Fried Friday

Well, well, well.

Yesterday the SEC says that banks will have to disclose that which they'd rather not tell us (what they have and how they priced it) in the United States.

Now, its the Japanese!

"Japan's Financial Services Agency has called on major banks to disclose details of assets and losses related to subprime mortgages before they announce full-year earnings, Nikkei English News reported, without saying where it got the information."

Oh so now Japan gets it? Gee, how long did it take? 20 years?

I do have to give the Japanese credit - they listened to Einstein. You see, they tried "hide the truth" 20 years ago, and it resulted in a "lost decade" in their economy. The Nikkei has never seen the levels it once traded at, their economy has been moribund for over a decade and their currency became the funding source for a vast arbitrage play instead of a medium of exchange.

All of this adds up to raw mockery of a nation that just a few years prior was the pride of Asia.

Of course Bernanke is hellbent and determined to try a re-run of the Japanese experiment, as he has demonstrated exactly zero propensity to force banks to tell the truth, and neither has Congress. That Chris Cox and the SEC have stepped up and decided to make a run at the truth is to be lauded, but don't rest on your laurels America - there are still 535 clowns in Washington DC collecting campaign contributions and one Fed Chairman who are pushing as hard as possible in the opposite direction.

The "alphabet soup" of various funding facilities that require zero disclosure of who's tapping those "sources" along with what they're putting up and how its being valued is all the evidence you need. If we lived in a nation where honest accounting and truth was paramount every security put forward to The Fed for credit would be identified by CUSIP, its source and composition published, its valuation by The Fed made public and the organization tendering it named. Thus we would see what The Fed thinks of it on a 28-day basis in terms of "value", which would be a tremendous improvement in disclosure.

I fully expect both our politicians and The Fed to continue to "hide the sausage" right into a re-run of the 1930s, with the truth being forced out into the bright light of the sun only when these institutions fail outright.

Oil is basically $125 now, and yet people keep insisting that the markets won't care - and it won't impact consumer spending. Pull the other one. The recent increase in fuel prices will take at least 1 and probably closer to 2% off consumer spending on discretionary items, which is a huge haircut no matter how you slice it. If oil keeps going - and until and unless we suffer a fairly-severe recession it will - the bite will continue to get worse and worse.

This is part and parcel of our insistence on "not in my back yard" with regards to oil discovery. Yes, I know, its all Cheney's fault.

Uh, no, its our fault. We think we can avoid the nasty, smelly business of oil exploration and refining, but we want to drive our SUVs, boats, and RVs. We want the ability to keep our homes at 75F in the winter and summer months, without regard to the fact that we expend 20-30% more energy doing so than if we kept the house at 68F in the winter and 80F in the summer.

All this is fine in isolation, but see, we didn't do that either. We exported our production (to "save money") to China and India, and they, of course, saw all of those nice DVD players and wanted one. Oh, and a car - instead of a mule, bicycle, or pair of feet.

This of course has driven up their energy consumption but heh, we still won't go get our oil!

The basics of supply and demand say that the price will rise as demand does, and gee, guess what - it has. Now add to that speculative "hot money" and $200 billion in "excess liquidity" courtesy of our Federal Reserve, injected into the system in a vain attempt to drive down the trading rate of short-term commercial credit and prevent a recession, and you have just established a feedback loop that drives the price of energy higher - which of course threatens a deeper recession. The more you flood the system, the higher prices are driven, and the greater the amount of money removed from discretionary spending - that is, the greater the recessionary pressure.

Thanks Ben.

Citibank will identify up to $400 billion in assets it may sell off in an attempt to de-leverage its balance sheet. This is amazing stuff, if you think about it - yet another bank that's "ok" so it says, then out they come (once again) with major restructuring and balance-sheet shrinkage.

For how long will investors listen to these clowns when every one of them claims they're "just fine" in terms of their balance sheet and liquidity position, and then nearly the next day announce yet more job cuts, balance sheet shrinkage or yet another equity or debt offering? I simply cannot get my arms around why anyone would want to own these stocks, yet these guys, just like Fannie and Freddie, seem to have no problem finding suckers, er, "investors" to take on yet more of their debt. Amazing.

AIG reported a disaster for a quarter, losing double what was expected, or nearly $8 billion net, with losses in its portfolio of over $15 billion. They said:

""The severity of the unrealized valuation losses and decline in value of our investments were beyond our expectations," said AIG Chief Executive Martin Sullivan."

How about this Martin? Don't buy crap (or originate and retain it) and you won't end up eating it!

The house approved Barney Frank's latest display of abject stupidity, in which there is allegedly going to be FHA refinances offered to stop 500,000 foreclosures. Mr. Frank said in an interview:

"'We're in a recession and a major cause of that recession is the subprime crisis,' Frank, chairman of the House Financial Services Committee, said today on the House floor. 'We do not see any alternatives to this bill to try to work on that.'"

No Mr. Frank, we're in a recession because you and your friends, from Congress to The Federal Reserve, refused to accept the natural consequence of the tech bubble (which was a fairly nasty recession) and instead played games, causing a speculative hot-money bubble in residential housing.

You were warned it would happen, you removed the constraints on banks that would have tamped it down, you preempted state regulation that would have helped prevent the worst of the abuses and you intentionally ignored multiple communications, including a petition with 10,000 signatures on it, advising you of abuses in the appraisal and lending industries.

The cynic in me says that you and rest of the 535 have done this specifically because you've been bribed, er, you've had "campaign contributions" made via PACs controlled by these institutions. Bluntly, these policy positions have been purchased, and the voters are too stupid to recognize it and throw every one of the bums doing so out of office.

Now, having done all that for the last eight years, you wish to put a bandaid on a gushing femoral artery, when you provided the chainsaw that severed it in the first place!

Display the utter lack of intelligence on display in this bill (and by Mr. Frank generally) he said the following in a Bloomberg interview:

"'Some people make bad job choices -- we give them unemployment compensation,' Frank said today in a Bloomberg Television interview after the vote. 'We are in an interconnected economy.''"

That's a lie.

And since Mr. Frank must be aware of how unemployment insurance works, I must assume this is not stupidity, it is an intentional falsehood.

See, I have run a company. The government doesn't "give" anyone unemployment. Employers pay an unemployment tax, which goes into a pool and forms the capital base against which unemployed people draw. Your tax is computed based in no small part on your history of laying people off or firing them without cause; the more you do that (up to a point) the more tax you pay. Thus, in a crude sort of way, if you tend to cause people who had jobs to lose them, you pay more tax. Perhaps a bad system, but at least there is some accountability.

Mr. Frank was also on Kudlow trying to defend his bill, an appearance I witnessed. At one point he was challenged on whether this would stop or slow price declines and he made a comment that "while I should lose 20 lbs, it would be bad to do so all at once."

I must take exception to this Mr. Frank. All we would have to do is open the top of your skull and extract the 20lbs of rocks that inhabit your cranium, inserting in their place the brain of an ordinary field mouse. You would lose 19.8lbs instantly and at the same time your IQ would go up by several points; I believe, objectively, that would have to be considered an improvement.

Now that's rather strong criticism, and probably deserves some justification, which I am more than happy to provide.

The key item here is that the FHA "reform" contained in this bill does not prohibit the sort of "down payment assistance" that non-profits have abused, it does not require 85% LTVs be maintained, it does not bar seconds and HELOCs (even instantly upon closing) that would immediately violate those standards and it leaves entirely at the FHA's discretion what loans to accept. At the same time it does not require the FHA to maintain an "at or below X%" default rate on its paper, which would force sound underwriting principles.

The FHA, for its part, has seem ramping default rates and losses, and as a consequence has demonstrated an inability to manage its own credit book.

As a "reward" for this lack of prudence Frank's bill allows them to lever up further!

This is simply another case of "we'll lose a little on every transaction but make it up with lots and lots of volume!" with the sucker in this case being the US Taxpayer.

Let's hope President Bush sticks to his threat to veto this bill.

Were I President I would exercise my veto power by using the bill as toilet paper and sending it back in "used" condition.

Next up in the stupidity mill is The Democrat's Windfall Profit Tax ideas on oil companies.

I know its popular to hate "Big Oil", but the facts are what they are, and the facts are that "Big Oil" isn't the problem.

We are.

Oil companies make from 8-10% profit margins. That's a fact, and one look at a 10K or 10Q proves this beyond all doubt.

Since 8-10% is in fact less than one can make with a passive investment strategy, one must wonder why you'd want to run an oil company at all? There's no particular entrepreneurial reason to do so, since the margins are not conducive to anything fabulous.

To put this margin in perspective, firms like Microsoft have margins in the 30-50% range. And before you say "but Microsoft doesn't produce anything that's a "hard good" I will simply note that Intel has a pretax operating margin in the 50% range, and they make physical devices.

Record source prices of course lead to record sales and that leads to record profits in dollar terms, but in margin terms this is a terrible business.

The reason oil is expensive is that both sides of the aisle have insisted on refusing to take our recessionary lumps from 2000 when they came due, and that pressure translated directly into monetary and fiscal policy. This resulted in a loss of relative value in the dollar, and since our oil comes from other nations, those nations have (quite reasonably) applied a discount to the present value of the dollar when pricing the product (oil) that we wish to buy, seeing no indication that we are going to return to sound fiscal and monetary policy at any time in the future.

At the same time we've spent the last 30 years refusing to develop any of our own petroleum resources, despite having very significant amounts of resource that can be recovered for our own consumption.

This, plus rising demand fueled by our stupidity in believing that we can have people sew jeans and assemble DVD players for 25 cents/day forever, and they will never demand better wages or working conditions, nor will they want a car, scooter or even a refrigerator in their house, has led to the circumstances we find ourselves in with energy prices.

This bill, which Bush will certainly veto (but Obama or Hillary will just as certainly sign) will bring back an old 1970s standby - gas lines. Why would you bother investing in more exploration when you can't drill anywhere, and if you manage to make more money the government will simply tax it away? The obvious outcome of such a bill will be lower production, not higher, and that will translate into shortages.

Count on it.

If you think the "stimulus checks" will spark a recovery in the economy, better read this first:

"The Bush administration's tax rebates won't prevent the U.S. economy from stagnating in the second quarter as soaring food and fuel bills hurt consumers, a Bloomberg News survey showed.

'Consumers have gone into the bunkers,' said Ken Goldstein, an economist at the Conference Board, the New York-based research group that tracks confidence. They 'fear that their budgets are getting squeezed tighter and tighter.'"

Note that while the conclusion of the article is correct it does not cite the real reason that they never work.

The fact is that such "rebates" are a circle jerk. The "money" to pay them did not come from production, it came from debt issue (we're running deficits) and the "spending" thus is not actual GDP expansion (productive output in excess of debt.)

As a consequence the net impact of such "stimulus checks" is always negative, because once the money is gone the debt overhang and service requirement remains, exactly like the HELOC and housing craze produced not sustainable GDP growth but rather debt overhang and a subsequent economic crash.

Isn't it time that we expected journalism to actually deliver news, and economists to recognize the basics of mathematics in their pronouncements?

Have you heard this from any of the mainstream media? CNBC? The Wall Street Journal? Bloomberg?

Why do we allow so-called "journalists" to continue to pronounce that 2 + 2 = 56?

We have become a nation where "put it off until tomorrow" is the name of the game - for more than 50 years. "Great Society" does not, did not, and cannot work. It is predicated on the idea that you will never have to pay the check on the table as you can always find a way to get someone to loan you the money so you can defer that until tomorrow - indefinitely.

This is just as fanciful as believing that people will sew our jeans for 25 cents/day forever, but never want a pair of those jeans for themselves.

Reality has a nasty way of intruding into our economic fantasy island game in both Washington and on Wall Street, and today we saw that in our trade deficit numbers. While some people cheered this, the internals told a story that is not being reported:

"Demand for goods from China suffered the biggest slump last month, helping to narrow the trade gap with that nation to $16.1 billion, the smallest in two years. At the same time, exports to China were the second-highest ever."

Pricing pressure (upward) as their standard of living rises at the same time our demand softens.

Oil, of course, will drive trade figures the wrong way, but the real story is softness in imports, which means softness in consumption, which means a falling GDP over time, as the consumer is 70% of our economy.

Unfortunately there is no "go vote for the right guy" trade you can put on, because all of the candidates and both political parties are divorced from reality.

As a consequence your choices are between dumb and dumber come November, which isn't exactly the "stuff" that a solid economy - and thus stock market - are made of.

SPX 1070 anyone?

In one hint of intelligent acts Homeland Security and ICE appear to be ready to actually start enforcing the law:

"Employers should be prepared in the coming months for immigration raids on scales never before staged by the federal government. The stakes for employers will be especially high if the courts give a green light to the mailing of Social Security no-match letters."

Ding ding ding. I've been advocating this for years.

There is absolutely no reason not to use this information to solve the problem. When I ran MCSNet we were required to report all new hires within a very short period of time, including the workers social security number. If the same number appears in two places at once in a fashion that simply could not be someone working two jobs (e.g. you're not employed in San Francisco and New York at once!) then send ICE out to both places and deport the guy who used the falsified credentials. If the SSN was never issued (its just plain false), do the same thing.

To those who claim that this is somehow "wrong", did you rail about the original purpose of this data matching? That was to find "deadbeat parents" and insure that they would be served withholding orders so their child support would get paid! Well, if that's ok, how come this isn't?

I hear all sorts of people bleating about how unfair it is to enforce immigration laws, but nary a peep was heard when this law was passed over a decade ago for its original purpose, nor has there been any attempt to block that usage up until now.

Hypocrisy knows no boundaries.