The Market Ticker

President-Elect Obama hasn't asked, but I'm going to offer up my suggestions for the first 100 days of his Presidency anyway, with full knowledge that I have about as much of a chance of winning the Lotto as seeing them.

Nonetheless, here it is:

All "BS games" in both Washington and Wall Street must end immediately.  Not in six months, not in a year, not in two.  On January 21st.  By executive order if necessary, you simply must force the truth to be told by every firm up and down Wall Street and every department in Washington DC.  We do not have an economic crisis - we have a trust crisis - there is effectively none anywhere in either our Capital Markets or Washington.  The bleeding in our markets will not stop until this problem is resolved.

This is on your back, like it or not, and your first 100 days in office will define whether trust begins to be restored or is totally destroyed.  Thus far your cabinet appointments are all being seen as "more of the same" by those on both Wall Street and internationally.  You must prove that this is not going to be the case and do so quickly or the meltdown that we will experience shortly thereafter will make this last September and October look like a Girl Scout picnic.

Specifically, the following has to happen:

• Immediately investigate Hank Paulson, focusing on his 2000 and 2004 "requests" to remove leverage limits and his firm shorting the bonds they were selling to investors.  Conflict of interest or something even more evil?  The fact is that every firm that has collapsed has had more than double the former leverage limit that was imposed on investment banks.  All of them.
• Immediately investigate the OTS (and OCC) to determine how it is that people involved in the S&L scandal remained employed rather than being indicted and jailed.  We need answers on that issue given the IndyMac mess and revelations in this regard.
• Each and every individual and firm involved in the blatant, rampant fraud that allowed the housing and mortgage bubble to occur needs to be prosecuted.  No exceptions.  Since this will involve locking up tens of thousands of people, including mortgage brokers, realtors, appraisers and bankers, and we seem to be a bit short on jail space, I recommend commuting the sentences of and releasing all non-violent "consensual adult" drug offenders.  That should create plenty of room for the new inmates.
• Appoint a cadre of special prosecutors with power to subpoena every hedge fund and broker-dealer on Wall Street to ferret out the other Madoff's out there - jail them all.  There is never only one cockroach.  Never.  Oh, and while we're at it we need to guarantee that everyone involved in the Madoff mess goes to prison, including people in the SEC who were complicit in this scam.  Nobody pulls something like this for 20 years, at this magnitude, on their own.  That's impossible, and by the way, lying to the FBI to conceal a conspiracy is its own felony and should get Madoff a Racketeering indictment on top of the rest (along with his other co-conspirators.)
• Force changes in the bond ratings agency game.  No more "pay to play", otherwise known as "issuer pays" - at all.  Further, bar by statute the "opinion" exemption; you want what amounts to near-monopoly access to publish these opinions, protected by law, you should be held responsible for gross errors.  While one AAA bond that defaults isn't a gross error, when 75% of the bonds you issue an "AAA" on in a given asset class wind up non-investment-grade within five years you've not made an "honest mistake"; you're either grossly negligent or crooked.
• Tell the truth about debt in this country and how we got here.  You can't fix an alcoholic's booze problem with a bottle of whiskey; making him drunk again to stop the DTs eventually will kill him.  Such it is with debt.  We must force the excess, unpayable debt to default, no matter how painful it is, to clear the market.
• Stop trying to support home prices.  The solution to the housing mess is in fact found in the exact opposite policy - correction to affordable levels nationally.  That's no more than 2.5-3x incomes, on average.  Yes, it will suck.  We get that - it already sucks.  At the same time we need to stop building new houses until the existing inventory clears.  There's no need to mandate this - just refuse to provide any sort of artificial support or help for the builders; some of them need to go bust, and they will if we quit screwing around.  Capacity must come down.
• Force The Fed to disclose every asset it has purchased, and disclose every action Treasury has taken.  One Executive Order takes care of both.  This is our money, not theirs.  Act like the Oath of Office and Constitution mean something.
• Revoke the EESA/TARP.  You can send a bill up to The House to revoke it.  Do so.  If we have insolvent big banks then instead use the remaining $350 billion to charter 10 new banks and immediately IPO them off to the public.  This would support three and one half trillion dollars in lending, present nearly zero risk to taxpayers, might earn them a profit, and would provide support for the system as opposed to providing support to the fraudsters and ripoff artists who caused this mess.  Mandate that every transaction that these new banks engage in is 100% public - complete, open book - until the entirety of that seed capital is replaced.  Trust me - it will be, and fast, considering that these institutions will begin with zero debt and zero crap on their balance sheets.
• Send up a bill to re-institute Glass-Steagall in its entirety.  All the "investment banks" are now bank holding companies.  Good.  This will force them to spin off their commercial bank holding companies and spit out their "investment banking" and "broker/dealer" operations into separate firms immediately.  Glass-Steagall was the right medicine and we need it once again.
• Enforce by executive order, immediately, 12:1 leverage limits via the SEC.  You control the SEC now.  Make it happen on January 21st.
• Send up a bill to make the use of off-balance-sheet games a federal offense punishable by forfeiture of the entirety of any asset so concealed.  That will end that.  We should have learned from ENRON, and the lesson should not be "how to screw the public and government."
• Send up yet another bill to mandate that any public firm that uses any modeling for asset values must expose the full details of all ingested data and all algorithms to the public.  Any firm that wants to claim a "mark to model", in short, must allow any interested party to replicate how they arrived at that valuation.  No exceptions.

If - and only if - you, President-Elect Obama, are interested in the recovery of our capital markets and restoring trust in them, you will do all of the above.

If you do not then you will have demonstrated that you have zero interest in restoring trust in our capital markets and the market will in fact not clear and recover.

We are at an inflection point - and an extremely dangerous place for America. 

If we fail to deal with the underlying issues that have destroyed trust in our markets we will see capital flee to those places where the rule of law matters, where fair dealing counts for something, and where people cannot run $50 billion dollar scams for more than 20 years with the open and blatant complicity of members of the government.

Your move Mr. Obama, and you should be aware that there are plenty of people in the mainstream media, especially outside the US, calling for exactly the same thing.

The gig is up on our culture of fraud and both the Treasury market and dollar hang in the balance.

~20% decline in the last week according to some retail surveys?

Well, yes.

Let's look at reality here - how much crap do you really need?

How many iPODs, how many DVD players, how many bigscreen TVs?

Did you notice the attempted "upselling" this year with the BluRay discs?  Titles that had been out for months - in some cases more than a year - being peddled for $30/disc - or more?

What's that about?  Oh sure, its higher resolution (quite a bit higher, in fact) but the actual disk itself isn't that much more expensive to press than a regular DVD - and certainly not $20 more, when the same title is available in the DVD rack as an "old release" for $10!

By the way, here's a secret you won't be told by many people - if you have a HD TV (e.g. virtually anything made in the last five or more years) you can buy an "upconverting" DVD player, or get a BluRay player and use your conventional DVD media.  The player will "upconvert" the media to your TV's native resolution.

Can you tell the difference?  Yes.  I can.  Easily, on my 60" DLP set in the family room.  On my 36" in my bedroom?  Not really - unless I look really, really closely.

But will I pay fifty percent more for a "new release", or three times as much for an older release, to have that movie on BluRay as opposed to DVD?

Well, having bought a couple of BluRay discs this season (to go with the Sony 550 player - a $400 unit that some guy was unloading 1500 of - overstocks I'm sure - on eBAY, for $212) I can tell you that on my 60" widescreen the difference between BluRay and DVD is easily perceptible but there's no possible way to justify a price three times as high.

When DVDs first came out I had been a 12" LaserDisc maven for a very long time and had well north of 200 titles.  DVDs were a quantum leap forward in both video and audio quality - while there were a few LaserDiscs that had discrete surround sound, they were the exception rather than the rule, and LaserDisc's video was in fact an analog signal - so it had "dot crawl" and all the other sins of an analog signal, even though it was damn good compared to a VCR.

The compelling difference between DVD and BluRay simply isn't there.

This, unfortunately for retailers, is pretty much the entirety of the market - across segments. 

Can you name one product that is a "game changer" - that provides a quantum leap forward, and thus is truly a "must have"?

I can't. 

That's a problem, when you get down to it; all retailers are really catering to is "the quantum of more".

Now look around your house.  Look at all the junk you have in your home.  Quantify "junk" as anything that doesn't provide you with a place to sit (or lay down), a way to keep you warm, a means to prepare (or consume) food or drink and a way to keep your premises livable (you gotta wash your clothes somehow, right?)

All the trinkets, the 47 computers, the three iPODs and the cell phones.  The "new car" you bought over the last few years, for what - the "new car" smell?  Does a used car - or even a clunker - get you to work? 

Think about it - how much less would an inexpensive used car have cost you?  Liability insurance only as opposed to "full coverage", because if you wreck it you could replace it for a couple of grand in cash - no need for collision coverage, and if the transmission falls out you could junk and replace it for less than the cost of the repair!  In a couple of years you're way ahead, and even more so if you make a habit of smashing cars (since insurance gets verrry expensive for collision coverage if you wreck frequently!)

We as a nation have gotten used to deciding we want something and therefore we will have it, because the credit card hasn't been declined (yet).  When it was, we then went to the bank and pulled out our home equity, paid off the card - and charged it up again.

The entirety of our media has become focused on exactly one thing - stoking that "need for more", with Americans being literally told they're poor, destitute, and deserving of that handbag from Gucci and the brand new Lexus you must have in your driveway.

It's all a scam.

I don't know about you, but I'm pretty much at saturation when it comes to "things".  I have a house, a grill, a fridge, car, dishwasher, laundry equipment and as many computers and TVs as I can reasonably use.

What's left?  Nothing, really.

The "culture of more" is how we got into this mess - the demand for "more" without first earning the money to buy it.

As this continued onward beyond reasonable limits those who "must have more" turned to stealing.  CDOs full of garbage "rated AAA" by companies who were effectively bribed (and used what they now acknowlege were computer models that assumed prices would never go down), peddled by people who knew their products were worthless (proved by the fact that in some cases they were shorting what they were selling!)  Union "bosses" who have been documented billing thousands of hours of overtime for work not performed.

Our entire economy has turned into a culture of scamming, fraud, and BS.  This morning CNBC has "news person" after news person nearly crying for people to go back to the mall and spend more money they don't have - on useless crap.

The adjustment to a "culture of what you need" is going to be jarring for many, even catastrophic for some, who simply must walk around with their noses in the air, spending at rates that are vastly beyond their ability to earn.  Indeed, in places like Manhatten where the "culture of more" has turned into fraud and theft extraordinaire, driving anyone who doesn't make $500,000 a year or more out as "too poor" to afford to live there this adjustment may even come (God willing) in the form of some long days in the graybar motel with a cellmate named "Bubba". 

But perhaps - just perhaps - we will rediscover the fact that a few simple things - a pumpkin pie baked from scratch in the oven (yes, including the crust), a bird or ham in the oven and hugs from those you love are worth a whole lot more than the newest plastic piece of crap from China.

Think about it - then tell the merchants of theft, fraud, avarice and greed that you simply won't play any more.

Tell the Paulsons of the world, who are inextricably tied to the financial scams of the last decade, to pound sand in the most effective way possible.

Spend your post-Christmas time giving your kids, spouse and/or SO a bunch of hugs, instead of at the local mall blowing yet more money you don't have.

You'll get more from it.

Its time to put a stake through this vampire's heart and pronounce it dead, then go find the vampire that bit what was a human and turned it.

Let's first talk about what "Quantitative Easing" IS.

That phrase applies to a central bank (in this case our Fed) lowering interest rates to zero.  You can't lower rates below zero, so what comes next is to "quantitatively" ease money - that is, "in quantity" print up reserves and buy "assets", thereby throwing yet more money into the economy.

In theory, anyway.

See, the economic theory is that when you lower interest rates people want to borrow more money, because it's cheaper to do so.  Therefore, when you want the economy to expand (faster) you lower interest rates, which makes it more likely that people will borrow.

When people borrow they either spend or invest those funds, and both produce more GDP.  If I buy a new flatscreen TV on credit that counts in the GDP of the economy, as does the farmer who borrows to buy seed and grows a crop of corn.

The problem is that the flatscreen TV purchase isn't really an increase in GDP; its a TIME SHIFT.

Without borrowing the money, you see, I'd have to earn it first then buy the TV.  By borrowing the money I am able to purchase the TV sooner than I would otherwise; ergo, I haven't actually changed demand in total, but instead have changed when the demand occurs.

Of course the downside of this little game is that the TV that I buy today is one I don't need to buy tomorrow.  I'm robbing tomorrow's GDP to add to today's.

This is why I have maintained all along that the debt-to-GDP graph (which I know you are probably tired of seeing by now, but here it is again!) is so important:

Let's take GDP over a longer period of time - say, 10 years, and make a law that says there is no credit to be extended.  That is, you pay cash or you don't buy.  We add up all the output for the entire 10 year period and put it in a bucket.

That's the total output of the economy over the entire ten year period, along with all the productivity that enabled it.

Now let's add credit to the system.  What happens?

Some people will immediately "pull from forward earnings" via credit.  That is, they will purchase a TV they want today with earnings that they believe they will have tomorrow.

This is the old "Wimpie" game from the Popeye cartoons - "I will gladly pay you Tuesday for a hamburger today!"

Now, here's the question - has the addition of credit actually added to GDP, or just shifted in time when the GDP is recorded?

If - and only if - the credit extended is used for the purpose of producing additional output, then it is a net additive to GDP.

If a farmer has 100 acres of land but only enough money to buy seed for 50 of those acres, his employment of credit to buy the other 50 acres worth of seed increases net GDP because he is using that credit line for the explicit purpose of increasing the net output of his labor.  The credit extended to him is liquidated when the additional output is produced, but the output (less the cost of the credit) remains.

When credit is used in this fashion the debt-to-GDP ratio falls because the amount of debt outstanding remains the same or declines while the GDP increases.

If you instead consume, however, you have only performed a time shift on demand, not added to actual demand.  In fact due to interest cost you have shrunk the total (long-term) demand that exists in the economy because interest does not accreate to GDP.

We all recognize Wimpy from the Popeye Cartoons as a scam; why is it that we don't recognize that what Bernanke is attempting to do is precisely the same damn thing and demand that he stop it!

If you look at the GDP over a long enough period of time, this becomes obvious and indisputable - that which is demanded today isn't necessary tomorrow, and there is no long-term salutary impact on the economy.

The third condition is when debt-to-GDP expands dramatically, as it has been now for the last 30 years.  In this case credit is being used to both pull forward demand and to pay the interest on previously-extended credit!

This latter case is insanely destructive when maintained over a long period of time, because there is a natural limit beyond which credit cannot be expanded nor can demand be pulled forward.

At some point the people have all the cars, IPods and flatscreen TVs they need, and their want for additional consumption becomes tempered by the pain of the debt service that came with "pulling forward" from an infinite future horizon.

In short continuing demand becomes irrelevant because debt service chokes off available free cash flow.

"Quantitative Easing" into such an environment, which we are now in, is a complete and utter waste of time because it in fact requires that additional debt be taken on in the economy in order to do anything.

That is, buying assets from banks and pumping reserves back into them so they can loan them out only boosts aggregate demand if there are in fact qualified borrowers who wish to take out a loan to buy something. 

Some so-called "economists" will argue that lowering borrowing costs acts as a stimulative effect in that interest costs come down.  This is only true to the extent that there is unsated demand among unsaturated (by debt) consumers.

We have spent thirty years pulling forward demand at an ever-increasing rate.  The graph above proves this.  We have too many automobiles, flat-screen televisions and houses for the amount of aggregate demand that exists in the economy and the debt overhang has been left behind on consumer balance sheets - it has not been worked off.  The "economics of more" have been pulled forward so far that there is nothing further to pull forward for those who have any hope of being able to pay the bill down the road.

You can take me to the best restaurant in town but if I just ate my fill that $100-a-plate steak is going to sit and get cold in front of me.

The paradox is that ever-increasing stimulus into such a condition will ultimately destroy the currency and economy where it is attempted. 

As each attempt at "Quantative Easing" fails to raise demand a more intrusive and expansive one will be demanded.  As the velocity of money dwindles toward zero confidence is lost - a non-circulating currency is very difficult to value!

This is what has happened over the last year and a half.  Bernanke has cut interest rates from over 5% to zero and yet aggregate demand has fallen in the economy because those who can borrow to consume are sated and those who are either over-leveraged or insecure in their ability to pay will not (or cannot) borrow irrespective of the cost of money.

In addition the very act of Quantative Easing puts a hard "bid" into government bonds.  As their yields collapse toward zero up the curve  prices for those bonds skyrocket and blow off in a parabolic fashion. 

This sounds great for the holders of those bonds (e.g. foreigners), except for one small problem - all bubbles burst, sophisticated investors know this, and in order to realize those paper gains you have to sell! 

Anyone who has seen one parabolic blow-off top on a chart knows what comes after the peak is reached.  Eventually someone comes to the conclusion that "it's just not going to go any further" and sells. 

This begins the collapse in price (and skyrocketing yield) which places the central bank in an extraordinarily-difficult position - if they "take up" all of the supply to prevent the yield from shooting higher they are printing money of zero velocity which does nothing, and once all that supply has been taken up they're out of ammunition and holding the bag on bonds that are worth nowhere near what they paid for them!

Oops.

It is time to face the facts - "Quantitative Easing" cannot and will not stimulate demand and "reverse a deflation" if there is no capacity (or desire) to borrow irrespective of how cheap you make the money or how much of it you pump into the economy.

To explain all this in one sentence:

You can't solve a drunk's alcoholism with a bottle of whiskey.

Bernanke's thesis has been debunked and both his doctorate and position should be revoked.

I never thought I'd see this:

Yesterday I wrote a letter to a number of House and Senate Committees, well-aware that the Congress is in recess.  The impetus was learning that Congress intends to hold committee hearings on derivatives (gee, nice to have a hearing about closing the door after all the horses are gone!)

One of the key themes of that communication was that The American People are losing faith in government as a protector and arbiter of fair play and enforcement of the law - and that down this road lay severe, perhaps even critical danger for our republic.

I had absolutely no idea at the time I penned and sent that letter that the events I had feared would occur the same day. I thought we had weeks or months before the proverbial dark matter would impact the airmoving device.

But then yesterday afternoon, I read the following:

A senior federal banking regulator has been removed from his job after government investigators concluded that he knowingly permitted IndyMac Bancorp to present a misleading picture of its financial health in a federal filing only months before the California thrift was seized by regulators.

The Office of Thrift Supervision removed Darrel Dochow as director of its western region, where he was responsible for regulating several of the largest banks that failed or were sold in the past year, including Washington Mutual, Countrywide Financial, IndyMac and Downey Savings and Loan.

Dochow allowed IndyMac to count money it got in May in a report describing its financial condition at the end of March, according to an investigation by the Treasury Department's inspector general, Eric Thorson, which was described in a letter from Thorson.

.....

In the late 1980s, Dochow had been the chief career supervisor of the savings-and-loan industry, and federal investigators later concluded he played a key role in the collapse of Charles Keating's Lincoln Savings and Loan by delaying and impeding proper oversight of that thrift's operations.

Dochow was shunted aside in the aftermath and eventually sent to the agency's Seattle office. Several of his former colleagues and superiors have said that he gradually reestablished himself as a credible regulator and again rose in the organization.

Let's be totally clear about what is being alleged.

The allegation is that Mr. Dochow was partially responsible for the collapse of the Lincoln Savings and Loan during the S&L crisis, and not only was he not fired from his position within the government but 20 year later he is alleged to have been involved in a conspiracy to falsely state IndyMac's capital position which could reasonably have been expected to have kept the OTS from seizing the thrift at that time.

That is, it is alleged that he got away with an act that, had a private party undertaken it, would have likely been a felony under US law (bank fraud, obstruction, etc) and not only didn't lose his job was then given supervisory authority (20 years later) in a second case where he is alleged to have done essentially the same thing by conspiring (with IndyMac!) to falsify their capital position - that is, falsifying an official document bearing on the condition of a federally-insured bank!

Now of course these are allegations at this point in time - but they are extraordinarily serious allegations.  They join the list of dozens of other, similarly-serious allegations that have been raised over the last year and a half - and yet where are the official investigations, grand juries, and indictments?

Then last evening a topic was posted on my forum linking to one Hal Turner's blog, in which he said (this is not my speech - it is on the linked site - and yeah - its shocking):

WARNING TO BANKING EXECUTIVES: If you do not return the bonuses, stock options and country club memberships bought with taxpayer bailout money, YOUR NAME AND ADDRESS will be made public in a manner designed to "incite" a reaction by the public. (Special emphasis on the word "incite!)

You have until Friday, December 26, 2008 to return the money. There will be no negotiating, no obeying of court orders of protection, no way to prevent being dealt with harshly.

I don't care about your employment contracts, I don't care about your civil rights and I sure as **** don't care about the law or the courts.

You guys have ****ed this country for the last time. It's time for you to be paid back and I intend to see that you receive your payback.

I don't like this one bit, it is way beyond "polite discourse" (and IMHO quite possibly into a realm that one should not cross) but it is entirely predictable, and unfortunately, is unlikely to be an isolated incident.

Why?

Because an increasing number of people no longer have any belief that the government exists to prosecute crimes and convict crooks.

In fact, there is a rapidly-growing belief among the population that the government and its agents have turned into the felons.

There is an uneasy "chatter" in this general vein showing up, widely dispersed among the population, but I hear it both in online and offline conversations almost as a "backhanded" comment now - much like occurred when Nixon was caught doctoring the Watergate tapes.

The difference is that this time the people know their wallets are being robbed instead of a political party's documents ensconced in a file cabinet.

This had better not spread into a widely and strongly-held opinion, and there is in fact only one way for the government to stop that from occurring.

We must see indictments of the bankers and government insiders who were involved in creating this mess.

It needs to start happening right now. 

TODAY.

We need a dozen Fitzgeralds' (the Federal prosecutor going after Illinois' Governor), we need them today, and they must include in their investigations referrals to grand juries and indictments aimed at the people inside these regulatory agencies where appropriate - that is, everyone who was involved in any form of fraud related to this mess.

I don't care if they're a banker, a broker, a Treasury Secretary, an OTS or OCC official, an SEC employee or a Congressperson.  Each and every one of the people involved need to be investigated, if appropriate indicted, arrested and see the Rule of Law imposed upon them, right here, right now.

Why?

Because if this doesn't start happening very soon there is a very real risk that the meme that is now starting to take hold - that our government is in fact the felon in chief - will spread and reach critical mass within the population.

We cannot - and must not - have that happen, for once it does the societal consequences that flow from that belief cannot be stopped.

There is only one way to stop the progression of this belief through society and that is for the government to prove to the citizenry that it will enforce the law even when the people who have to be arrested, charged and jailed are government employees and "favored" powerful individuals who have been robbing the public for over a decade.

We are running out of time and what I want for Christmas is for our government to show the citizens of this great nation that it is not the felon and the people who are the felons will be indicted, arrested and prosecuted to the fullest extent of the law - no matter who they are.

If our government does not do this, and do it fast, then may God have mercy, because I am absolutely certain we will need it.