Entries by Karl Denninger

Ben Stein needs to be locked up - or BBQd and eaten - for penning this article:

In this situation, the governments that care about their citizens should and must have extremely expansive policies. That would include running very large deficits — which we are doing, not even mentioning tax hikes until the situation is stabilized, and possibly cutting taxes as a temporary measure. Public works projects, tax rebates, even to people who paid no taxes, extensions of unemployment insurance payments — all of these are necessary. Bailing out the big auto companies, offering loan guarantees to encourage banks to lend, making sure lending facilities are in place for credit card issuers - all of these should be done and immediately.

"Mr" Stein is an ass - and that's being polite.

This sort of "beggar thy neighbor" concept - that is, mass and intentional devaluation of one's currency (what else do you think happens if you "reflate" by throwing money around?) is precisely how we wind up with a hyperinflationary depression, which is far worse than a deflationary one.

Deflationary depressions are nasty business, but they are created by governments who attempt to stimulate economies beyond the point of reasonable credit and business growth, thereby guaranteeing a deflationary bust. 

Mr. Stein was NOT, if I recall correctly, one of the people who sounded the warning back in 2000-03 about the excesses in credit growth nor did he advocate stopping that stupidity - going all the way back to the 1980s!  In short, where was his objection to creating the mess in the first place?

Missing, that's where. In fact I distinctly remember Mr. Stein being unabashedly bullish back in January of 2008.  Indeed, here's what he said January 4th of this year:

This isn't a development to strike terror into your hearts -- if you're a long-term investor, it signals a time to buy. (As I've said many times, if you're a short-term investor you can just skip my column.) The history of stock market investing is unequivocal on this point: When the market is low, when the economy is in a recession, it is -- in the long run -- by far the best time to buy.

Such a wonderful record you have there Mr. Stein!  Why, you'd only have lost what - 40% of your money listening to this buttclown (the SPX was at 1440, more or less, on the date that column was published, down ~125 pts from its top! That was a time to buy?!)

Hyperinflationary depressions are worse than deflationary ones, because a hyperinflationary depression almost always results in political failure.  For examples you can look at Weimar Germany or Argentina, both of which resulted in the destruction of what were democratic political systems, right up until the government decided to take Mr. Stein's general approach.

Let's look at some more from Stein's most-recent piece of stupidity:

I desperately hope I am wrong and I may well be, but the government has to put in a bottom here. Otherwise, the bottom is very hard to see. Again, I hope very much I am being too pessimistic.

Government created this mess by removing leverage limits and blocking state enforcement of predatory lending laws.  In 2004, specifically, our present Treasury Secretary lobbied as CEO of Goldman Sachs for the removal of one of the last safeties on the nuclear credit weapons, obtained his requested change, and in doing so set the timer on the bombs.  Where is Mr. Stein's call for the people responsible for this to be recognized, outed and punished?

NOWHERE, that's where. In fact if you read Mr. Stein's writings archived over on Yahoo Finance you will find unabashedly bullish BS all the way down the pipe, until he finally got hit over the head with a Clue-By-Four.

How long did it take Ben?  Was it when YOUR retirement accounts got clobbered for 40% of their value that you finally woke the hell up?

And how does one avoid taking the pain that results from setting off a firecracker in your hand once you've lit it and it explodes?

Let's continue:

If workers can only rely on dividend and interest income and not on long-term capital gains of 8% or 9% per annum, pre-retirees have to save enormously more than they had anticipated to adequately fund their retirement. This is serious business.

No kidding!  You mean that spending more than you make and betting on silly credit expansion - that is, granting loans to people when you have no reasonable expectation of ability to pay, isn't a valid and appropriate strategy?

Gee, who'd have thought that you should actually save 10-20% of your income toward retirement instead of spending it (plus even more money you don't have!) on IPods, cruises and Hummers?

Finally, he says that because we can't expect people to behave prudently, he calls for:

This makes reflation even more desperately needed. I hope Mr. Bush will wake up, stop listening to Dr. Evil, his Treasury Secretary, Henry Paulson, and work with President-Elect Obama to get a large, serious stimulation package into the economic bloodstream pronto.

This is getting ugly.

The ugly part is listening to you Mr. Stein.

Advocating the impossible is puerile and idiotic, and that you managed to find an audience in Congress to spew this crap today in the context of the automaker bailout hearings is even more stupid.

If you're dumb enough to listen to someone who has this sort of public, easily-accessed record of accuracy you are better off with paying a weatherman to guide your investment and economic strategy.   The weatherman, after all, is right about whether it will rain at least half the time!

There is apparently some "backlash" to my idea of boycotting the automakers if they get bailed out, with people wondering where my anger was at Wall Street.  Gee, have 'ya read any of what I've written for the last year and a half folks?  The tens of thousands of dollars I've spent trying to stop this crap?  I've advocated what amounts to a personal credit boycott the entire time, have advocated that people look into whether it makes sense to walk away from their underwater homes, and have advocated other actions that amount to personal acts of retrenchment that will punish those who did unsound (and I'd argue evil) things in the context of Wall Street securitization and the credit bubble. 

Funny how people want an exemption when the anger against bailouts extends to them, eh? 

This, by the way, is one of the reasons that the idiocy of Wall Street (and Main Street) requires leadership from Washington to stop, and if its not forthcoming we will see the destruction of our economy.

EVERYONE is against bailouts - until its their pet industry, firm, or region that is going to be bailed out. 

Then the bleating and even threats begin.

Congress needs to let the adults into the room and banish the mouth-breathers who have consistently been wrong since the beginning of this mess, acting as an adult to remove the punch bowl and force the detox process that will purge excessive credit creation from the system.

You want to know why the market keeps going down?  Why various support levels keep falling, and the stock market, while it has sharp rallies from time to time, remains in a confirmed downtrend?  Why your 401k keeps shrinking?

It is happening because government keeps changing the rules and there is still no transparency nor is there any reasonable belief there will be any going forward, and the bleating continues to produce "free money" - which the market fully-understands is in fact not free.

As a consequence there is no way for anyone to value companies and industries on a clean, transparent basis.  Neither I or anyone else can determine if a given company, whether it be a bank or industrial concern, is fairly priced, overpriced, or underpriced in the stock market.

When I cannot determine the value of a company the only price at which I am willing to buy (as a stockholder) is for pennies, spreading my bets around with "stink bids" while being willing to be wrong at least half the time - because all I'm doing is guessing. 

There is no floor on valuations and thus prices because there is no way to derive an honest understanding of underlying value!

I have said this all along - so long as the government continues to meddle in this fashion the market is going to continue to fall, because literally every sector of the market is potentially subject to the same sort of crap!  So as each sector comes under suspicion it is taken out and sold and the market goes down further.

The private sources of money that, for example, came in to do a deal with Goldman or Citibank got screwed by the government and they will not be coming back.

The stupidity of our government agencies in this regard has destroyed the analytical foundation in our equity markets and investors have sold out as a consequence of their inability to derive fair metrics for any firm in the United States, along with the intentional destruction of private equity investments.  Examples?  Dick Bove's "generational buy" call in the financials.  Look at the XLF since then - you've lost more than HALF YOUR MONEY listening to him; in May the XLF, the financial sector ETF, was over $25, today it broke $11! 

I said at the time his call was idiotic as there was no possible way for him to derive an honest valuation and thus there was absolutely no possible way for anyone to know what a fair market price was for these firms. 

Read what I said at the time in full; or the condensed version:

"The Truth: The "powers that be" (including the media, The Fed and The Banks) are absolutely beside themselves with the possibility that stocks, especially bank stocks, might decline in value. For "why" see the top of this blog entry. If you fall for this you will be wiped out. DICK BOVE PUT A MARKET PERFORM RATING ON BEAR STEARNS STOCK ON MARCH 11th - JUST THREE DAYS BEFORE IT BLEW UP AND (THE FOLLOWING MONDAY) WENT TO $2! You have NOT and you WILL NOT see CNBC or DICK BOVE take responsibility for the wipe out of SEVERAL BILLION DOLLARS IN SHAREHOLDER WEALTH - when he could have preserved YOUR MONEY if he had told you the truth about our financial institutions and that YOU SHOULD SELL ALL OF THEM AS THERE ARE AND WILL BE MORE EXPLOSIONS, ALTHOUGH NEITHER HE OR I HAVE NO WAY TO KNOW WHICH ONES AND NEITHER DO ANY OF THE ANALYSTS SINCE WE CAN'T SEE HONEST BALANCE SHEETS!"

Who was right, six months later, judged objectively?

At the same time the machinations of the Treasury and Federal Reserve have destroyed liquidity in the credit markets and introduced insane distortions where investors have "front run" expected bailouts and handouts, then fled instantly when it becomes apparent that their bet wasn't going to work out.  This has produced repeated dislocations in the credit markets with the latest being the asset-backed credit market (ABX and CMBX) when Treasury suddenly repudiated the stated purpose of the EESA/TARP. 

These dislocations are not "natural outcomes" - they are the direct and proximate product of government interference with what should have been forced into the open and resolved last fall.

Recessions are the natural product of business "exuberance", but Depressions are caused by government interference with the normal and necessary recessionary adjustment process.

Thanks Washington; I now expect and am preparing for a Depression, and it is specifically due to your actions that it is going to come to pass. 

It is Washington's willful refusal to force full and complete transparency in the Capital Markets, instead extending ever-more TARPs and other means of obfuscation, including "23A" letters, "bank secrecy" among and in The Fed, along with intentional distortions in the credit markets that have "crowded out" private capital and caused it to flee that now threaten this nation and indeed the world with an Economic Depression.

We're not alone, of course.  Our idiocy is shared with the rest of the world, who if anything have done even more stupid things than us!  The leverage in European banks is, believe it or not, actually higher than ours, and they are more opaque! 

But that other people are drinking gasoline does not give you license to take a nip off a bottle of antifreeze under the argument that its "less harmful" to drink the glycol in comparative terms, when both will kill you very dead!

The Treasury, ABX and CMBX market today all continue to have their "pointers" aimed straight at economic depression, literally worsening by the hour.  There is every reason to believe we are on the precipice of a deflationary credit collapse that will make the 1930-32 bond market dislocation look like a cakewalk.

Washington must stop and in fact reverse this idiocy here and now before our economy lawn-darts into the ground at 600mph.

One chart should tell you everything you need to know:

That's "AAA" credit folks, spread over reference (swaps).  250 bips in days, or a move of fifty percent?

The TNX, on the other hand, looks like this:

That's a very pretty triangle, it broke today, and should the TNX continue southward (as is indicated by basic technical analysis) it is forecasting a deflationary Depression.

If you think the stock market is bottoming then you must have some sort of belief that the credit markets are improving.

I'm sure you can explain, then, why the IRX (13 week T-Bill) is yielding a whole 1/11th of a percent (annually!)

To those bottom-callers:

Pull the other one.

These three charts tell you everything you need to know.  Commercial Real Estate is a train wreck and about to go supercritical while the credit markets are so sure there will be zero inflation over the next 13 weeks that people are willing to accept essentially zero to park money in 13 week T-Bills and less than 4% to park it in 10 year bonds.

The TARP/EESA has done nothing to stabilize anything.  It has provided a drink to a drunk, but the drunk is now once again going through DTs.  CONgress was again lied to today, and the proof is in the charts above - there is no way you can make the argument that "the credit markets have been saved" with that data. 

The market does not lie but people testifying before Congress sure as hell do and the committee today was either too stupid to call the "witlesses" on it or is complicit in the scam!

The data says that we are headed straight for a Deflationary Depression. 

Ben Bernanke is out of bullets in his rate-cut gun, having cut the rate to 1% but in fact Fed Funds has been trading at one quarter to one third of a percent since the day that cut was made. 

He may as well just cut to zero and get it over with, because the effective rate is zero, as you can see above in the IRX.

His gun is empty; the opportunity to stop this crap that existed back last fall when I was screaming for transparency and forced marks NOW has been squandered.

Yes, doing that would have forced "blood in the streets", it would have forced many bankruptcies, and it would have cut off the credit machine and forced it to retrench and purge itself.

That's what has to and will happen, and since we have decided not to do it the honest way by allowing the liars to pull a TARP over themselves and their rotten "assets" (in fact debt that cannot be prevented from defaulting) we now get to do it the hard, painful, nasty way as our nation is dragged into the gutter.

We'll be lucky if its only as bad as Japan had it when they tried the same thing (we learned nothing from them) or when we did in the 1930s (gee, we didn't learn anything from that either, did we, when we removed all the safeties on the nuclear credit devices with Gramm-Leach-Bliley?)

In fact, we still won't talk about what really happened, or what we did wrong.  We still have the architects of this mess advising our President-Elect (one of the other clownfaces was advising McCain until he made a comment about a "mental recession"!) and through the halls of both Congress and the Executive we have yet to hear a "mea culpa" for removing leverage limits, allowing affiliated broker/dealer transactions via commercial banks, off-balance sheet funding or "mark to fantasy."

Air America is pointed nose down at 60 degrees in a full-power dive and we're dangerously close to structural failure of the wings. 

If our trajectory is not altered now our nation is going to play economic lawn dart at 600mph - possibly within weeks, likely within months.

We have squandered more than $2 trillion that has been blown via commitment or direct expense down the rathole of coverups, handouts and bailouts, and we will need that money in the next couple of years to feed, clothe and shelter our people. 

Thanks to Bernanke, Paulson and Congress its gone.

Barack Obama made the statement that "deficits are not important" on 60 Minutes Sunday.

He is going to get a rude surprise; the President of the United States is subservient to the bond market - specifically, he is subservient to the willingness of foreigners to finance our deficit spending.  Embroiled in their own mess this capacity is quickly eroding, and over the last ten years our Treasury has put itself in the unenviable position of shortening the maturity of its outstanding debt (to get lower interest rates) which raises the potential of a rollover funding "emergency".

I have said it before and I'll say it again - President Obama is going to find himself on the wrong end of reality, and be forced into austerity measures that neither he or Americans are going to like one little bit.  I wouldn't want his job when he is forced to go on Prime Time TV to tell America that we simply can't finance our profligate spending any more and that serious, real, across-the-board cuts are going to have to be made to our federal budget, entitlements and "promises" - that we simply cannot keep those promises. 

Historically there is only one other way out of the trap we are now in. 

Start a war. 

A really big one - big enough to kill a couple million Americans (reducing competition for jobs) and destroy a trillion or more dollars in American "stuff" (that will have to be replaced.)

That option would truly suck.

Oh, and if you think that the FDIC presentation today on CSPAN is a model for "preventing foreclosures", you might not want to read this:

"Industry evidence indicates that in a majority of instances loan modifications simply delay the timeline from default to foreclosure but don't prevent them from taking place," Nathaniel Otis and William Clark, analysts at KBW, wrote in a note to investors on Tuesday.

For the industry in general, after mortgages are modified roughly 25% go delinquent again after just one post-modification payment and more than half end up delinquent after several post-modification payments, Lender Processing Services told the analysts.

So much for "putting a floor under home prices", "keeping people in their homes" and "an effective program to prevent foreclosures."

I know, I know, telling the truth is difficult in front of Congress, as we've seen, and Congress is too spineless to issue a contempt citation (or ten.)  They sure don't want truth-tellers on their panels, or they'd have invited people like Mish and myself to come testify!

As for GM, Ford and Chrysler: All I heard tonight was "blah-blah-blah give me money."

To GM, Ford and Chrysler: GO TO HELL.

Further, if CONgress passes this crap you will immediately hear a call here on The Market Ticker to permanently BOYCOTT the American automakers, and I've already got a bumper sticker order ready to go.  It'll be "send me a SASE, I'll stuff 'em with stickers."  Stickerguy, here I come again!

If Congress won't do the right thing and force these turkeys through Chapter 11 where they can shed 75% of their dealerships and their labor agreements, including the "Jobs Bank" (paying people who are furloughed is asinine) I say we kill 'em the old-fashioned way - stop buying their crap.