The Market Ticker

We all know that farmers get tremendous subsidies in America, right?

Well how would you like it if you discovered that the family of a sitting Congressman - and perhaps the congressman himself - was getting subsidies that he passed on himself? What if that Congressman sits on the Agricultural Committee and the Approrpriations Committee?

Is that crooked?

You decide:

http://farm.ewg.org/farm/top_recips.php?fips=12065&progcode=total

"Boyd Family Farms Inc received payments totaling $1,230,607 from 1995 through 2006"

And who owns Boyd Family Farms?

You gotta be kidding me.

From Allen Boyd's (D-FL-2) web site:

"A fifth generation farmer, Boyd graduated from Florida State University in 1969, and served his country in Vietnam. To this day, he continues to oversee the family farm operations on land that has been in his family for five generations.  He and his wife, Cissy, reside on their farm in Monticello, FL, with their youngest son, David.  Their older children, John and Suzanne, are also Florida residents."

Cissy eh?  As in a "pet name" for Stephanie?

And what does Allen say about his work in Congress?  In part:

"Throughout his tenure in Congress, Boyd has worked to protect Florida's military community and bring much-needed aid to the agriculture industry."

You mean "bring much needed money to your own bank account", right?

Same Allen Boyd?  I can't be sure but how many Boyd's are there in Monticello Florida anyway?

Allen, I think you got some 'splaining to do for the voters, and I'd like to know why in the HELL anyone would vote for someone who appears to be  siphoning off taxpayer money while sitting in Congress for his own personal and family benefit!

What a freak show we had in Congress this morning with Bernanke and then Paulson's "wham-bam-screw-you-taxpayer" speech.

Let's start with Bernanke's "testimony".

How many times was he asked a specific question - in his professionally-claimed role as an economist - that he refused to answer?

And for each refused answer, the DOW fell 25 points. 

When asked why Countrywide "the primary dealer" was allowed to continue while Countrywide "the home loan folks" were allegedly ripping people off and writing loans that were allegedly fraudulent, Ben sidestepped the question with a claim that they're "not the same company." 

Uh, Ben.  Both firms owned by the same holding company = same firm.  Sorry.  Both are under the same umbrella, both are wholly-owned subs, and that sort of crap won't wash with the market or America any more.

Bluntly, you were skewered and exposed as head of The Fed who knowingly and willingly let Countrywide deal with you as a primary dealer while their mortgage lending arm was robbing America blind.

The other ugly was your refusal to address the fact that these banks that are being "helped" have put $70 billion of this money toward bonus pools - all discretionary pay - which means that about 1/3rd of the funds supposedly-loaned will in fact go straight into the pocketbooks of the employees of these firms.  "Increase lending"?  Bull.

Regulatory discipline by The Fed, and by extension, you?  Zero. 

Protection of the American Taxpayer (and homeowner) under your watch?  Zero.

Willingness to rip off America to the tune of several trillion dollars in phantom "house price appreciation", with The Fed urging Americans to take out ARMs and otherwise impoverish themselves, then demanding that Congress bail out you and your friends when the predictable consequences of those exhortations come home to roost?  Absolute.

Your culpability?  Total.

Thanks for the admission, and I hope you have a spare pair of underwear at your office.  It looked like you needed them.

Unintended consequences of your interference?  Many.  Like, for example, the fact that Fannie and Freddie's spreads continue to blow out, which means that mortgage rates are going north while you continue to claim that this bailout is for "Main Street."

Tell that to home buyers who are faced with rapidly rising mortgage interest rates.

The talking heads on CNBC are all over the field this morning saying that we're in "better shape now than before." 

Oh really?  Look at the national debt lately?  What happens when Congress keeps being goaded by you (Bernanke and others) to keep cutting checks they don't have the money to cash, forcing more borrowing, ultimately throwing Treasury borrowing costs to the moon and forcing either extraordinarily severe austerity measures on our government or worse, a US Sovereign default?

Impossible? 

Uh uh. 

Don't you believe that for a second.

Again - $2 billion a day is required from foreign creditors just to keep us afloat.  Take that away for any reason whatsoever and an instantaneous $800 billion dollar hole appears in our federal budget. 

Current estimates for FY08 (now) are that we will run well north of $1 trillion in budget deficit.  FY09's estimates are now north of $2 trillion (!) from some sources, and nobody has a credible estimate under $1 trillion.

The total Federal Budget is $3 trillion annually.

Think this one through folks.  We will obtain from new borrowing and foreign money about 2/3rds of our total Federal Budget in FY08, which is up from about 30% in FY07, or a clean double.  In FY09 our total borrowing and external funding will be equal to all federal expenditures by current estimates.

God Help Us if anything goes wrong with either of those processes; this is rapidly rising into "supercritical" territory in that any disruption is likely to lead to an immediate and catastrophic sequence of events in the capital markets, up to and including a federal government funding collapse.

Paulson, for his part, dissembled as well.

In fact I believe he lied outright - he implied that the 9 banks that "took the money" were volunteers.  Uh, no Hank.  We have multiple credible media reports that the CEOs were essentially locked in the Treasury building and told to sign up, and that not all of them were willing participants.  Does Treasury have to literally use guns to exercise force? 

I think not.

Will there be full disclosure?  Nope - Treasury won't tell us if a bank is denied access to their TARP.   And while he continues to say that this will "permit banks to continue lending that will support our economy", not one word was said about the fact that $70 billion of the $250 already committed is apparently going to pay bonuses, nor is there any legal or other guarantee that any of this capital will be loaned out.

In short: Stop lying Hank and Ben.

The market is tired of this crap and so are The American People.  We've had it with the incessant fraud, lying, concealment, self-dealing and failed policies, all of which you have created, fostered, supported, and in the case of Paulson, cleared $500 million in personal profit from.

You will not get trust to return to the financial system as a whole nor will investors return to the market until we have the truth from everyone involved, including you, on what has happened along with who is responsible.

Those individuals, agencies and organizations must take responsibility for their malfeasance and misfeasance. 

We the people want to see those institutions responsible cut off from federal assistance, whether it be the discount window, the alphabet soup or your new TARP. 

We want to see perp walks - lots of them - maybe even including YOU Hank for your part in creating this mess, and we want to see disgorgement of the ill-gotten gains that the executives (including you Hank) garnered via the advocacy and practice of policies that led to this bubble and the economic damage you have done to this nation.

'Nuff said.

Congress: Think.

Ben and Hank have both told you that the critical issue for the economy is for "lending to resume", stating that it has dramatically contracted.

If this was the truth, then Ben and Hank would have come to you for $700 billion in the TARP, but instead of TARPing the money, they would have asked for permission to use it to capitalize 10 new banks which would be immediately IPO'd off to the public with the stake being in the form of some kind of super-senior debt that held a coupon high enough to encourage immediate (or nearly-so) replacement with private capital.

This would have resulted in an aggregate of seven trillion worth of new lending capacity in the economy, an amount that, incidentally, would allow the full replacement of Fannie and Freddie as holders of housing debt with about $2 trillion left over for credit cards, auto and business loans.

That would have immediately solved the "credit freeze" problem.

So why wasn't this proposed?

This is the reason:

In short, it wouldn't have done anything because the economy only grows at a rate of about 20 cents for every dollar of debt taken on.  That is, it takes five dollars of debt to generate one new dollar of GDP.

The bad news is that once you reach the "$1 for $1" level you are no longer able to finance growth with debt, and it becomes inevitable that you will begin to finance debt with debt.

That, of course generates no GDP at all but precipitously tightens the spiral.

We crossed that Rubicon roughly around 1968, and you have had this fact concealed from you.

Congress, please listen:

The Truth is that we now require about $5 of debt to generate $1 of GDP.

The Truth is that the reason you were not asked to approve $700 billion to capitalize 10 new banks, thereby creating seven trillion in lending capacity is that the economy cannot soak up that new lending capacity; each dollar of new debt generates almost no aggregate GDP.  If this were not true then that would be the logical and effective cure for the 'credit crunch" - if the borrowing capacity and impact on GDP necessary to help existed.  They do not. 

The Truth is that you were lied to about the purpose of the TARP/EESA, because what you were sold was mathematically impossible.  It is supposed to be unlawful to lie to Congress.

The Truth is that the purpose of the EESA/TARP is to rescue the bankers on Wall Street and elsewhere who have made imprudent loans, all of whom are aware of the declining value of a dollar of debt in the economy - a fact they have intentionally concealed from you.  The bankers (including Hank and Ben) all know how to do this math, and they are well-aware that the best they can do at this point is to "Rob every dollar you can while the getting is good, and hope they don't figure it out before you get the cash."

The Truth is that once you reach a level where a dollar in debt will not support a dollar in GDP you must inevitably either pay down or default that excess debt.  Unfortunately, in this case we must pay down or default approximately 80% of the aggregate public and private debt in the United States in order to return to a standard were $1 in debt will generate $1 in GDP.  Defaulting or paying down less will "turn the clock back" to a degree, but does not change the ultimate outcome.  Only returning to $1 of debt returning $1 or more of GDP, and holding the total level of debt outstanding at or below that level, results in a stable monetary system.

The Truth is that the monetary and banking system is inherently unstable until and unless this is done, and as the "zero point" is approached it becomes more and more unstable, producing more and more violent dislocations.  This is why every crisis since 1968 has been more serious and required larger and more intrusive interventions to calm, including the 1970s/80s energy shocks and inflation crisis, the 1987 market dislocation, the LTCM crisis, the Tech Implosion and now the Credit Bubble/Housing crash.

The Truth is that the absolute worst thing you can do when "in the hole" like this is to spend even more on a deficit basis, thereby driving the debt ratio higher and return-per-dollar-of-debt in GDP lower.  The last eight years have been disastrous in this regard.

The Truth is that the TARP/EESA and other "stimulus" and "rescue" packages, which now total more than $1.6 trillion dollars, have dramatically tightened the spiral depicted above.  The above graph does not include the impact of the Fannie and Freddie rescue nor of the EESA.  Both will move the return-per-dollar-of-debt meaningfully lower.

The Truth is that $7 trillion in new lending capacity, if it was put into the market and utilized, might well push the aggregate rate of return for $1 in debt below zero - that is, force it to a negative rate of return.  Ben and Hank know this, which is why they didn't propose that solution, and why they did not force the bankers (under law) to lend out the recapitalization they provided.

The Truth is that if we reach the point where a dollar of debt has a NEGATIVE impact on GDP The United States monetary system and government will implode.  The reason for this is mathematically obvious - each additional dollar of borrowing beyond that point actually contracts GDP instead of growing it; this is, for all intents and purposes, a "black hole".  It is that event that has led to the implosion of other monetary systems such as the hyperinflationary implosion of Argentina.

The above are mathematical facts, not my or anyone else's opinion.

It is your job to safeguard this nation and prevent this outcome, even if you are lied to or have these facts concealed from you by people who know better.

We are dangerously close to that event horizon and your actions are bringing us closer to it, not moving us further away.

Debt that cannot be serviced must be defaulted.  While it sounds counter-intuitive, the "bad mortgages" must foreclose, not be reworked.  All of them.

House prices must fall to no more than 3.5x incomes on a median basis.

Corporate debt (e.g. LBOs, etc) that cannot be serviced under existing terms must be allowed to, and indeed encouraged to, default.

The contraction in outstanding debt that this will produce must occur, and the economic impact that results from it, while painful, is far less painful than a monetary system failure. 

A monetary system failure is inevitable if we reach the point where one dollar of new debt no longer supports a positive contribution to GDP.

Again: This is mathematics, not social science or politics.  It is not subject to your or anyone else's desires or political aspirations.  It is as certain mathematically as is the fact that 2 + 2 = 4.

As I spend more and more time pondering the actions of our Treasury and Fed, along with the last Depression and the actual steps taken by various administrations (most specifically Hoover and FDR), I come to the conclusion that those who claim to know so much about it, and how to prevent it, are in fact either talking out their ass - or worse.

Yes, this means you Ben.

See, the common rhetoric is that we had a Depression because credit tightened and liquidity dried up - the government took a "you made a mess, you burn in it" attitude.

This, however, is simply not true, and worse, it ignores the fact that The Fed created the bubble in the 1920s that led to the Depression, just as The Fed created this bubble that is now bursting!

In fact, one wonders - if Ben was chosen for his expertise on The Depression, was (and is) his intent to cause the second one?

You could hardly pick a better matching set of conditions.

1. In the 1920s The Fed's (newly minted at that from The Federal Reserve Act of 1913) "liquidity machine" was on overdrive, and regulation non-existent.  There was a huge property bubble created filling in swampland in Florida, stock market speculation was rampant, and even ordinary shoe-shine boys were running on 10:1 leverage on margin accounts.  People were becoming rich by the hour, to the point that we called the entire decade "The Roaring 20s".  Likewise, this time around The Fed pumped liquidity into the markets after the 2000 Tech Stock disaster, The SEC removed leverage limits on investment banks, regulators willfully ignored the fact that entities under their regulatory umbrellas were sporting 20:1, 30:1, 40:1 or even 80:1 (in the case of Fannie and Freddie) leverage and the CDS marketplace made a mockery of any sort of leverage limit at all.  People became rich by the hour speculating in real estate.
2. When the bubble burst in the Florida Property market in '27 and then in the stock market in '29, there were some who argued for a "liquidationist" position - that is let the idiots who made the bad bets fail.  Among them was Andrew Mellon, Secretary of the Treasury.  Herbert Hoover had always been an interventionist and in fact promoted that stance as Secretary of Commerce under Harding and Coolidge.  From his nomination speech onward, he maintained a strong interventionist stance, and refused to allow the debtors and creditors who were overextended to meet their just desserts in the marketplace, instead intervening to prop both up.  Today it is George W. Bush's administration, headed by Treasury Secretary Paulson, who is taking the exact same interventionist steps that led us into a Depression the last time, with Ben Bernanke cheering all the way!
3. There were tremendous attempts to hide the truth in the 1930s in terms of which banks were solvent and which were not.  As a consequence bank runs swept the nation, taking them down institution by institution, until FDR was finally forced to declare a bank holiday, go into every bank and inspect its books, and decide which ones were safe to re-open and which were not.  Today, we have the same game being played, with mark-to-market rules being removed first here in the United States, over the weekend in Canada, and now a wire announcement just came across that the EU is permitting the same thing.  This should not surprise, given that many European banks are levered to as high as sixty to one!  And people wonder why there is no trust between banks?

It is commonly thought that FDR "got us out of the Depression".  This is abjectly false.  In fact, it was not until World War II that we exited The Depression, and no meaningful recovery in economic activity occurred prior to that time.  Roosevelt's interventionist actions in the economy made the problem considerably worse, compounding errors by imposing wage and price controls among other things.  The "New Deal" was in fact responsible for deepening the economic malaise and prolonging the misery, as it refused to acknowledge and force into the open the investment that had caused the collapse in the first place.

There were positive things that came out of FDR, one of them being the HOLC.  But the HOLC was a vehicle brought about by the insanity of the 1920 property boom, where short-term (typically 5 year interest-only balloon loans) were being used to purchase property and when refinancing became impossible, mass defaults ensued (does this sound familiar?)  In fact, the HOLC put in place the structure for what was, up until the 1990s, sound mortgage finance - 20-30 year term loans with a fixed interest rate and stringent debt-to-income ratios. 

Current attempts to extend FHA, Fannie and Freddie refinancing are radically misapplying the lessons of the HOLC, as DTI ratios in the 50% range are still being permitted and zero-equity positions, or close to them (e.g. 3% down payments and down-payment "assistance" remain available.)  This has resulted from a different approach to that taken in The Depression; at that time property price "resets" to levels affordable by the average income family were considered inevitable and reasonable, where today every effort is being made to avoid that.

There are even more striking parallels in the 2000s and the 1920s.  Like, for instance, the fact that Fannie and Freddie "arranged" a stealth lobbying campaign to kill legislation that would have trimmed back their leverage - and prevented the collapse:

"If effective regulatory reform legislation ... is not enacted this year, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole," the senators wrote in a letter that proved prescient.

Unknown to the senators, DCI was undermining support for the bill in a campaign targeting 17 Republican senators in 13 states, according to documents obtained by The Associated Press. The states and the senators targeted changed over time, but always stayed on the Republican side."

This, after both firms were caught cooking the books in a massive accounting scandal. 

Where were the cops?  Sleeping, apparently.  The SEC certainly had jurisdiction, as these were publicly traded companies.  Was anything done?  Nope.

Nor was Congress about to crap on their gravy train.  No surprise there, right? 

And while John McCain has railed about Fannie and Freddie being malfeasors, he's not quite so coy about his campaign manager and where he gets his funds:

"McCain's campaign manager, Rick Davis, or his lobbying firm has taken more than $2 million from Fannie Mae and Freddie Mac dating to 2000. In December, Freddie Mac contributed $250,000 to last month's GOP convention."

I guess talk is cheap eh John?  Now to be fair, Obama has taken more direct money - $120,349 .vs. $21,550.  But over $2 million, and then $250,000 to fund the GOP convention?  $120,000 makes you look like a piker compared to a $2 million payday, doesn't it?

DCI's web page touts "Expertise.  Execution.  Impact." 

Sure looks like they delivered what they promised, and now the entirety of the United States is getting it - getting violated, that is.

In the "Roaring 20s" there were similar naysayers warning about the excesses of leverage and bubbles in both stock and property prices, but once again nobody listened, and as has happened this time, once the bubbles burst every attempt was made to keep those who had made the bad bets from being forced to recognize their losses.

We have several things working against us this time around, and few things working for us, compared to the 1930s.  Here's a short list:

• In the 1930s we were resource-independent.  Today we are near-absolutely dependent on foreign oil.  We import about 2/3rds of our consumption, and while Canada's supply is probably assured irrespective of our economic condition, the same is not true for the net creditors to the United States, particularly Arab nations.  They both can and might cut us off, and so may Venezuela.
• In the 1930s we had debt owned by foreigners, but nothing like today.  Today we require about $2 billion in foreign capital per day to remain solvent as a nation at the government level.  This has been almost-entirely financed through the purchase of cheap foreign goods from China and oil from the Middle East.  If either of those sources of foreign capital flows are disrupted, things get very bad very fast.  There is no reason to believe that either of these blocks of nations will continue to provide this funding as our consumption of their goods decreases and thus their need to recycle dollars disappears.
• In the 1930s we had heavy industry out the wazoo in America.  Today we have very little.  Yes, we produce more now here than ever before - but as a proportion of what we consume, it is at all-time lows.  What this means for us is that as those trade imbalances disappear prices are going to go up as the "recycling" trade goes away and production is forcibly repatriated here to the United States.  (The alternative, a refusal to repatriate that production, is far worse, as that will result in a currency dislocation that will produce the same sort of price increases but no wage improvement for Americans.  Down that road lies really serious trouble for us.)
• On the good side, we have technology we didn't have then.  This means we may be able to find efficiencies that were the stuff of fancy 50 or 100 years ago.  The counter-balance to this is that the really big efficiency gains are likely behind us, having been gained in the 80s, 90s and the first part of the 00s.

In short we are setting up for what looks like an even Greater Depression, perhaps something similar to the 1873 panic.  While the causes would be very different in practice, in principle they seem to be the same - malinvestment caused by "easy money" that, when business conditions turn, becomes "protected" by government - leading to Depression instead of an ordinary business recession and bankruptcy of those who overextended themselves.  Now, as then, we have companies that have spent incredible amounts of money to buy influence - it was recently disclosed that AIG, for example, continues to pay lobbyists in an attempt to loosen regulation even though they are now surviving on money borrowed from The Fed!

Be prepared, get out of debt and position yourself so you can survive without the use of consumer or business credit of any sort.

If you have liquid cash, you will be in a great position to pick off property and other goods that people are forced to abandon as the situation worsens.  There are many people who became fabulously wealthy as a consequence of The Depression, and all of them had one thing in common - they had cash when things got really bad, and were able to pick off assets cheaply in forced sales.

The TARP has now been proven a failure; even Secretary Paulson has abandoned his original plan, but what he hasn't done is come back to Congress (or the American People) and apologized for the idiocy of his original proposal, nor has he taken responsibility for the equity market crash that this bout of insanity precipitated.  Not that this is surprising in the least - expecting anyone in government to have the smallest bit of integrity and admit that they screwed the pooch and hosed Americans is asking too much, isn't it?

After all its not his retirement that got shredded - its yours.

Bet on the economy worsening, especially with Obama nearly assured election, and Nancy Pelosi and others already talking about further massive government intervention.  They just can't resist revisiting the misery of the 1930s, and you can be assured that with people in Washington DC such as Paulson, Bernanke, Pelosi and Reid you're going to get it - in spades.

As for the stock market, my target within the next 12-24 months is now S&P 500 - yes, trading at 500.  This target may not be achieved in full, but I am rapidly losing confidence that the 2003 Bear Market lows will hold, and if they do not, that is the next area of chart support, a full loss of the entire original bull market level going back to the early 1990s.

When adjusted for inflation the damage will, of course, be far worse than the nominal numbers indicate.  In fact, for many investors, especially those who try to "buy the dips" here, they will be catastrophic.

Beware.