Well that was fun.

Tough work scalping futures today, but heh, work is rewarded with profits, right?

Ok, let's have a look at how we got where we are, and what's likely ahead for us.

Let's start short (today) and go long (backwards and forwards)

First, in the total bull**** department, we have this:

"In currency markets, the dollar headed for the biggest weekly loss since November 1988 against the Canadian dollar, falling 3 percent. The U.S. currency has lost 1.5 percent this week against the euro and set a record low today on speculation the Fed will cut rates further to spur growth.

'It makes our equities look cheaper to a foreign investor,' said Bartley Barnett, head of listed trading at Morgan Keegan Inc. in Memphis, Tennessee. 'A weak dollar spurs U.S. exports as well.' "

Well, that's true if you want to buy now. But if you bought before, its exactly the same thing as having your investment devalued.

This sort of horse**** is the same crap that was run after the tech bubble started to explode in 2000. Remember people saying you were getting a "great deal" when some stocks were "half off"? Was that a "great deal"?

Well, not if they subsequently went to $5!

Bottom line - the dollar is likely to devalue further.

In the bombshell department we had the Harman LBO deal apparently blow up (makers of Harmon-Kardon audio equipment):

"Harman International Industries, Incorporated (NYSE:HAR) announced that it was informed this afternoon that Kohlberg Kravis Roberts & Co. L.P. (KKR) and GS Capital Partners VI Fund, L.P. (GSCP) no longer intend to complete the previously announced acquisition of Harman by a company formed by investment funds affiliated with or sponsored by KKR and GSCP. KKR and GSCP have informed Harman that they believe that a material adverse change in Harman's business has occurred, that Harman has breached the merger agreement and that they are not obligated to complete the merger. Harman disagrees that a material adverse change has occurred or that it has breached the merger agreement."

Well that's one that goes up in smoke.

And can anyone really argue that there is no economic stress? Oh do come on! When Apple and Hovnavian play "fire sale" with everything from iPhones to houses, you tell me!

"Crazy Eddie, the electronics retailer who advertised insanely low prices, went out of business nearly 20 year ago. But the company's spirit is thriving in blue-chip American corporations. On Sept. 5, Apple sharply cut the price of the 8GB iPhone from $599 to $399. Last weekend, Hovnanian, the big home-builder, held a highly promotional "Deal of the Century" campaign, slashing prices for 72 hours on new condominiums. In some Hovnanian developments, prices were cut by up to 25 percent. Other builders are now following suit. Welcome to fire-sale nation!"

Yeap.

In the "The political class is not ALWAYS wrong" camp we have this:

"Homeowners who lose their house to foreclosure would no longer face a federal tax bill for their unpaid mortgage debt under a bill being drafted in U.S. House of Representatives, a congressional aide said on Friday."

That would the right move, by the way. It would ramp up the foreclosure rate and bring the housing correction to a close more quickly than otherwise. It would also force the **** sandwich to be eaten by those who deserve it - the lenders and CDO holders, without trying to send the tax bill back onto the homeowner who gets forced out of his or her house!

If you think this housing market mess won't get that bad, you're very wrong. Well, at least the market says you're very wrong. Take a look at this; the CME now lists housing futures.... where you can place futures bets on the price of housing in major markets. Have a gander..... they don't see a bottom coming for years.

Now maybe you can tell me how we can have any "home equity withdrawals" to fund consumer spending if this view is correct? Oh, and by the way, these futures are of course priced in nominal dollars - add inflation and things get REALLY bad.

Ok, so what has really happened here up until now?

We need to identify this with some degree of confidence if we are going to figure out what's coming around the bend! Why? Well, I hear the rails singing and past experience tells me that this usually means you better get the hell off the tracks..... but am I right or wrong?

Let's postulate a few things from what we do know, because it has been published.

First, Bernanke pulled the safety pins out of the banking system when he waived the 10% affiliated capital limits. This was done for ONE bank back earlier this year, but just recently, he did it for four large primary banks. WHY? One can assume that their affiliated entities, which are the "trading" or "securities" arms of these organizations, were on the verge of collapse!

Now why would such a thing be about to happen but nobody would know?

That's a good question. And I think we find the answer in the SIVs, or "off balance sheet" conduits, that these organizations set up. These are the same sorts of off-balance-sheet "vehicles" that got Enron in trouble, and they're particular odiferous because they are almost completely hidden from shareholders and the public. Yet if something goes wrong, the liability magically "reappears" on the underlying firm's balance sheet!

So what do we have here?

I think what we've got is a that the commercial paper markets closed for any commercial "paper" that had either mortgages or derivatives in it. By the way, neither is supposed to be in commercial paper, but in the "world of magical leverage" all sorts of crap was stuffed in those things.

This was picked up in part by "Sudden Debt"; they got the "what", but not the "why".

The problem with what Bernanke did with pulling the safeties is that he took what was a manageable problem and turned it into something really hideous. He hasn't (and can't) make people want to take debt that is polluted with this crap, and the correct thing for him to do (especially after all the posturing about how neither he nor Bush was going to "bail out" anyone) was to force those "affiliated entities" to eat their SIVs and, for many of them, die.

Why? Because that would have ended it. Now we've put the entire banking system at risk.

We've seen what happened with Northern Rock. It can and is at least somewhat likely to happen here.

Do you guys realize that by pulling the safeties Ben Bernanke has put all four of those BANKS at risk of collapse?

So should you run to the bank Monday and get all your money?

Well, not necessarily. Here's the deal - a "crisis of confidence" somewhere would have to kick this off. Will it happen? I have no idea. But if it does, with all of that commercial paper now essentially being rolled every night (whether it really is or not) via the overnight FFR market, and the safeties having been pulled from four of the largest money center banks by Ben Bernanke, you've got a very dangerous situation.

All it takes is for those folks to ask for their money back and suddenly you get this:



With absolutely no warning.

Economically, we've still got a wreck. There is no way out of that one. We've had $6.5 trillion (estimated) withdrawn from home equity appreciation in the last four years via HELOCs, cash-out refinances and other such schemes. While this is not "the end of MEWs" it certainly is not going to happen any more at the pace it has been - that much we know for certain.

This has contributed about $1.5 trillion a year to consumer spending. Conservatively, half of that has now disappeared.

We have a $13 trillion economy, roughly, in terms of GDP (which is the only measure that really counts.) If we remove $750 billion from that, about 5.8% of it disappears.

We were not growing at more than 6%; the real GDP growth was in the 4% range during the "boom" years and is now claimed to be in the 2-3% range.

Remove 5.8% and we have a negative GDP growth rate.

This is the definition of a recession.

As we sink into this, employment will be affected. This will further contract spending and thus GDP. It is simply unavoidable; this is no longer a matter of what a political party would like, or what Ben Bernanke would like, or what some economist would like.

It is a matter of debt service in consumer households, which has reached its carrying limit, along with the realities of the Housing Marketplace - we have an affordability problem which can only be repaired by home prices contracting back to 2.5-3x annual income - they are currently running nearly double that on a national basis, with the ratios being even worse in certain parts of the nation (California and parts of Florida in particular)

Oh, by the way, for those who argue that "The Fed cutting rates will spur housing and thus prevent a recession", let me point out two inconvenient facts that blow that argument straight to hell:

1. In the last several months real interest rates charged for mortgages have come DOWN. Has it stimulated housing? No, it has not, because the problem is not that interest rates are too high, it is that house prices are too high!
2. Since Ben Bernanke cut interest rates the long end of the bond curve has moved upwards, not downwards. In other words, real interest rates for "long money" - 30 year mortgages - have GONE UP, NOT DOWN. In short, Ben got exactly the opposite response to what everyone says needs to happen.

Of course this reality - that the Fed interest rate decision will actually make things WORSE - doesn't please those who would like the party to continue.

But reality is what it is, and what someone WANTS to have happen doesn't matter.

We also have this little problem of the SIVs and "Conduits" in the first place. Anyone remember ENRON? I do, you do I'm sure, we all should.

How did they "suddenly" implode instead of slowly bleeding off with everyone aware of the problem? SIVs, Conduits, and other "off balance sheet" games.

These need to be made illegal - it is absolutely imperative that investors and the world be able to look at your 10K and 10Q and see EXACTLY what your exposure is to everything you are involved in!

That is the definition of accounting and a public company. No more mark to model, no more mark-to-myth, no more Level 3 "assets" and while you're free to run all the SIVs and Conduits you want, they all have to be on your balance sheet!

Further, all derivatives must be traded through an exchange with proper margin supervision. This practice of allowing Hedge Funds to write OTC derivatives with ZERO margin supervision, effectively allowing unlimited leverage backed by nothing but hot air, MUST STOP.

Our government was responsible for allowing things to get to this point, and it is time for them to take responsibility on the other end as well. Don't expect them to do so willingly, but do expect that the more they try to prop it up the less each successive "prop job" will provide in terms of relief, and the worse the situation will be when it all comes apart.

If you care about this nation you need to get politically active right now. Yes, I know, the Bush Administration would love to shove this off onto the next administration, which is likely to be a Democrat one, and let it blow up in their face, just like Clinton did to him. You think he doesn't "get it" at that level? Oh yes he does.

But this sort of "gotcha" politics is the kind of thing that could provoke a depression instead of a recession, especially with an incoming Democrat President nearly certain to raise taxes into a recessionary environment.

What we've seen this week is only the beginning. If this is not stopped we are likely to see the Dollar devalued all the way to FORTY, or even more!

Why?

Because foreign governments are increasingly diversifying away from the OUTRIGHT FRAUD that our government has allowed in our financial marketplace.

We have no means to FORCE them to prop up this garbage or allow this fraud to continue. None whatsoever. They don't have to sit there and take it - they can move towards a more open accounting environment, they can move out of the United States, they can and are taking their ball and going home.

We are in no position to negotiate with nearly $9 trillion in active outstanding debt on our books in a $13 trillion economy.

Simply put - we the people either insist on reform - now - or we risk the following which will total your purchasing power and wealth -

Hyperinflation.

The government continues to raise the debt ceiling whenever they hit the old one and no reforms of substance are enacted. The bond market, however, will continue to price in trouble because foreign governments are no longer willing to prop us up. The only way out of this box will be for The Fed to buy the long end of the curve to force rates back down, which is instantly hyperinflationary. To actually do so would require an immediate devaluation of the dollar by 13-15% and that is to cover China alone! This will precipitate a full on dollar collapse.

Everything you want to buy will double in price.

The price of milk, eggs, and other things you need to buy are already skyrocketing. Exempting food and energy from "inflation numbers" is fraudulent. We are experiencing 10% inflation right now and it will get much worse if we do not act.

Unfortunately your wages will not keep up. The result will be the destruction of the middle class in this country and as real purchasing power is destroyed our GDP will contract precipitously. In purchasing power terms we will see over the next five to ten years half of our nation's purchasing power destroyed as debt service will become the #1 consumer of capital.

There is no way to prevent this result if the current policies undertaken by The Fed and our government are not immediately reversed.

So how do we get out of the box? Can we get out of the box?

Yes.

The prescription for a fix is some tough medicine and will result in short-term pain, but will also come with longer-term gain. This medicine needs to be swallowed - now. Here 'ya go:

• No more mark-to-model or mark-to-myth. All derivatives and underlyings must be traded on a public exchange. If there is no currently quoted bid for a given item then its value must be carried as zero on your balance sheet. Period. Margin supervision must be enforced and those margin limits must be published and consistent.
• No more off-balance-sheet anything. Create all the SIVs and Conduits you want, but you must carry all of them on your balance sheet along with their current assets and liabilities! In short no more "hide the ball."
• The safeties must be put back in on the banks - right now. If this forces one or more "affiliates" out of business, so be it. These safety mechanisms were put in place to prevent a banking system COLLAPSE after the 1930s! Removing them was the single most irresponsible thing I have seen our government do in the last thirty years. CONGRESS, GET OFF YOUR ASS AND DO YOUR DAMN JOB! YOU ARE THE ONLY CONSTITUTIONALLY-ALLOWED ENTITY TO REGULATE THE MONETARY SYSTEM! To find these "Exemptions" that must be reversed immediately, look at this link for "23A exemption" letters. THERE ARE NOW SIX OF THEM OUTSTANDING, WITH THE LATEST ISSUED ON SEPTEMBER 12th, AND NONE HAVE BEEN WITHDRAWN! ALL OF THESE MUST BE WITHDRAWN IMMEDIATELY.
• Congress must act to require the Federal Reserve to not take actions inconsistent with the defense of the nation's currency. If the Federal Reserve refuses, then Congress, in their exercise of the Constitutional Power to regulate the monetary system, must override The Fed! Failure to act will result in extreme inflationary pressures at least as bad as we faced in the 1970s, and perhaps FAR worse. CONGRESS, LISTEN UP - WE KNOW ITS YOUR JOB AND WE REMEMBER THE 1970s AND DO NOT WANT THAT TO HAPPEN AGAIN! The short-term reality is that the Fed Funds cut must be reversed immediately - right now. In fact, Ben Bernanke should have and must in fact RAISE FedFunds, not lower them.

The results of this medicine, if it is taken, are predictable. We will have a recession - probably a fairly severe one. Housing prices will contract back to 2.5-3x annual incomes on average, with values at the higher end of the range in more desirable (e.g. coastal) areas and slightly less in "heartland" areas. Demand destruction will drive down commodity prices over time, which will result in purchasing power remaining reasonable for the Middle Class.

Those who bought homes during the middle of the boom are in big trouble.

But they cannot be saved no matter what is done. We can either contain the damage to them or we can make it 100 times worse and spread it to everyone!

The Bill cited above by the Senate and House will help; those who bought or refinanced during the "boom" will be foreclosed upon but the good news is that in a year or two they will be able to buy back their house for half the price they paid before, which is good for them (and the rest of the economy), not bad. With a lower house price they will also have a lower house PAYMENT, which means that those people will have more discretionary income to spend.

Ask any of these people which they'd prefer - a short-term "clean" credit report followed by a bankruptcy, foreclosure and destitution, or a foreclosure now, a trashed credit report for seven years but the ability to maintain their standing of living over time and, in a year or two once they start rebuilding their credit, they can buy back their house at half price at a permanently-affordable payment!

THAT IS THE CHOICE WE FACE AS AMERICANS.

If we act politically and stop this madness, we get the latter.

If we don't act politically we will get the former, and the damage which will be inflicted on us as Americans will be hundreds of times worse.

You've got four points above to raise holy hell over.

Look up your Representative and Senators at http://www.house.gov/ and http://www.senate.gov/. Fax them a copy of this Ticker.

Then fax another copy to President Bush - his fax number is 202-456-2461.

And before you say "The Fed is independant", no its not. Greenspan has said in his book that there were many times that he was under political pressure to take rate actions. There is no reason to believe that Bernanke wasn't basically "told" to cut rates.

Therefore, if we want to fix this, we damn well better get politically active RIGHT NOW or the window to actually affect the outcome will have passed.

Here's your technical update for the markets over the weekend....