" are "prime paper" wasn't enough evidence that folks in the banking system would do the very same thing to the central banks, quite confident that in the end the taxpayers would get the bill?

I'm shocked that anyone is surprised. I'm even more shocked that there isn't an instantaneous reaction that goes far beyond these "yelps" - something on the order of an immediate "putback" of all this garbage followed by bank examinations to see exactly what sort of other games are being played!

Moral hazard? Hell, how about outright fraud! Moral my bupkis.

You want another example of the shining ethics in our banking system today? Try this:

"NEW YORK: Would you invest money - at a very low interest rate - to finance mortgage loans that allow risky borrowers to buy homes with no money down? What if you knew the company that made most of the loans had gone bankrupt because so many of its loans had turned bad almost immediately?

Now, no one would do that. But it was just a year ago that Merrill Lynch was wrapping up a securitization that met just those criteria. The securities were snapped up by such buyers as the Bond Fund of America, one of the largest mutual funds."

That's right, just one year ago, it is alleged, Merrill, one of those fabulous trustworthy bankers, apparently put together a securitization and sold it off to a huge mutual fund - with loans from a company that had gone under before the securitization was completed because they were writing bad paper!

Oh, and the best part?

That great securitization was rated "Aaa" by Moody's - the top investment grade rating.

Current estimates? 60% of the loans will default or already have.

How can you possibly invest anything in American securities, much less American banks, when this sort of garbage does not result in an instantaneous indictment and prosecution?

How can Moody's retain its "NRSRO" status or even be allowed to remain in business when they issued an "Aaa" rating to a securitization where the originator of the loans went bankrupt because it had been writing trash?

How can you justify leaving your money in the bank when this sort of game is played and nobody goes to prison for it? Do you really think the FDIC or anyone else in government will protect your money when they have failed to do anything about this behavior?

How is it that our "banking regulators" permit this sort of outrage to take place without revoking the involved bank's charter?

How is it that Congress does not subpoena all these clowns along with Bernanke and ask them, under oath, how they justify this sort of thing, and why they shouldn't be forced to eat these so-called "money good" instruments?

If that's not stupid enough now Fannie is going to scrap its "must have positive equity" rule in declining markets:

"Fannie Mae is expected to announce Friday that it is scrapping a policy requiring higher down payments on home mortgages in areas where house prices are falling.

The change comes in response to protests from vital political allies of the government-sponsored provider of funding for mortgages, including the National Association of Realtors, the National Association of Home Builders and organizations that promote affordable housing for low-income people."

"In a recent letter sent to Fannie and Freddie, the Realtors reminded the companies that the trade group in recent years helped them fend off Bush administration attempts to impose tighter regulatory constraints."

Absolutely. The National Association of Realtors, who were prime architects of the housing bubble, along with the other clowns who were largely responsible for this problem in the first place, now are pressuring Fannie to do even more unsafe things.

Of course the Realtors remind Fannie that they were part and parcel of lobbying so that they could have a balance sheet problem in the first place. Why, regulation, that's bad! And now, having applied pressure when Fannie needed it, its time to call in our chips and put the heat on Fannie so we get what we want, whether its a sound lending practice or not.

The Taxpayer is always there to bail us out after we screw the American Public (again.)

The FHA scam is in full swing. You need only a 620 FICO and no more than one missed payment in 12 months, and you can refi virtually anything. Yes, all the way up to and in some cases beyond 100% LTV!

The banks are loving these deals as they take absolutely no risk - the government takes it all.

620 FICO and one missed payment? This is "good credit"? Oh, the only problem is that it actually is, apparently, hard to find people with only one missed payment!

The Taxpayer is always there to bail us out after we screw the American Public (again), and this time Congress wants to give the FHA even more buying power so we can screw the public even harder, faster, and more often!

Now let me tell you what I think, and make some predictions, based on the "observable inputs":

• The bankers are lying about their exposure and delinquency rates in various real-estate loan experience categories. That is, whether through incompetence or outright fraud, real honest-to-God credit losses are being taken that are not being reported at the present time. The bankers are not pressuring their staff to be up front in this regard because they are quite sure they will not face prosecution for their "lack of attention", and they are right. This will become apparent over the next few months.
• Foreclosures are not being pursued (intentionally) and REOs are being held off the market (intentionally) in a vain attempt to "wait it out." Cash flow will, in the next three to six months, make this tactic impossible and force the banks and servicers to act. Then we will see the real foreclosure and REO rates, which will be much higher than are currently being reported.
• Consumer spending is being propped right now by people who are blowing off their mortgage, not being pursued by the banks or foreclosed upon, and as a consequence they are living "free" in their home and spending the difference, holding up consumer spending numbers. Consumer spending numbers will positively crater when the foreclosures and REOs are pursued actively in the second half of the year.
• Commercial Real Estate is in much worse shape than is being reported. This will become apparent in the second and third quarter as retailer bankruptcies start to ramp.
• Business credit defaults are beginning to increase. They will peak over 10%; on balance the credit quality of American Business is the worst it has ever been going into a slowdown in the economy. Don't believe the BS you hear on CNBC - look at the bond ratings, they don't lie.
• There will be bank failures. Lots of them. If you have uninsured deposits in a bank at the present time, anywhere, you're an idiot. Fix that right now.
• Average hourly earnings have been falling since October without so much as a single month of advances in real (inflation-adjusted) terms, and this is using the government's cooked CPI numbers! You can't have growing consumption and GDP without growing earnings; ALL of the consumption growth in the last six months has been fueled by increases in the debt to equity ratio among American households. This WILL blow up in the economy's face; it is a mathematical certainty.
• The economy and the markets will be the issue by November and McCain will lose badly. In fact, I believe that The Senate is very likely to become filibuster-proof.
• The only way oil prices will decline on a sustained basis is if we see an outright demand collapse in the United States. This may well happen - but if it does, you won't be talking about it being "bullish" as we'll have ramping unemployment and a deeply-negative GDP print to go along with it. Otherwise, I hope you like $4 or even $5 gasoline, because you're going to get it.
• Government will attempt to increase its "bail out" actions, even though only a minority of people behaved badly or took foolish risks. Look for the government to continue this foolishness up until they are forced to stop by the bond market, and the bond market may go "overcenter" where long interest rates shoot the moon - this year.
• There will be talk - if not outright action - by consumers that will border on a revolt against the fraudsters/bankers. As government continues to give "free passes" to the bankers at the expense of all there will be rumblings if not outright organized actions such as consumers banding together and simply refusing to pay good and sound mortgages as a protest action. There is already a hint of this with sites like http://thisjune5th.com/, which standing alone means little - but may be the start of a trend. This sort of "economic counterattack" is a totally-unappreciated risk to those who are trying to let the fraudsters get away with it. With even a few-percent uptake such protests could cripple the system and force immediate reform. The damage done from even 5% of all households refusing to pay their mortgages for a couple of months as an act of protest would be extreme and force the issue, should the people get sufficiently angry. Do not count out the people if they truly get pissed off!

Housing starts up 8% so they say, but guess what - its all condos! Here's what Bloomberg said:

"Builders broke ground on 692,000 single-family homes at an annual rate, down 1.7 percent from March and the fewest since January 1991, the Commerce Department said today in Washington. Total starts jumped 8.2 percent to a 1.032 million pace that was higher than forecast as construction of multi-family units increased 36 percent following a 35 percent drop in March.

Lower prices and bigger incentives have yet to revive demand for houses, indicating builders will need to come up with even more discounts to attract buyers. Stricter lending rules, job losses and growing pessimism about the economy signal sales will not rebound quickly. "

Yeah, and the CNBC pumper Jack with his "GOP" badge was instantly on the boob tube crowing about how this was "great" for the market and the economy.

He didn't bother to actually read the report, did he?

Try getting a mortgage for a condo and tell me how it works out; you only think the foreclosure and default rate in single-family homes is high.

Every one of these clowns is going to go bankrupt playing this game.

I'm stunned that this is considered "good news", but do you actually expect reporting these days from Bubble TV? If so you're going to be disappointed - there is no reporting nowadays, only blatant falsehood and intentional misdirection.

Oh yeah, I'm sure these banks are securitizing the construction loans and sending them to The Fed for Treasuries, and will stick us with the bill for this stupidity as well.

Sentiment came in weaker than expected at 59.5, weakest in 28 years. Gee, what a surprise; you mean Joe Sixpack knows that the incessant CNBC pumping is a bunch of BS - he can see what's reality when he goes to the gas station and grocery store!

Funny that.

From Bernanke's speech today....

""They have taken a lot of losses. They are also being very protective of their liquidity because they are unsure of the possibility of additional off-balance sheet assets coming onto their balance sheets and therefore they are being rather conservative in making new loans which has implications for the broader economy," Bernanke said."

There 'ya go.

What did I post this morning?

Yep.

See, the banks know the game.

They have an alleged "wrap" on all these "assets" which allows them to "claim" that their credit book is all "money good."

Same deal for places like Fannie and Freddie that have roughly $5 trillion of mortgage paper in their "credit guarantee" book, with a fair bit of it at LTVs over 80%. They claim "money good" because the mortgage insurers wrote policies (swaps, effectively) against the potential failure to recover the full loan balance.

The problem is that essentially none of these swaps are any good.

That's the bad news.

The worse news is that the situation is going to get worse over time, not better, because home prices are going to continue to fall, not rise, for at least another one to two years, and before they bottom we will see the long end of the interest rate curve start to rise too, which will put further downward pressure on prices.

The NAR (which has been all pollyannaish until recently), Fannie and Freddie are all predicting double-digit additional percentage declines, and Case-Schiller is on board with that too.

As this occurs it "uncovers" more and more exposure in the insurers (swap writers) which in turn results in more degradation of the credit book, which in turn causes the real cost of mortgage money to rise.

This in turn causes more home prices declines which........

Yeah.

Here's the thing - in "normal times" being a MI company is a license to print money, just like writing swaps is. If the "base case" is that only 1% of all prime mortgages default, and you only insure the top 20% of the note, then you only lose if the default happens before the note drops below the principal value.

In a normal market this is unusual - you might only have to pay on 1/2 of 1% of the loans you write. Same thing applies to swaps - in the recent past we had a year where there were essentially no corporate defaults!

But in this market it is anything but normal, because the default percentage rises to 2 or 3%, and you have to pay on most of them, and corporate defaults are rising too!

The underlying model that firms have used to price this risk is mathematically unsound in a declining home price marketplace.

Specifically, the model relies on the assumption that you will only experience losses on 1% or so of the loans and for the most part price appreciation will prevent you from having to pay as the foreclosure sale will recover most or all of the deficiency.

Neither of these assumptions are valid in today's market!

Here's the proof (click for a larger view):


Note that we have $142 billion worth of exposure "off prime" with 21% of it delinquent 60 days or more yet it was all rated "AAA" at origination.

Most 60+ delinquencies will foreclose. The 2nds and HELOCs are essentially total wipeouts in an environment where home prices are declining as foreclosure nets you nothing since the balance exceeds equity.

Now take a look at the real losses likely to be seen here. Assume we're talking that most of the 21% delinquent on the $142 billion goes "boom", we have $30 billion in exposure. Being nice and allowing a recovery of 50 (hopelessly optimistic) we have $15 billion in losses.

The problem is that MBI, Radian and Ambac's market cap combined is less than $4 billion.

So we have $11 billion in "forward, unrecognized and uncovered" losses but Freddie is going to raise $6 billion? Yes, I know, they have some capital cushion, but is it really wise to invade that when the problem is nowhere near over?

We also haven't accounted for losses in the prime book - at all. And how much of that "prime" is really prime and not "Fast and Sleazy" paper that was sold to them as prime but in fact is Alt-A?

See, this is at today's home prices and loss experience - but both Freddie and Fannie are predicting further home price declines, which will feed into more delinquencies.

The bottom line is that the claimed "credit guarantees" are crap and this is only Freddie, which has less exposure than Fannie (they were nice enough to publish a pretty table that made this pretty easy to put out there for 'ya.)

You can extend this problem to both the investment and commercial banks; the basic problem remains the same - the so-called "guarantees" represented by these OTC swaps and other "derivative devices" are worth nothing as the money simply is not there to make the payments.

Once the first blowup bankrupts the guarantors everyone else is immediately running uncovered.

There is no way out of this box. We have had a nearly-10-year run where all this paper was written in a mispriced environment under the premise that the music would never end.

Bernanke has admitted that he knows this in that the banks are "hunkered down" and unwilling to put more exposure out in the market because they know what is coming.

But Bernanke is compounding the error by not forcing institutions to take down their leverage.

You force them to take down leverage by demanding that they either prove their swap and "insurance" counterparties can pay against the most pessimistic assumptions in the current environment or those policies must be declared "worthless" and your assets then have to trade on their underlying credit quality.

If he was to do so then we would find out who is swimming naked (and there would be plenty of people who are) but the bleeding would stop in the banking system because once the trash paper is sold it's not your problem any more - it is now owned by whoever bought it.

Remember folks - if hedge funds want to bet on recovery of this paper and buy it for 80 cents on the dollar on alleged "money good" paper, and they're wrong, we do not get a systemic failure.

People who are risking their own capital get to either make or lose money.

But if the banks continue to hold this paper trying to get "par" for it rather than take the losses now and they are wrong we all get screwed because Bernanke has literally loaded over $400 billion dollars of this trash on The Fed's balance sheet, and to bail that out, if it becomes necessary, will require transferring that bad debt to the United States Treasury with catastrophic results.

Worse, if this blows up in our faces you'll find that you suddenly need 50% down to buy a house, because nobody in their right mind will loan on more than half of the underlying collateral value.

This happened during The Depression for this exact reason - what do you think a development like that will do to house prices?

Bernanke is gambling with our future by refusing to act to force the deleveraging to take place now through recognition that these swaps and "insurance" policies are, in aggregate, worthless.

Congress, for its part, is sitting back and fiddling instead of insisting that the truth of these firm's financial positions be recognized and the underlying credit quality be the basis upon which they trade.

It's time for you to either stand up and raise hell or shut up, because come the July Recess, which is only about a month and change away, there will be no further Congressional action of consequence until after the Inauguration in January of 2009.

We don't have that long.

Oh what a tangled web we weave, when we practice to deceive....

Freddie Mac posted their loss yesterday and as if on cue investors bid up the stock by nearly 10%.

Why? Well, look at how our government "regulates" those who refuse to be honest in their accounting:

"The company’s regulator, which only a month ago chastised Freddie Mac for questionable accounting policies, also recognized the results by reducing the size of the company’s financial safety cushion."

Yeah, there we go. Accounting doesn't matter, right?

Speaking of which, did 'ya look at their Level 3 exposure?

Institutional Risk Analytics said this:

"'Both these companies are clearly going to be insolvent by the end of the year, but everyone knows that Congress will do anything to keep them afloat, because if Fannie and Freddie go under, the entire global financial system will melt down,' said Christopher Whalen, a founder of Institutional Risk Analytics, an independent research firm. 'These companies' earnings don't matter. Their accounting hardly matters. People buy the stock because they believe the federal government will bail them both out if things get really bad.'"

"Cooked" accounting is fine and the inability to earn a profit doesn't matter, because "someone" will let us rip people off and then bail us out.

Does anyone care about the truth in American Business any more?

Oh there will be those "sacrificial lambs" offered up. Like, perhaps, Countrywide?

"Rejecting the arguments of Countrywide executives and directors that they were unaware of lax loan operations that led to ballooning defaults, Judge Mariana R. Pfaelzer of Federal District Court in Los Angeles ruled Tuesday that she found confidential witness accounts in the shareholder complaint to be credible and that they suggested ' widespread company culture that encouraged employees to push mortgages through without regard to underwriting standards.'"

No, really? The bankers would never lie, cheat and steal?

Will we ever see answers to exactly who wanted to buy PUTs on Bear Stearns 50% out of the money and requested the option market markers to open up those PUTs for speculation? Do you think we will ever see Congress subpoena those market makers and the OCC to get the names of people who made the requests, then stick them under oath and travel back up the chain until we get to the people who started this?

There is a long history of looting operations conducted by people with power and money.

In fact, there is plenty of evidence that The Federal Reserve was initially formed as part of such a looting operation conducted by bankers against certain institutions in the United States.

That was neither the first or last time such operations have been conducted.

Look at the history of the British banking system and its sovereign debt for yet another example.

Of course back then there weren't computers, email, and logs, and the usual practice was to simply kill the person who you "planted" the rumor with after they initiated it so they couldn't testify in a court as to where it all came from.

These days records have a nasty way of showing up at the most inopportune time, because we have gone from writing things down on paper to recording them in a computer and sending them around, and the latter often results in lots of copies being made that the originator isn't aware of.

The discussion on "monetary system changes" continues to get lots of play at the forum.

Unfortunately the "I saw a witch, get the sticks, rope and kerosene!" reaction also continues, instead of focusing on where the real problems are.

This is why I wrote "How Freedom Dies"; it is very easy for people to focus at an area that does not really bear on the issue at hand and try to destroy it, because it's the "most visible" means of retribution.

In doing so they give the fraudsters the very means to destroy them instead and history shows that every time you open up your kimono and give people with power and money a free shot they take it, much to your chagrin down the road.

The solution to this entire mess is the same that it was (but not taken) back when the Bank of England was essentially looted, and when our banking system was looted in the early 1900s - find the market participants who have engaged in fraud via various forms, whether they be mortgage bankers handing out liar loans and misrepresenting them as "AAA Prime" paper or whether they be people in the marketplace who initiated the plethora of (false) rumors over the last many years about various companies, irrespective of whether the intent was to drive prices up or down, and prosecute them.

We have existing laws that make that conduct illegal. Investigate the activity, charge the wrongdoers, prosecute them, get your convictions and toss the lot of 'em in prison with a bunch of 7' tall rapists in the exercise yard, no guards, and a $100 video camera in the guard shack.

Then post the "results" on YouTube as a warning to the world - try that again in this country and this is the consequence you will receive.

That will be the last time it happens.

But until we take that sort of step and hold people to account, this sort of "looting operation" will continue, and we the people will continue to get screwed.

As for the "CDS Mess", I have a solution for that, but it requires that you understand how these things work.

Let's say that you buy a CDS (Credit Default Swap) from me. You pay me $10,000 for "protection" against Company X defaulting. Let's say that if Company X does default, I would have to pay you $100,000.

These trade based on the risk of that default from day to day.

Ok, now I, the guy who wrote that swap, go bust and can't pay, and by the way, Company X does default.

How much do you lose?

If you say "$100,000!" you're wrong.

You lose $10,000 - the amount that you paid for the swap.

Your opportunity cost is $100,000 (profit you should have gotten but didn't) but your actual monetary loss is $10,000.

Ok, so why are these things such a big deal?

They are a big deal because "you" (the guy who bought the swap) have been "marking" your portfolio of bonds and other investments based on the claim that I can pay!

This is a lie, because "you" are well aware that I can't fork up the coin. I simply don't have it; the mathematics in this regard are simple.

You are committing fraud and claiming that you have a "good asset" because of this "wrap", when in fact you are well aware that the wrap is worth nothing.

This is the basis of the claims that "we couldn't allow Bear Stearns to fail."

The entire claim and chain of events rests on the fact that market participants, up to and including Ben Bernanke at The Federal Reserve, were and are aware that these CDS contracts are in fact fraudulent in that there is no way performance can take place, yet everyone up and down the line is allowing these "assets" to be counted as "money good" on the books of banks and other financial institutions!

THIS is the key item in the debate folks.

The rest of this noise making is mental masturbation and intentional misdirection intended to keep you from asking the tough questions and demanding that existing law be enforced.

Congress and prosecutors across the board, both State and Federal, need to start bringing indictments, starting with the fraudulent accounting.

You can't value something at "par" when you are well-aware that the underlying credit quality has gone straight in the toilet and that there is not a snowball's chance in hell that the "insurance" you bought to protect yourself has no chance of being "money good." As soon as you become aware of the impairment under the law you are required to reserve against it!

While any one company could claim that its insurance is "money good" that's not the point.

Everyone in the marketplace today now has proof that these swaps in aggregate are worthless, with proof of this found in the fact that The Fed claimed under oath exactly that as justification for the Bear Stearns bailout!

So you have a situation here where the entire banking regulatory system has declared these contracts worthless in the aggregate and yet company after company continues to claim in their financial statements and results that these contracts are "money good"!

This is out and out fraud and must be stopped.

We the people are being systematically looted by these people and our prosecutorial apparatus sits on its butt and sips Starbucks Lattes instead of doing their job!

It is time for we the people to say ENOUGH.

Call Congress and demand that they stop this charade here and now. Every firm that has claimed their paper is "protected" by these wraps must be forced to identify the counterparty that currently holds the risk and those parties must be forced to prove that they can pay any and all claims against those policies.

If they can't (and the default case must be "they can't", since that was in fact Bernanke's and Geithner's position under oath!) then those wraps must be considered "doubtful" and reserves must be taken against the underlying credit quality.

Do this and we immediately identify who is broke and who is not, the market finds its proper price for these assets, and as a consequence the market will clear.

Everyone wants to make this whole mess complicated.

Its not.

It is in fact very simple.

The only "complication" is that there are thousands of people who are ripping the American People off wholesale, waving their arms around in the hope that you'll let them get away with it.

Don't fall for it.

Claims that headline inflation were only up 0.2% are, once again, "seasonal adjustment".

Without it, the CPI headline number was up 0.6%, or ~7.2% annualized.

Let me guess - your gas prices were only up 2% on the year this month, right? Yeah, ok. Same with food, electricity, etc.

"Seasonal adjustment" eh? Yeah, right. Gasoline prices down, as they reported?

I think The Government should be required to sell any product or service they "measure" in the CPI at the price delta they have claimed. Under that rule we'd all be paying about $3/gallon for gasoline instead of $4!

C'mon. The FedSpeak was all about inflation yesterday, then we get this?

So was that all posturing, do we instead believe the import prices-paid (and prices-charged for exports) that we got yesterday, or do we believe this sort of "report"?

Well, we'll see, but the initial Futures reaction is that the market "cheered" tamer than expected numbers, with a roughly 8 point move on the data release.

Here's the problem with "Ministry of Truth" nonsense like this - it destroys your credibility, and once that's gone, you have nothing. The "data" you release from that point forward no longer is used for planning purposes in business (if your business survives attempting to use this data!); it becomes simply a speculative tool that futures traders bet around and then as soon as the bets are either won or lost, they cash their chips and move on.

This is extremely damaging to the broader economy, because in fact the economy is not the stock market.

The real economy is the buying and selling of goods and services, and in the end must respond to the real marketplace, not obviously-cooked numbers.

The usual criticism is that the CPI-U doesn't track what people actually buy. Well, I think we can toss that complaint and replace it with this one - they're simply not reporting actual price changes any more, on purpose.

Please raise your hand if you saw a decrease in gasoline prices during the month of April.

Wait a second - the CPI information release claims that gas prices fell, but the EIA - the government's own energy administration - reported that gas prices rose by 9.5% in April, from $3.29 to $3.60! That's a one month change, not an annualized one!

Which of these two claims on gas prices is closer to what you have personally experienced?

25% of the average American's budget is spent on food and energy. Anyone here think that food has come down in price over the last month? I just went to the grocery store last night and I saw no prices that had declined over the previous 30 days; all were either even or higher, in some cases significantly higher. While I don't track "item by item" I do track my grocery spending (via Quicken) on a monthly and annual basis and my food bill has risen by close to 20% in the last year.

Over the last five years it has literally doubled.

Gas is simple - its up 30% over the last year and of course that's a clean double in recent memory too, as we all remember $2 gas, right? It wasn't that long ago.

Electricity and natural gas are higher as well; electrical prices on a per-kW basis are up 10% in 18 months here, or an annualized rate of about 6-1/2%.

For natural gas prices you only need to look at the spot quote - its higher. A lot higher, and in fact its still doing a rocketshot.

We had two interesting reactions - the dollar got hit on the release but the TNX also tanked, which is interesting. Why? The "common explanation" is that the market "un-priced" rate increases later this summer and fall, but I don't buy that one.

One has to wonder - is the "Ministry of Truth" emperor perhaps losing his clothes? We shall see...... but talk out of Britain was more morose on the price inflation front.

Is the rest of the world more inclined to be honest about economic conditions, including prices, than the United States? I thought we were supposed to be the "paragon of virtue" when it came to open and honest capital markets? Hmmmm....

Now let's talk about the impact of this report, as there are two possibilities:

• Its accurate. If that's the case, then the double-digit increase in import (materials) prices is being "eaten" by companies. By the way, ex-petroleum that was 7%, and solidly double digits with them. If that's the case, then you have a major profit margin squeeze, as this comes off the topline, which means that if you have a 10% pretax margin you now have a loss instead!
• Its not accurate, and "cooked", perhaps so that COLA adjustments on Social Security checks don't have to reflect reality. In that case those on fixed incomes get squeezed and can't spend, which means 70% of our economy takes a hit. Worse, wages that are indexed to CPI (union jobs, mostly) don't see increases, but prices really rise, which also squeezes consumption.

Either way its "welcome to falling margins", which spells multiple compression.

I figure it will take the market a quarter or two to figure this out, but it will, and when it does things get real interesting in the capital markets.

Now let's talk about what Bernanke says he really thinks about - that's "inflation expectations."

That is, he is utterly dependant on your belief in the government statistics.

Let me tell you what you should believe, in my opinion:

• The government is lying through "black box" horsecrap adjustments. The "mathematical models" are simply wrong, and the government refuses to correct the errors.
• These "errors" inure to the benefit of the people who would otherwise have to pay a real rate of return to you. This is why they're not fixing the broken models.
• You can believe what they spew, or you can believe your experience. Your choice.

If you believe your experience then it is my considered opinion that you better turn up the heat for wage inflation (for you!) lest you find yourself with a major standard of living problem right down the road.

So yes, I am advocating for you to do your part to "unhinge" inflation expectations.

Not because I really want to see a punishing spiral like we had in the 1970s, but because without one I see no way that you're ever going to succeed in forcing the government to tell the truth, and thus, address the issues.

Bernanke and his pals at the BLS will lie, cheat and steal every penny you let them have, and until you show up in your Boss' office and demand a 15% wage increase every year or you're going to walk, this crap will continue and your standard of living will continue to come under attack.

Your boss already knows he's paying that 15% increase, and he's counting on you being stupid enough to eat it.

Your choice.