The Market Ticker

If you're curious about what we're up against as a nation with the previous Ticker "Here It Comes", particularly when it comes to California and its fiscal problems that threaten to turn into an all-on state-wide collapse, this ought to make it rather clear:

LOS ANGELES - The woman who gave birth to octuplets this week conceived all 14 of her children through in vitro fertilization, is not married and has been obsessed with having children since she was a teenager, her mother said.

Angela Suleman told The Associated Press she was not supportive when her daughter, Nadya Suleman, decided to have more embryos implanted last year.

That's right.

14 children, all conceived by artificial means, unmarried, and worse...

"She told me that all of her kids were through in vitro, and I said 'Gosh, how can you afford that and go to school at the same time?"' she added. "And she said it's because she got paid for it."

Uh, by whom was she being paid?  That wouldn't be our wonderful "welfare" system, would it be?  WIC, EIC, you know, "pay me to live and poop out kids"?

Unknown.  What is known is this from the LA Times:

"Friends and family also reported that Nadya Suleman worked as a psychiatric technician until she was injured on the job. Then she began having children and enrolled in school.

She graduated from Cal State Fullerton in 2006 with a bachelor of science degree in child and adolescent development, school officials said. She returned to pursue a master's in counseling, but last attended in the spring of 2008."

So how did she get paid to have these kids?  The timing suggests that she quit school when she became pregnant with the octuplets.

Nor does it end there:

"The eight babies — six boys and two girls — were delivered by Cesarean section weighing between 1 pound, 8 ounces and 3 pounds, 4 ounces. Forty-six physicians and staff assisted in the deliveries."

Not one of those children could go to a normal nursery ward as all are critically under normal weight.  Never mind the 46 physicians and staff (and the dozens more who will take care of these kids in neonatal until they reach a safe weight to remove from around-the-clock medical supervision) - who paid for them?

14 children.  No ability to cover the expenses of having or raising them by herself.  Implanted by a medical system that was paid by you and I to perform these procedures, given "free" medical care which you and I paid for, born into a demand for extreme immediate medical care and expense and now, to raise those 14 children (each of which, by the way, has a cost of at least $100,000 - each - from birth to 18, assuming no complications post-discharge) you and I will pay for that too.

And before someone says "what if she's not on welfare" let me point out that (1) even "private insurance" has lifetime limits on coverage which almost certainly will be exceeded by these kid's neonatal care, and (2) even if they're not this still constitutes a massive "money grab" from every other policyholder to her for an elective procedure (the choice to be IVF'd in the first place.)

Oh, and it gets better.  The Times in the UK is saying this:

"Her family has told agents she needs cash from deals such as nappy sponsorship — she will get through 250 a week in the next few months — and the agents will gauge public reaction to her story.

....

Nadya Suleman, who describes herself as a “professional student” living off education grants and parental money, broke up with her boyfriend before the birth of her first child seven years ago."

Then there's this, from the same article:

US public reaction has been mixed: many have asked how an unemployed single mother can raise 14 children, as her first six have already strained the family budget. Angela and Ed Suleman, Nadya’s parents,bought her a two-bedroom bungalow in the suburb of Whittier in March 2007, but soon after got into debt and had to leave their own home.

They filed for bankruptcy and moved in with their daughter and grandchildren. Last week her father said he would return to his native Iraq to work as a translator and driver.

Sounds like the family money has already run out.

The epitomy of "I want, therefore I will have, and damn the consequences and costs."

There is no chance of this woman being able to forward up the nearly $100,000 per year that such a family would cost to raise assuming, once again, not one of those kids requires special care. 

That's after we (not she) pay the $1,000,000+ in up-front costs for the neonatal and birth expenses for these eight - whether through Medicaid or private insurance, she did not pay that bill personally.  A neonatal stay is an easy $150,000 (each), and that's if things don't go badly south.

It didn't matter.  She wanted an entire kindergarten class of her own and so by God she was entitled to access extraordinary medical procedures and to have one, irrespective of her personal ability to cover the cost both here and forward.

However you slice it this is ridiculous.  FOURTEEN children as a single parent? Assuming she has medical "insurance" from somewhere, exactly how does a desire to have as many kids as humanly possible entitle her to this sort of abuse of that insurance?  If she doesn't have insurance, who's footing the bill?  And how do you possibly go out and earn a living while raising fourteen kids?

This is what the nation is up against. 

This is why California is broke.

This is what we have created and allowed to fester in our country.

This is what happens when demands are not tempered by ability to pay and the consequences of one's actions, but instead are allowed to be shoved off on other people. It is what happens when ethics fail and regulation is eschewed to enforce that which ethics refuses to.

In the financial markets it was put this way by Jesse's Cafe:

"You want leverage? Imagine a 20 billion dollar portfolio of mortgage backed securities with a capital base of $10k, literally 2 million-fold leverage. Imagine the shock of the inventor as he watches as his successors expand similar portfolios up to $900 billion.

.....

The guys initially putting these packages together had some sense that they were crazy, that they made no sense, but nobody said stop, and they didn't care. It was a good time to make money and then move along.

Got it?

It was a good time to do what we wanted, get what we want, take as much as we can (irrespective of the ethics or even the law involved), ignore the consequences and then move along, saddling someone else with the bill.

This is not just a financial markets issue.  It is an everything and everywhere issue.

The problem is that there is no "someone else" and the bill is on the table.  We will pay that check, and it will be paid through radical contraction in our standard of living and, if we do not stop rewarding these sorts of actions and instead try to bail them out we will suffer an all-on economic and social collapse.

THAT is what has to change if we are to solve the problems we face, and WE as Americans must demand that it change.

Buckle up.

I've noted that a few people have cast questioning eyes at my triangle, and the 210 target off it.

Some have claimed that I should be using a log scale on that chart.

Yeah, yeah.  I've heard that.

Now let's look at what we've learned the last few days, weeks and months:

• California appears to be functionally insolvent.  As in now.  How far is the state from widespread inability to pay police officers and firemen, and how long does it take before widescale riots break out when those who leach off the government teat for a living have their checks interrupted?
• It is increasingly clear that there is absolutely no way that the "big banking system" comprised of firms like Citi, Bank America, JP Morgan and Wells Fargo, along with a handful of others, can make it through this without one trillion or more in additional funds.  Yes, it really is that bad.
• It is also increasingly clear that there are literally hundreds of midsize and smaller banks that are perfectly fine.  They did not lever up, they did not write a bunch of crap commercial or residential construction paper that cannot be serviced and they most certainly did not drink the KoolAid of securitized synthetic garbage debt.  Even in bad economic times traditional banking is a very profitable business - so long as you lend money to people who can pay you back or you have sufficient collateral so that if they default you don't lose your shirt.  These sound banks have been frozen out of the "money fountain" and also out of the opportunity to be rewarded for their prudence.  The Fed's policies have made it impossible for them to attract capital at any reasonable deposit or CD interest rate and yet their capital ratios are very healthy.  These firms should and must stand and yell NOW.  There is nothing wrong with the banking system.  There is plenty wrong with a handful of big banks who engaged in outrageous and possibly even criminal conduct.
• Speaking of possible criminal conduct, it has now been revealed that Indymac was not the only bank that improperly booked funds and violated reporting standards - there were four more.  The government has refused to identify them.  Gee, can you think of four Thrifts that got in trouble in the last year and disappeared?  It's not difficult is it?  FOIA's anyone?  Speaking of which, where's that new President Obama "transparency" in government?
• Ben Bernanke's neoclassical monetary theories have been proved incorrect.  He has doubled base money in the last few months.  Under neoclassical monetary theory this should have immediately produced inflation as the increase in base money would have spurred an increase in credit money (cash and credit are not the same thing, although they spend the same.)  However, neoclassical monetary theory relies on a false premise - that the existence of additional base money causes the creation of credit - that is, the monetary tail wags the credit dog. In fact it is the other way around - credit is the dog and the tail cannot wag the dog.  When worthy borrowers refuse to take out additional loans and unworthy borrowers cannot borrow additional base money has no effect, because each dollar of credit money must be matched by a dollar of debt.  No new debt issue, no credit money expansion.  Debt cannot expand because the carrying capacity for it in the economy has been reached, ergo absent Weimar-quantity printing of raw cash (on the order of $20 trillion dollars!) deflation cannot be halted until the bad debt is forced from the system.  This excess came about because of knowingly unsustainable leverage - that is, credit-to-money ratios.  Unfortunately until the total leverage in the system is reduced to sustainable levels there is nothing that can be done to halt demand destruction and economic contraction.  Transferring leverage from the private sector to the government cannot change this outcome.  In an economic system where most monetary exchange is in fact credit deleveraging always produces deflation which cannot be halted until leverage ratios return to sane and sustainable levels economy-wide.
• A nation's standard of living is not based on its ability to borrow in aggregate, but by its ability to produce.  Therefore, we cannot borrow our way to prosperity nor can attempts to "spur lending" lead us out of recession.  Rather we must produce actual goods and services - not push paper - to grow our way out.  Over the last 20 years we have replaced production with false claims of "wealth creation" that are nothing more than the creation of additional credit through intentional mispricing of risk.  That scam has now come to an end as the true lack of value has been exposed. All major busts in reasonably-modern time (e.g. back to TulipMania) have come from credit excess.
• Ben Bernanke and Alan Greenspan before him had the responsibility and authority to regulate the credit system, as did the OTS, OCC, SEC and Congress.  ALL abdicated that responsibility; Congress in particular appears not to understand how these functions work, but the other institutions do and their abdication was willful.
• There are all sorts of theories about why prices of both stocks and bonds fell this last couple of weeks.  They are all wrong.  There is only one reason - supply and demand.  Treasuries are being rained into the market like a monsoon and this is depressing price; what's worse is that it is sucking up money from the system which then causes a supply:demand imbalance in stocks.  In order to issue the sort of supply necessary to fund the grand schemes of former Treasury Secretary Paulson, the last and present Congress and President Obama, as well as "keeping the promises made" by the previous administration (some $7 trillion worth!) the amount of supply that must be issued will literally destroy both stock and bond prices. 
• We now know that not only Tim Geithner evaded taxes but in addition Tom Daschle, Obama's Health and Human Services nominee, failed to pay $100,000 in back taxes and interest.  What's worse is that those taxes were incurred due to a car and driver provided Mr. Daschle by a private equity firm raising very serious conflict of interest issues.  Where is my "change that we can believe in" Mr. President?  I see only the very same corruption and influence peddling that Washington DC has been known for.
• There is a tremendous amount of anger rising in America.  You don't see it - yet - in public, but it is there, simmering just under the surface.  President Obama made note of it when it was revealed that nearly $20 billion was paid out in bonuses to Wall Street firms this year - after they took $70 billion of taxpayer money in direct assistance.  That's about 30% of the total that went right out the door as bonuses.  In effect, we are now paying taxes so that Wall Street can hand it out to the very people who got us into this mess!
• Government tax receipts on all levels are cratering.  Income tax and sales tax numbers are frightening with many state governments reporting double-digit drops in the last month. All these handouts and bailouts sound good but where is the money going to come from?  When the money runs out the game is over in truly-spectacular fashion.
• Speaking of which The Bond Market issued its statement of displeasure over the last two weeks on the idea that we'll just blow money left and right.
• Finally, that taxpayer anger and falling tax receipts, plus the government continuing to hand money to people who demonstrably not only made bad bets but engaged in outrageous and perhaps even illegal and fraudulent conduct, yet have returned nothing of what they stole sets up a very real risk of a tax revolt by Americans.  It would be ruinous and nearly impossible to control if Americans decided en-masse to simply refuse to pay and to the extent possible went "off grid" through barter and underground transactions, or started modifying W4s to greatly limit withholding and then simply didn't file.  Anecdotes related to this occurring are already popping up. I realize this is extremely illegal but at some point the American public is going to reach it's breaking point with the government literally stealing their money to bail out those who robbed them in the first place!

There are rumors of a "big bang" financial cleanup coming next week from the Administration:

The “big bang” approach reflects the belief of Tim Geithner, Treasury secretary, and Lawrence Summers, National Economic Council director, that the Bush administration was wrong to dribble out policy initiatives. Mr Geithner intends to present a “comprehensive” plan that policymakers hope will command market confidence.

Details of the financial overhaul are being finalized and have yet to be approved by President Barack Obama, but it may include both the purchase of toxic assets by a “bad bank” and insurance-style guarantees for problem assets remaining on bank balance sheets.

Anti-foreclosure efforts are likely to focus on subsidizing programmes that reduce unsustainable monthly mortgage payments, though there may also be support for schemes that subsidise the partial writedown of loans that exceed the value of the home. Treasury may also unveil new efforts to revitalise dysfunctional securitisation markets.

If this is all they intend to do it will fail spectacularly and the odds of a full-on market meltdown become very high because in fact this is nothing different, in reality, than what has been done thus far - and has failed.

I want to expand on the bond market problem because it is absolutely critical to understand this, and for the Obama administration to put an immediate halt to it.

Prices respond to only one thing in "reality" - supply and demand.  Both can be illusory which produces short-term distortions but the truth always pokes its head through and when it does, the direction becomes clear.

Treasury, The Fed and Congress (the previous one) have in aggregate promised some seven trillion dollars in spending they do not have.  This of course will eventually require issue of debt to find it in one place or another.  The current spending plans of both Treasury and Congress are guaranteed to require upwards of $2 trillion of issue this fiscal year (running through September 30th.) 

This last couple of weeks Treasury has been issuing bonds like crazy and as they have bond prices have taken a dive into the mud.  Why?  Because the supply has to be taken up by someone so that Treasury can fund the nation's promises, and as that supply is taken up money is sucked out of the system to buy those bonds.  This then upsets the supply and demand picture in equities.

Reality has started to intrude into the market and it's not a pretty picture.  FCBs sold Treasury and so did Primary Dealers in the most recent week.  This is new, it is ominous, and it signals that market participants in the bond market have detected smoke in the room.  Should they all rush the door at once the bond market dislocation that I have been warning of for months will gather steam and cut off federal funding, along with kneecapping the stock market.  The Fed cannot possibly absorb this supply as it will not be limited to Treasuries; they would have to print up literally $20 trillion dollars to halt the collapse and should they attempt it the dollar would collapse instead as that would be a literal ten times over expansion of the monetary base.  This would produce a monetary and market implosion twice as bad as what occurred in Iceland overnight.

This is where neoclassical monetary theory meets reality.  In the real world credit leads, it is the dog and money supply is in fact the tail.  When regulation of credit is abdicated to the degree we have seen in the last five years the resulting credit collapse cannot be avoided through diddling monetary and fiscal policy as the tail cannot wag the dog. 

We stand on the edge of the failure of all of American's retirement assets.  Literally all of them.  Buried in some of the earnings reports of the last quarter are the fact that half of the market capitalization of some firms was wiped out in the last year due to pension fund shortfalls as a consequence of the stock and credit market swoon.  CALPERS and other funds are rapidly going from being adequately capitalized to critically undercapitalized.  If the Treasury and Stock market both sell off as I believe both can and is likely to happen if the current policies are continued essentially ALL American Retirement Assets will be destroyed - 401ks, IRAs and both private and public Pension systems.  Total losses through these systems is likely to reach 80-90%, and the Boomers start retiring "en-masse" just a few years from now.

In short, if policies are not changed now there will be no retirement for Americans and the currently-retired who rely on these funds will find them gone and be forced back into the workplace.  Unemployment in that scenario is likely to reach and may exceed 20%, and what's worse, Medicare funding will be severely curtailed at the same time due to the inability of the government to fund it.

It is absolutely critical that Obama and Congress understand these  facts (and they really are simple; we have $53 trillion in public and private debt - that is, credit - and yet the monetary base is just shy of $2 trillion up from the "normal" $800 billion or so) - it is not mathematically possible for a $2 trillion dollar thing to control the outcome of a $53 trillion thing, especially when you are threatening to add $7 trillion to it.

Let me put forward a different view of what should be done, and hope that President Obama and his cabinet direct Geithner and company to take these actions.  I fully realize that parts of this call for Geither to "turn on" some of his banking buddies, but irrespective of his desire not to, if he does not then the plan will fail.

Specifically, we need to, here and now today:

• Make at least $100 billion dollars available to existing good banks in additional capital so they can take on the good assets of banks that cannot survive in their current form with their current losses and balance-sheet garbage.  (This, by the way, includes the off-balance-sheet junk that has magically "disappeared" from the public's radar, but you can be certain it IS still there.)  This is essential so that the banking system, as opposed to individual banks, remains operational now and into the future.  The "your ATM card doesn't work" scenario must not be allowed to occur.
• The "bad banks" that created this mess must not be further rewarded.  The public simply won't stand for it. This is no longer an option and if President Obama and the rest of the government is too tone-deaf to understand this they will make a monumental mistake.  Americans tolerated the first $350 billion going to these clowns because we were told that they would use it to restart lending and that it was necessary to prevent an all-on economic collapse.  The money was spent on bonuses, acquisitions, and stuffed in The Fed's vault where it now earns interest, proving beyond a doubt that the original claim was a lie.  If Washington thinks they'll get away with this a second time they are sadly mistaken.
• The "promises" made to backstop the failed credits represented in Freddie, Fannie, AIG and elsewhere cannot be kept.  Read back through the above - if Government continues to attempt to issue Treasuries into the market they will precipitate both a bond and stock market collapse.  This is a mathematical reality and the market has been issuing warnings now since the beginning of the month.  January was the worst "first" month of a year for the market ever and yet the new issue from Treasury was a tiny fraction of the refunding and new issue that is currently scheduled for the next few months.
• To deal with the "bad banks" we have only two choices - we can either:
  • Strip them of their good assets and sell those off to the good banks, then cut them off from all public assistance and let them fend for themselves, having protected the good assets (and deposits) by placing those with sound institutions OR
  • "Cram down" their equity and debt structures and resolve their balance sheet issues in this fashion.
• ALL debts must be settled - either reaffirmed with capital adequacy and ability to pay proved up or those debts must be forced into the open and restructured or defaulted.  The game of "hide the sausage" among financial institutions cannot be allowed to continue; confidence must be restored and it cannot happen until and unless everyone knows that all balance sheets fairly represent a firm's assets and liabilities.  The lying has gone on for long enough that nobody trusts anyone; only FULL TRANSPARENCY resolves this problem.  This includes, by the way, the garbage held by The Federal Reserve - it must be forced into the open and valued with 100% transparency today, tomorrow and every day thereafter.
• President Obama has said that he intends to try to create "4% Mortgages" to "help the housing industry."  Such a move will do no such thing; the market will not permit 4% mortgage rates when the cost of long money is higher than that by any mechanism other than direct subsidy.  Since housing is a $30 trillion (roughly) value proposition and roughly 40% of all homes are mortgage-free even providing one percent in subsidy would cost about $150 billion a year and the worse news is that adding this to the debt load of the government would likely drive the differential much higher.  At 3% such a move would run $450 billion, or more than the entire first half of the TARP - annually!  This is clearly unsustainable and President Obama must stop drinking this KoolAid.  The solution to housing affordability is lower home prices, not higher ones.
• There must be a public statement and immediate follow-up action from the Obama Administration on the massive fraud and abuse of the public that has occurred over the last ten years with regards to securitization, mortgage fraud, appraisal fraud and other various ENRONesque acts by the giants of Wall Street.  The public wants blood and Washington had better pay attention on this point; you have hundreds of thousands of Americans who have lost their homes and close to five million who are on the continuing unemployment rolls as a direct and proximate result of this nonsense.  The government cannot contain five million angry Americans with platitudes or, for that matter, anything else.  There are in fact lots of "bad actors" in this mess who at minimum profited from intentional deceit in the pricing, securitization and intentional blowing of this credit bubble, and it is unjust that they are allowed to get away with it.  Everyone is entitled to a fair trial but the public must know that the investigations are in process and prosecutions will be forthcoming as is appropriate.  Government must not be seen as the felon in the eyes of the people or it's authority, both moral and legal, will be lost.
• Government must not act in any fashion that may cause confidence in Treasuries to be lost.  This means that the trash-taking games of Treasury and The Fed must be halted now.  We may be too late to prevent this and the market has issued a clear and loud warning of the potential consequences over the last month.  Should the dislocation that I have warned about over the previous year occur government's funding model would be effectively cut off, forcing an immediate termination of Social Security, Medicare, and half or more of all military spending.  This in turn would cause a spiraling collapse of tax receipts which in turn would squeeze government finances even further.  Government must have contingency plans in place for what it will do if 75% of its financing capability simply disappears.  It both can and may happen.
• Government must be prepared to provide the basic necessities of life for at least five to ten million Americans and possibly as many as fifty million - one in six.  As I have noted before this means barracks-style places to sleep, food, clothing and basic medical care.  Hungry, homeless and unemployed people are dangerous.
• Government must deal with the illegal alien issue.  We simply cannot have tens of millions of illegal aliens consuming public resources at a time like this in our nation - period.  Americans will pick strawberries if they're unemployed; that we have illegal immigrants doing this sort of work with 5 million Americans out of work is an outrage.  Again, if government does not act there is a high probability that the American people will, with disastrous consequences.

Finally, for those who think that SPX 200 and DOW 2,000 is a "pipe dream" let me point out that the DOW was at 2000 in as we turned into 1988 and the SPX was at 250.  Pipe dream?  Not at all.  When did the insane credit creation antics begin?  Shortly after the 1987 crash, that's when.  Here's a long-term chart - you tell me what "mean reversion" takes us back to.

Oh, and yet another basic technical analysis principle is that an "M" formation (otherwise known as a "double top") usually retraces the at least the entire run that produced the left-side of the "M".  We can argue over whether that's 200 or 450 - either is really, really bad.

President Obama must decide - he either stands for this nation, the Constitution (as he pledged when he took the oath of office) and its citizens or he stands for the fraud, abuse, and raw theft that has been perpetrated against us all.

The markets have sent a clear signal over the last month - attempting to "borrow and spend" to prop up failed institutions and shield them from the consequences of their bad decisions, when those bad decisions exceed in aggregate the federal budget, cannot be done.  If Treasury attempts to issue the amount of supply necessary to fund this it is virtually certain to cause a major meltdown in both the stock and bond markets, and this may be right around the corner as the quarterly refunding is upon us.

There is no middle ground and President Obama must choose.

Our new President was elected to office by the people who were tired of Washington DC influence peddling, pervasive fraud and theft and the economic damage it has wrought on this land.  President Obama now has two high-level appointees he has continued to support after they were revealed to have "ethics issues" (at best.)  If President Obama does not choose here and now to stand with American citizens and against the fraud and corruption of the previous twenty years he will at best be a one-term President and at worst there won't be an economy or nation worth being President of within the next year or two.  The situation really is this grim and neither the markets or the people are going to sit still for any more of "business as usual."  Words will not cut it - it is only deeds that count now.

This is not the time for "bipartisanship" or any such thing.  It is time for President Obama to demonstrate that he is the leader the people elected and to stand up for the common man - not through "paying back" organized labor with things like "card check" and ordering the removal of disclosure statements of union worker rights related to the ability to "opt out" of political activity, but rather by standing with the common man against the pervasive fraud, abuse, theft and lies that have been perpetrated by Wall Street, K Street and Washington DC in general over the previous twenty years.

The road ahead is a rough one.  Our nation faces an unprecedented economic mess of which we have only seen the beginning, but that mess is of our own making.  We have "enjoyed" false prosperity for more than a decade fueled by intentionally-overinflated asset prices that represented not real wealth but rather a chimera grown from ridiculous and outrageously fraudulent actions by many throughout our credit, banking and regulatory systems.

The blame for this cannot be laid at the feet of either political party to the exclusion of the other.  Both sides of the aisle are to blame, as both have held the reins of power during this period of time.  There are dozens of Senators and Representatives who have dirty hands, including many who personally profited from "special deals" doled out by some of these firms, in many cases to the tune of tens of thousands of dollars.  Reported frauds have been intentionally ignored and both lawmakers and regulators have not only looked the other way but in many cases have been actively complicit.

Our nation truly stands on the precipice of history.  We cannot borrow and spend our way out of this mess, we cannot pass $800 billion dollar "stimulus bills" that do not actually stimulate the economy and we cannot rob Peter to pay Paul.  Asset prices must contract to reasonable, supportable values, and they will - whether we like it or not.  Those who are overlevered and in debt up to their eyeballs will and must default, and have that debt cleared.  Transparency must not be a word, it must be a deed throughout our financial system and markets. 

On Money Markets:

“The people who brought down Lehman and almost Bear Stearns weren’t the banks, they were the money funds,” Staley said. “You have this huge industry with $4 trillion of capital, immediate intraday liquidity to the client who wants it with no capital behind that statement and no insurance behind that statement.”

Then stop selling the damn things to investors as safe alternatives to demand accounts (checking accounts) at banks!

The problem isn't with the lack of insurance.  It is that the industry sells these damn things like they are 100% safe and secure (yes, I know, there are disclaimers in the prospectus, but that's not how they're SOLD), when in fact unless they are exclusively in short-term government debt they are not.

This is just another lie by the investment industry that has resulted in exposure to investors - a lie that the industry refuses to take responsibility for and now is demanding that the taxpayer bail them out of.

What we need to do is hold investment salesfolk to strict accountability for their claims and marketing materials and actions.

Generally-speaking a lot of marketing is exempt from being "completely honest" as to risks and reward potential under the general rule of "puffery" - in other words, the law presumes that since you're trying to sell something, you will present it in the most-favorable light possible so long as you do not cross the line into overt misrepresentation.

This must change for all investment products so that each and every statement made in such marketing and sales communications is instead held to a rule of strict scrutiny - if it is not 100% true and balanced in the presentation of both risks and potential rewards then it is deemed deceptive and exposes the marketer or seller to liability for any losses incurred.

Investors simply should not have to read 2-point fine print in advertising and 100+ page prospectuses to discover that there is no insurance, no backstop, and that you can lose money in these funds.

So you recently saw my short-term and intermediate-term targets and the rationale for them.

Today you're going to see my warning - to The Administration, to anyone who will listen, which, it appears, is nobody.

If nobody "in power" wants to hear it at least the people deserve to be warned so you know what can happen if poor decisions are made.

You're getting this on a "one night" delay; it was a major feature of my nightly video last evening on the forum..... but better late than never, and I decided, given the early-morning action in the futures, that this had to be put where everyone can see it.

Before I present this chart, I want to make clear that this is NOT a prediction.  It is, however, a caution.  It is a place we can go, but not one where we must go.

This, should Obama or others in Congress and The Administration try to play "too cute by half" and jack around the markets, the public, and the world, is what is going to happen:

That structure is known as a "pennant" or "symmetrical triangle."

The rules of technical analysis for this pattern are:

• Pennants are continuation patterns - that is, whatever direction the market is moving when it comes in, it will move when it comes out.
• The minimum target for the move is given by the length of the pole to which the pennant is attached.

In this case the pennant prognosticates a move downward of six hundred S&P 500 points from the break, which occurs at approximately 810.

That gives us a target on the S&P 500 of 210.

No, that's not a misprint. 

I said two hundred and ten, and I meant two hundred and ten.

This puts the DOW at TWO THOUSAND.

Mr. President, Congress, and the rest of the fools in Washington DC, including TurboTax Timmie: You only get one shot at this and you better stop writing checks with your mouth that you cannot cash. This goes DOUBLE for Ben Bernanke.

Bernanke wrote one such check the other day in which he threatened to "monetize" the long end of the bond curve in the Fed Announcement.  In response while the stock market was down big, the bond market called his bluff by ramping long-end yields and the Treasury auction this afternoon saw tepid demand at best.  The TNX, or 10 year yield, was up nearly sixteen basis points or six percent, an outrageously large move upward on a day when the market itself was down huge (it should have gone the other way!)

The above pattern can break "wrong way."  It does so over about 920 on the S&P 500.  That, in fact, was what (until today) I thought was the highest-probability scenario - we would blow this pattern up, rally for a while - then we would start the next significant move downward.

I no longer believe that to be the highest-probability scenario for the following reasons:

1. Bernanke bluffed and the bond market called it.  He cannot monetize several trillion in new issue plus the entirety of the 10 and 30 year bonds out there to stop a bond market sell-off.  In addition, the market no longer believes him, as evidenced by today's price action.  A serious bond-market sell-off will ramp the cost of all credit, including mortgages and commercial loans.  If he tries to monetize the result will be current bondholders tendering into his buying, forcing him to essentially "consume" the entire float.  That stunt will cause the dollar to implode and we wind up exactly like Iceland.  Overnight.  Ben knows this; ergo, he is screaming like a petulant child while the market laughs at him just like the market forced Paulson to do what he said he wouldn't with Fannie and Freddie.  Bernanke had better shut the hell up before he precipitates a bond market dislocation; traders can and will try to force him to make good on the threat.
2. This caution goes double for Congress which seems to think it can blow money like crazy.  Never mind Schumer talking about a $4 trillion tab for the "bad bank."  We don't have $4 trillion and we can't raise it.  That's simply off the table due to inability and thinly-veiled threats to attempt such a foolish action risk causing the very market crash that everyone says they don't want.
3. Yesterday Steve Liesman from CNBC "reported" that the Administration had a "bad bank" plan that was momentarily going to be rolled out.  Tonight we learn that just as with the original "Super-SIV" from 2007 (which was essentially the same thing), the un-resolvable problem is that the banks will not sell for the mark-to-market price (or anything near it).  The unspoken reason is if they were to take the market price they'd be rendered instantaneously bankrupt.  (This, by the way, is an admission that they are intentionally mis-marking these "assets" on their book now, or they'd have already been seized!)  The government will not buy at "par" or anything near it because to do so will cause the taxpayer to suffer a trillion dollar loss; Goldman (and Schumer) both said this is a potential $4 trillion problem.  Ergo, its a Mexican Standoff and there is no solution.  This means that nationalization is still on the table. It also means that we're back to the days of AMBAC and MBIA - whenever the market was selling off hard on their "rumored" bankruptcy, Charlie Gasparino was trotted out by CNBC to claim that some sort of deal was imminent - and the market would instantly rally.  These rumors all were false, by the way, and nobody took responsibility for that, nor will they this time.
4. The "dirty secret" behind a lot of these "assets" is that they are literal zeros.  A lot of the debt issued in the last few years was in fact fully synthetic - that is, it was not backed by an actual mortgage or other actual debt instrument - it was created out of swaps and other derivatives that "acted like" the real thing.  The problem with this sort of model is that it relies on the ability of the counterparty who wrote the swap to pay - if they can't pay then what you have is a worthless piece of paper since you can't even foreclose on the underlying property and seize the collateral!  With no meaningful margin supervision a lot of these so-called "counterparties" in fact can't pay.  This means these "synthetic" instruments are in fact worth nothing.
5. The pattern of our government since August of 2007 is to "dare" the market by making outlandish and unsupportable claims (such as Paulson's famous "Bazooka" threat) and effectively stare it down.  The market calls all such bluffs with an "all-in" raise.  It always has, and it always will.  This is simply a function of how markets work; that we have people in positions of regulatory oversight over the Capital Markets that don't understand this fact given the hundreds of years of history on the matter is a mark of incredible arrogance.  I had hoped that Obama would reverse this insane course of action and stop "bluffing"; the last two days have made clear that no such "change" came to power in Washington on January 20th.

We desperately need a real solution to this banking issue.  In my opinion there simply is no "market friendly" answer.  There are only solutions that respect the market, and then there are those that attempt to transfer the bad debt - of which there is a lot, to the taxpayer.

The latter cannot be done.  Schumer (and Goldman) have it about right in terms of the capital required to pull that off, and the impossibility of funding such an exercise.

Therefore, the only rational answer to this mess is to:

1. Defang the CDS monster.  This must be done now.  CDS provide a limited-risk and near-unlimited reward for shorting a firm's credit; this is exactly backwards from the equity markets where shorting is limited-reward but unlimited risk.  Short-selling is essential to a balanced market but allowing CDS to be abused to invert the long/short risk profile is outrageous and must be stopped. The proper approach to doing this is to:
   1. Force capital adequacy to be proved for all outstanding contracts.  If you can't prove the ability to cover the contract, it is declared void.
   2. Bar the writing of new CDS on any TARP recipient.  The government has said it will not allow these firms to fail.  The bets have been made; existing ones that can be covered by the writer are ok, but no new positions can be opened until the government's interest is extinguished in that name.
   3. Require that all new CDS be written against a public exchange and direct the ISDA to produce, immediately and nightly until that has taken place, bid/ask/OI on an accessible public interface.
   4. Consider barring all CDS that are written "naked" - that is, not against a deliverable bond.  There are already-existing means to short a firm you believe is in trouble in the equity, options and futures markets.  The inversion of the risk:reward profile in the CDS market is a big part of the problem and we must consider putting a stop to it.
   5. Do this all right here, right now.  Give market participants a very short term (two weeks, maybe four) to get their act together or face having their contracts rendered noncollectable.
2. Send in the bank auditors and examiners, suspending all bank share trading for two weeks.  Mark everything to the market.  Anyone who is insolvent under Tier Capital rules gets crammed down ala-The Genesis Plan. All firms that are crammed down have their boards and management removed; the new equity holders (former bondholders) get to elect new management to run the firms they own without prejudice (if they want the old management back, they're welcome to have 'em, but there is no ability to manipulate the vote by entrenched management!)  All firms then re-open for trading at the same time - but existing shareholders (including preferreds) of the "crammed down" are wiped out.
3. For those firms that cannot survive even when crammed down they are instead seized by the FDIC and RTC'd.  This works exactly as it did in the RTC days; the FDIC gets the assets in exchange for guaranteeing deposits, and disposes of them in its self-funded "bad bank."  That is a "bad bank" model that can and will work and has no "asset valuation" issues.
4. Be prepared to use the second half of the TARP funds to either internally capitalize new banks which will then be spun off to the public or add capitalization to existing good banks.  The cramdown and receivership of the bad banks will undoubtedly lead to lots of guaranteed deposits and good assets needing a home.  There are hundreds of perfectly solid existing banks that should be permitted to grow their asset and deposit base by feasting on the carrion of the deposed. 
5. Start investigating the fraud, and be vigorous about it.  The public is not going to sit for their 401ks being destroyed as they have already (and will be as this plays out) without blood.  There are lots of bad actors out there, starting with the officers and boards of failed institutions.  These were not just "bad bets" that caused our banking system and economic problems - I'm willing to wager that it can be proven that they were knowingly-unsound bets and the mismarking of "asset values" was not accidental either.  Down this road should lie plenty of securities fraud charges and maybe more than a bit of Racketeering.  Go for disgorgement of the ill-gotten gains to at least provide the people with something to refill the treasury and assuage the anger, along with prison sentences.

There is no "market-friendly" solution to this mess folks.  There are, however, disastrous decisions that can be taken, and continuing to hide losses - and the truth - will lead directly to that disaster.

We must deal with the bad debt by forcing it into the open.  Transferring it from one pocket to another fixes nothing and if we're not careful we will wind up precipitating a bond market collapse coincident with the stock market melting down to a degree that is several times worse than what we saw in September and October.

Unless President Obama wants to be known as our second Herbert Hoover, he must not allow the game-playing to continue any longer.

Neither you or I want to see the S&P 500 collapse down into the 200s with 75% of the listed firms in this country going under.  Nor do we want to see 20 or even 30% unemployment.  I'm sure you're not interested in seeing not a 30 or 40% loss in your 401k as you had last year, but an 80% loss.  And I'm very, very certain that having the government - both state and federal - unable to raise operating funds and being forced to cut off social services and entitlements is not on your "desirable" outcome list.  Yet all of this can and will happen if the bond market dislocates and starts a cascade. The price action in the market over the last couple of weeks is a strong warning that "borrow and spend" will not work and the market is getting rather upset with papering over ever-expanding losses.

It would be nice if President Obama had several weeks or even months to coordinate a strategy. Unfortunately the market doesn't work this way, and it appears that he is being forced to either crap or get off the pot essentially now, lest the market decide for him.

From SeattlePI:

"The FBI was aware for years of "pervasive and growing" fraud in the mortgage industry that eventually contributed to America's financial meltdown, but did not take definitive action to stop it.

"It is clear that we had good intelligence on the mortgage-fraud schemes, the corrupt attorneys, the corrupt appraisers, the insider schemes," said a recently retired, high FBI official. Another retired top FBI official confirmed that such intelligence went back to 2002.

The problem, according to the two FBI retirees and several other current and former bureau colleagues, is that the bureau was stretched so thin that no one noticed when those lenders began packaging bad mortgages into bad securities."

Ok, so now that the FBI both has admitted that it knew (and knows) and now knows that these fraudulent mortgages were packaged into securities and sold off as early as 2002, where are the indictments of the bankers, brokers and others involved?

And Falvey said that financial executives who deliberately chose not to learn the facts about dicey mortgage-lending practices in their companies -- who chose to be "willfully blind" to such practices and the subsequent securitization of those mortgages -- could be vulnerable to prosecution for securities fraud.

Both retired FBI officials asserted that the Bush administration was thoroughly briefed on the mortgage fraud crisis and its potential to cascade out of control with devastating financial consequences, but made the decision not to give back to the FBI the agents it needed to address the problem. After the terrorist attacks of 2001, about 2,400 agents were reassigned to counterterrorism duties.

I'll believe it when I see it.

Where's my "Change", Mr. President?

The only "change" I see is that this is all my daughter will be left with in her future when your coverups and bailouts are done, starting with your appointment of a tax cheat to head the US Treasury who it is clear also either knew or should have known of the fraud in the mortgage industry - but did nothing - as head of the NY Fed.

These bankers, brokers and everyone else involved has now been effectively indicted in the media by the FBI. 

Americans are tired of this crap Mr. President, and you were elected to put a stop to it and lock up the fraudsters. 

Yes, even those who were and are big contributors to political campaigns.