The Market Ticker - Editorial

Pollution in China - A Must Read

nospam@example.com (Karl Denninger) — Wed, 18 Nov 2009 10:45:17 -0500

America used to mistreat her land and water like this.

This sort of thing, by the way, is how you manage to produce things with a wage of $1 or $2/day and undercut first-world producers.

When we have "free trade" with China, this is what we are supporting. This is what we're serving up on their people. This is what our government and corporations all say is ok - so long as it is hidden from us, and happens "over there."

Make all the excuses you want America, this is what you're supporting every time you buy anything made in China or containing Chinese componets.

Go walk around your house and pick up 10 random items. Look for the "made in" tag on the back or bottom. What's it say? Now consider this - it is virtually impossible today to buy a piece of consumer electronics, a toy, an automobile or even a toaster without some part of it coming from China.

YOU are why this is happening.

These are not old photos, or someone's Photoshop experiment.

They're real, they're current, and they are what our hedonism, demand for $20 DVD players and "cheaper and faster" from everyone has resulted in, all so our "corporations" can report "record profits."

Those "great earnings" the last two quarters were in fact generated by firing Americans and shifting yet more production over to China, where they poison their air, water and ground with wild abandon, all so we can have a "strong" stock market and our banksters can loot us some more.

This is just one example.... head to the original article to read and see the rest.

You lost your job so she can bathe in industrial waste, and you are not only consenting to all of it, you're actively supporting it.

Any questions?

Open Letter To President Obama

nospam@example.com (Karl Denninger) — Wed, 18 Nov 2009 09:23:00 -0500

Yesterday you undoubtedly saw my letter to The Chinese Premier. Today, it's your turn.

You could have made quite a splash over there in China - and made a difference for all Americans. But instead, you did nothing of the sort - you simply continued the sell-out that has been going on for the last two decades in the so-called "strong relationship" between China and America.

That "strength" has included selling China advanced radar technology allowing them to shortcut 20 years of development time off their ICBM targeting, making their nuclear weapons far more lethal to potential targets - including targets in the United States. It has included turning a blind eye to the blatant and outrageous technology rip-offs that go on over in that nation every day. You won't see them because your Presidential Motorcade will never be allowed in the street markets found all over the nation, but if you were, you'd see literal millions of unlawfully-made copies of US-created software and music sold openly while the cops stand by to protect the vendors instead of enforcing internationally-agreed to laws that the Chinese pay only lip service to. And it has included granting virtually tariff-free "trading" status to a nation that forces poor farmers off their land and into sweatshop factories, away from their families where they are paid a buck a day in US equivalent wages, turning out products for sale in the US.

And let's not forget who these companies are. They're the WalMarts, Apples and Nikes of the world - many of them huge American firms. Oh not directly - that would bring these firms under US labor and regulatory stricture. No, they're "independent companies" owned by Chinese slave-drivers who instruct their employees to lie when the "auditors" from WalMart and Apple show up, telling them to a single employee that they're "complying" with reasonable wage and hour laws under penalty of losing their job, being blacklisted forever and literally starving to death. Since there are no whistleblower protections in China (it is, after all, a Communist government) the big US companies can claim to be "responsible" while in the background you hear the slave-driver's whip crack - and everyone smiles (except the Chinese worker who is being outrageously exploited.)

You ought to know something about this, given your heritage. Kenya featured prominently in the global slave trade until the British put a stop to it. There's nothing like a bit of history to screw up the revisionism that finds its way into American Politics, is there?

You ran on a populist platform and won on the basis of "hope and change." But hope and change is not working at WalMart while offshoring the production of our various consumer goods to China where the replacement for our US workers are paid a buck a day. Indeed, many of the 8 million American jobs lost since the top of the employment market in mid-2007 will never come back, simply because the small and mid-sized businesses that once dotted the landscape have been destroyed by this "offshoring" activity. It is clearly not possible for a US supplier or vendor to compete with $1/day wages or anything approaching it, yet this is the "competitive supplier" environment over in China and elsewhere.

The Truth is that America and China are locked in a deadly embrace. They're not buying our Treasury Debt to be nice or "support" us. They're buying because we have exported our inflation to them for more than two decades, and they're desperately trying to prevent it from destroying them. See, when you make $1/day (or $2/day) inflation is the difference between eating and not eating, and hungry people have a habit of reaching for pitchforks. Since there are about 1 billion of them (ordinary Chinese) and a much smaller number of military and leadership, well.... you do the math.

But that "buying" of our Treasury Debt has fueled your (and your Republican cronies) desire to spend beyond all reason. This distortion has allowed the government to blow money it does not have for more than a decade without watching interest rates ratchet inexorably upward, as happened to Bill Clinton and those before him.

The problem is whatever can't continue forever won't, and if you've been induced to borrow "interest only" (as our government always has) and the interest rates start to rise you can be bankrupted even if you stop borrowing. Your refusal to recognize that nobody can survive for long when you take in only half of what you spend, borrowing the rest, is an outrage and insult to anyone with an IQ larger than their shoe size.

Speaking of outrages, let's go down the list of current ones. We can start with the SIGTARP report on AIG and their counterparties. While AIG might have been free (under the law) to sell "insurance-like contracts" with no capital behind them, there is nothing that forced The NY Fed (and The Federal Reserve generally) to allow regulated bank-like entities to purchase those swaps and count them as "money good hedges." Yet the very boob who apparently did that, along with intentionally overpaying counterparties, was appointed by you to head the Treasury. I suppose none of us should be surprised at this revelation by Mr. Barofsky, given that one of Timmy's qualifications to head the Internal Revenue Service was that he didn't even bother paying his own taxes. You do realize the example this set for other Americans, right? Is that wise, given that the government is undoubtedly going to try to extract more and more tax money from the rest of us in the years to come?

Then there are people like Lloyd Blankfein, who yesterday "apologized" for "participating in things that were clearly wrong." I know you created a "government-wide task force" as of yesterday to "fight financial fraud", but somehow I doubt we'll see the person who made a public admission yesterday of "participating in things that were clearly wrong" in the dock. Indeed, yesterday we were treated to a revelation that Sacramento is suing a bunch of banks for bid-rigging and kickbacks - suspiciously similar to what apparently happened in Jefferson County Alabama, in which JP Morgan/Chase agreed to a fine and "foregone profits" of nearly three quarters of a billion dollars - while "not admitting guilt." Pardon my cynicism, but I've yet to see anyone willingly hand over nearly 3/4 of a billion dollars unless they're concerned that they might lose a lawsuit or worse, be found guilty in a criminal trial. It would seem to me that this "task force", if it really is intended to do something productive, would start at the top - with Racketeering prosecutions aimed at our largest financial firms. But that's not going to happen, is it?

Speaking of "OCCE" (operating a continuing criminal enterprise), what about drug companies? There's a bit of a problem there too, no? Are not the drug companies one of the beneficiaries of your alleged "Health Care Reform"? After all, you're not going to strip them of their re-importation protection, are you? Why not?

Far more important however is where a "gentlemen" (Kindler) wound up after not one but two criminal guilty pleas by Pfizer for the same crime. He was elected to the board of the NY Fed. Are you as proud of Pfizer's record as is Mr. Kindler is as their former CEO and General Counsel? It appears so - not only does your "health care" proposal not bar deals with drug companies that have twice pled guilty to the same felony, not only is Pfizer still operating as a corporation (where any "natural person" who did the same sort of thing would be sitting in the hoosegow) but in addition you've sat back silently while their CEO is appointed to one of the chief banking regulatory positions in The United States!

Here's the problem at the end of the day Mr. President.

You were elected on a platform of "Hope and Change." In point of fact the only change we got is the change at the bottom of our pockets - all the rest of our money has been siphoned off by the very same robber barons and banksters that have corrupted our nation for decades. You've done exactly nothing to prosecute them for their previous actions or prevent them from doing the same things in the future. Nearly a year after your election Citibank served upon the American people a 29.9% "rate jack" on their credit cards - an "atomic bird" served up by one of the largest financial firms in The United States, and one that the government now owns a large stake in. This was a slap in the face of Americans by THE GOVERNMENT - that is, YOUR ADMINISTRATION.

You claim to be for the working class people in this country, yet you bow down to China paying people $1/day to assemble junk products, from capacitors that explode (found in literally millions of pieces of electronics) to melamine-laced "food products" to poisonous toothpaste to corrosive drywall that destroys wiring, plumbing, and, allegedly, the lungs of US Citizens.

We continue to hear that we "must reform health care" yet just recently Pfizer pled guilty to a criminal felony that it previously, years ago, pled guilty to before. Nobody went to prison, and the fine levied was less than 1% of the firm's market capitalization. A mere cost of doing business. These are the "engines" of Americans' health you wish to protect with laws that force we the people to pay for the development of drugs and medical devices that are then used worldwide - without the rest of the world paying "their fair share" for the developments that save their lives. We're a generous people but don't you think such charity should be by choice rather than extracted at gunpoint?

You refuse to step in and force The Fed to be audited, even though you could get behind Representative Paul and demand it happen. Why? Is it because you're protecting the very people who ripped us all off? There are those who believe the true purpose of your Chinese trip is to find a way to pry open the doors in China so our Banksters can loot them, since the blood all seems to be gone from Americans - the vampires simply drank too much and killed us all. There's one small problem with that plan, if indeed it is your intention - in China they shoot people for the sorts of things that the banksters did over here. Call it a "feature" of Communism if you'd like.

Let's face it: America may need some protectionism. Americans can't be expected to compete with $1/day - or $2/day - in wages. While this "looks good" for a little while as prices come down just as business profits look good when you fire people in the quarter you do it (witness the last two quarters of "earnings") those employees who lost their jobs can't buy anything in the future, as their income has evaporated! They wind up on the dole, and this drives our budget deficit from 20% of our Federal Budget to roughly 50%. The pegs and forced buying of Treasuries that have allowed this to happen won't last forever, and when (not if) they snap they will force a Federal Government default. Thus, my statement in the open letter to China's Premier - we're not going to pay you.

Some have claimed in comments I received that my views in that letter are some sort of jingoistic orgasm. Nothing could be further from the truth; my views are simply an expression of mathematical fact. Math is the only true science.

Speaking of the math, I'm sure you're aware that about half the nation loved you at the time of your election and the other half hated you. That's a "feature" of American politics, of course. But I would be concerned for your job security down the road if you don't change course. After all, the SEUI and UAW both were strong supporters, as were the "ordinary people" who bought into your "hope and change" mantra.

The problem is that you haven't kept any of those promises. Your "stimulus" didn't, your "Recovery Czar" has refused to certify the jobs "saved or gained" numbers (that's because they're flat lies, as is obvious from the employment situation report's household survey) and a huge stock market rally aside, there hasn't been any real turn in the economy. Instead Wall Street is feasting on the destruction of the dollar, which is a direct consequence of your policies - spending more than one makes eventually destroys confidence in the strength of your balance sheet, and the puerile acts of a Fed Chairman who you claim to support for re-appointment in his futile attempt to keep the musical chairs game going isn't helping matters. You could stop this tomorrow by demanding that Bernanke raise rates to a mere 2% immediately or you'll replace him with someone who will - after all, his reconfirmation has not yet occurred, and your nomination can be withdrawn. You could fire Timmy and direct Mr. Holder to prosecute all of the crooks on Wall Street that stole the hopes and dreams of millions of Americans, then looted their retirement accounts on top of it. While your admission of the obvious this morning - that "too much debt could lead to a double-dip" sounds good, the fact of the matter is that it is your administration that has piled on most of this debt - and continues to do so. Are you admitting - in advance - to what's to come next year?

Best of luck to you Mr. President - from where this commentator sits, given the underlying realities of the economy and exploitation of our working class and your willful blindness to the mathematical realities of our fiscal and economic situation, you're going to need it.

Lying Sack Of Dog Squeeze: Blankfein

nospam@example.com (Karl Denninger) — Tue, 17 Nov 2009 15:27:00 -0500

Sorry Lloyd: NO SALE

“We participated in things that were clearly wrong and have reason to regret,” Blankfein, 55, said at a conference in New York hosted by the Directorship magazine. “We apologize.”

But then there's this...

Goldman Sachs, the most profitable securities firm in Wall Street history, had a record profit in the first nine months of this year and set aside $16.7 billion for compensation expenses.

No they didn't. Their "profit" was entirely ill-gotten.

About $10 billion from the government via the AIG conduit, which they had a ZERO chance of collecting had AIG filed bankruptcy.

Another $21 billion financed at RADICALLY below-market rates due to government guarantees - that is, an explicit taxpayer subsidy.

That money is not Goldman's. It is ours.

Furthermore, the standard for forgiveness among Christian faiths for sins requires certain things. Specifically one must:

Be sorry for one's sin. Lloyd professes to be. Ok.
Forswear sin in the future. To do so one must identify the specific sin(s) for which one is atoning. So far, Lloyd hasn't done that. Exactly what things did you do that were wrong Lloyd, and why are you trying to evade whatever lawful and reasonable punishment might come from making a full account of your activity?
Make penance where possible. In this case it is possible, since the sin involved money. Yet Goldman and Lloyd have made no penance whatsoever, despite the myriad people who got hosed as a direct and proximate cause of activities he now admits were wrong for Goldman to engage in.

Goldman may be the "most profitable" Wall Street firm but I will simply observe that it is trivially simple to be "profitable" when one does wrong, since it is always easier to make money by doing wrong than by acting with honor and propriety.

No Lloyd, your apology is not accepted, as it is insincere. You are simply trying to deflect attention from the well-deserved hit to your reputation - a reputation that, from my perspective, is somewhere south of Satan's.

Have a nice day Jackass and may you burn in Hell.

Open Letter To The Chinese Premier

nospam@example.com (Karl Denninger) — Tue, 17 Nov 2009 09:22:00 -0500

Dear Wen Jaibao:

We in America have noted with concern your nations' expression of alarm at our Federal Reserve's blatant money-printing, debt monetization, and interference in the free markets, in particular the recent commentary of China's bank regulator cited here:

“The continuous depreciation in the dollar, and the U.S. government’s indication, that in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation,” he told reporters in Beijing today at the International Finance Forum.

Liu said this has “seriously affected global asset prices, fuelled speculation in stock and property markets, and created new, real and insurmountable risks to the recovery of the global economy, especially emerging-market economies.”

Mr. Liu is correct, of course. However, yesterday afternoon Ben Bernanke gave you the finger, first in his speech and then later in the Q&A in which he said:

Nov. 16 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said it’s “not obvious” that asset prices in the U.S. are out of line with underlying values after a 64 percent jump in the Standard & Poor’s 500 Index from its March low.

Donald Kohn, another Fed Governor, erected his middle finger in your direction as well with his comments last night and Yellen added her view this morning in which they also both said "we see no bubble." That's three.

How many more times do you need to be flipped off before you get it: The Fed isn't going to do what you want, and neither is Obama. Get over yourself.

On the objective measures the price/earnings multiple of the S&P 500 currently stands at over 130, more than double its previous record and vastly beyond anything achieved even in China's manipulated and overheated markets. In short, they're lying and they don't care.

Welcome to American Politics Mr. Wen.

(In the event you're not aware, "the finger" is the extended middle finger pointed in your direction, a universal American insult that, roughly translated, asks that you be fornicated. I do not know what an equivalent insult is in Chinese.)

Now that I have your attention by making sure you that you realize that our Central Bank has flipped you off, let me point out something you should be aware of:

The so-called "paper" you hold denominated in our dollars will not be paid in full.

Let me put forward a few realities you may not be aware of, since you are the Premier of a Communist Nation where there is no freedom of the press nor, for that matter, any of the other freedoms guaranteed in our Bill of Rights. That is, you head a nation where you believe the government has rights and the serfs, er, population has privileges you grant, where our founding documents express the precise opposite view - we believe that all people have rights that are endowed by our creator, that government can secure and protect rights but is incapable of bestowing them (since it didn't have them in the first place), and that government has mere privileges granted by the people - and that the people have the right to revoke those privileges.

Here's the problem you face, in a nutshell, just to make sure you read it correctly the first time:

We're not going to pay.

First, we (the citizens) didn't enter into these obligations. You pursued a mercantilist strategy that involved, among other things, near-literal enslavement of your citizens under working conditions equal to or worse than those we imposed on the Africans we forcibly imported into this nation (that is, kidnapped) in the 1600s and 1700s. We eventually figured out that this was abusive and stupid, although it took a civil war for us to do so. You've yet to figure it out - you punish dissent with tanks and bullets while refusing to recognize basic human rights. You build schools and other structures that collapse in minor earthquakes or when 3" of snow falls on their roofs, claiming this is "progress", when the native Americans that inhabited this nation were capable of constructing buildings of nothing more than sticks and animals skins that remained standing under similar conditions. Using this slave labor, having destroyed our middle class workforce via offshoring, you have then sent back to us poisoned children's toys, toothpaste and drywall, and demanded that we pay for these poisonous and dangerous products with good money. As a consequence we the people don't like you very much. In fact, some of us would be quite content to invite you to dinner - as the main course.

Next, it is clear that you have strong-armed our government into exchanging toxic securities you bought from private actors for "good credit" US Treasuries. You are among those who have played the "Financial Armageddon" card with a fair measure of success. Precisely what you said and to whom you said it has not been publicly disclosed, but that threats were part of the negotiation is essentially assured, since nobody in their right mind would exchange used toilet paper for good Treasury Debt otherwise. Yet our government wasn't the agent of the original fraud - those were private corporations and actors. Instead of doing what reasonable people do - that is, sue in a US Court and hold the guilty to account - you decided to play geopolitics. You have that right, but we have the right to tell you to stuff it - today or tomorrow. That day will come I can assure you.

Third, there is the matter of our citizens waking up to the scams - including your scams. An increasing number of citizens in this country have had enough of the BS and, having been ignored when EESA/TARP was debated (by over 100:1 we told Congress not to bail out those bastards who ripped both us and you off) are intentionally reducing their output. This of course reduces the tax base against which our government can extract money to pay you with. Further, our government has over the space of more than 30 years embarked on programs that allow any US Citizen to effectively live for free, paying nothing. There's not a thing you can do about this, and we both can and are de-funding our government's ability to tax. Have a look at tax receipts - the government is running a near-$2 trillion deficit for this reason above all others. Attempts to raise taxes on the remaining productive citizens simply cause more of them to decide to join those who erect their middle finger toward Washington DC, choosing Food Stamps and Medicaid over hard work. There's a phrase for this: "Going Galt." I recommend you read Ayn Rand's "Atlas Shrugged" - I'm sure there's a Chinese translation somewhere, although I suspect you shot the translator after he completed the work, lest he gain "subversive" thoughts and communicate them to others.

Trust me when I tell you we're just as pissed off about the frauds and scams as you are, but that doesn't give you the right to obligate we the people who were not the architects of these scams and frauds to pay for them, and we will not accept any such putative "obligation." Go take your gripe up with Mr. Paulson, Bernanke, Geithner, Obama, Bush and those who peddled all this crap worldwide. Your beef is with them, not us, and we hold that those who commit bad acts are where the liability for same begins and ends.

Finally, we have the matter of our children and those yet unborn. They did not consent to any of this - not even the rampant consumerism you fueled in this nation with your slave labor and pegged currency. They have no obligation whatsoever to you or to any debt contracted by anyone prior to their coming of age, and it is highly unlikely they will consent to be bound to it. The privation necessary for us and our children to pay - that is, reducing our working class to an income of $2/day to match your serfs (who thus far have surprisingly not found their 750 million pitchforks yet) isn't going to happen.

You proceed from the unfounded belief that our government will be able to extract this effort from us via either voluntary compliance with ever-rising taxation or the employment of naked force at arms. This is not a sound assumption. Americans have a long history of suffering various usurpations and injustices, but Americans also have a history of "snapping" when pushed too far. Ask the British about what happened at Concord on April 19th, 1775.

Sooner or later, whether by peaceful election or less-than-peaceful means, a leader will arise in America who will contemplate erecting the middle finger back in your direction, just as many Americans have flipped off Washington DC. Ben Bernanke, Mr. Kohn and Ms. Yellen are just the first three you've seen in our officials who are willing to tell you where to stick your expectations - the day will come, I assure you, where a decision is made to simply tell you to stuff it at the highest levels of our government. Yes, such a declaration - that your alleged and dear "Treasuries" are in fact nothing more than toilet paper - would have severe geopolitical consequences. So what? By then our nation will be incapable of paying anyway - a default by any other name is still default. But our citizens, unlike yours, are and will be armed - go ask Admiral Yamamoto about the wisdom of considering an attempt to enforce your alleged debt by force. While you're at it count the blades of grass in our nation. I think you can figure the rest out for yourself.

Worse for you, while we would suffer were America to turn isolationist, we would survive. Your nation and its people would not.

Let me give you a piece of advice: Sell your Treasuries and dollars while you can.

Oh, you'd love to do that, wouldn't you? But you can't, and you know it. See, you've entered into a pact with the devil - a devil of your own creation. Should you sell a material amount of your holdings you would collapse the Treasury market and receive only pennies on the dollar. Further, you would instantaneously cut off your trade flow into the United States - the rise in interest rates this would provoke over here would force our citizens to spend only what they earn, as the cost of credit would rocket higher - much higher. It would also force an immediate default on whatever was left of your alleged "Treasuries" as our government would be forced to repudiate your holdings to remain solvent. When it comes down to "you or us", let me assure you, it will be us. This in turn would cause all your poison toy, drywall, toothpaste and melamine-laced baby food factories to close. Without that meager $2/day salary you would have 750 million hungry and angry Chinese who just might figure out what a pitchfork's best and highest use is. We, on the other hand, would chuckle mightily as we returned to actual hard work - for our benefit, not yours.

So let's cut the crap Mr. Premier. You have no good way out of this dance with the devil. The amusing part of this is that you're reduced to the position of a petulant child who can't have that next candy bar - you scream loudly but have the balls of a baby, unable to do a damn thing about the increasing number of middle fingers erected in your direction - now by our Central Bank, and soon by the highest levels of our government.

If you have trouble reading the intent behind those three birds being flown in your direction, I assure you - those are only the first three of many you will recognize in the months and years to come. We the people of America, having been abused with your poisoned toys, toothpaste and construction materials, are taking great amusement in the fact that an alleged "superpower's" Premier in reality has no more power to effect geopolitical outcomes than the incessant howling of a 2-year old child.

Have a nice day.

Goebbels Retail Sales?

nospam@example.com (Karl Denninger) — Mon, 16 Nov 2009 11:52:00 -0500

Interesting note on methodology noted by a forum user (Licorice):

Each month, questionnaires are mailed to a probability sample of approximately 5,000 employer firms selected from the larger Monthly Retail Trade Survey (MRTS). Firms responding to MARTS account for approximately 65% of the total national sales estimate. Advance sales estimates are computed using a link relative estimator. The change in sales from the previous month is estimated using only units that have reported data for both the current and previous month. There is no imputation or adjustment for nonrespondents in MARTS.

Got it?

The number is cooked. Only same-store sale changes count and those stores that closed or were newly opened are ignored.

This implies that the report will may slightly understate results in a rapidly-expanding environment for the first month (although that understatement will be corrected via revisions in the second month) but is almost certain to grossly overstate results in a weakening consumer retail environment - and those overstatements will not be corrected.

Here's why.

A new store (that has no "last month" history) will typically have low sales numbers for its first month of operation, simply because nobody knows it's there. While most stores have some sort of "grand opening" or other promotion linked to their inception, the usual "buzz" associated with that tends to be fleeting (days.) Traffic then tends to build with familiarity, assuming that the store is successful. Since in a flat market this traffic comes from other competitors, the "new store" impact would tend to be neutral or slightly positive beyond actual sales results. That is, the traffic taken by the new store (from existing retailers) will be counted, because the retailer that loses to the new store is counted and the new store is also counted. The numbers balance; the under-reporting is limited to the initial "grand opening", which is normally a one-off until traffic and familiarity builds, and the new store is reported both for prior and current months as soon as the first month passes. This causes a revision (upward) in the second month of operation to the prior month's results.

But a closed store is ignored in the month it fails, and the traffic that shifts FROM it to other stores pumps their comps .vs. the previous month. Therefore, as stores close it looks like retail activity actually increased when in fact at best it was flat.

Examples will make this clear.

We start with one store in the world that has net sales of "100".

Store #2 opens with sales of 10. Half of that is new activity, half comes from Store #1. First month shows a sales report of "95", a decrease. But in the next month Store #2's numbers come online, the "95" is revised to the (true) 105, and Store #2s numbers (which have climbed to 60, while Store #1 has lost share and now also has an amount of 60) are all reportable. Net activity is now accurate at 120 and the previous month is revised to the (true) net 105.

Store #1 and #2 both are operating with sales of 60. Store #2 fails, and half of its business goes to Store #1. In the month it fails Store #1 shows an increase and Store #2's numbers are DROPPED ENTIRELY, since it did not report. This is not revised. We now report a "50% increase" in retail activity, which is total crap - we really had a 25% net decrease for the current month. But the revision to the previous month does get posted, and depresses the previous month's numbers.

Did this just happen?

The August to September 2009 percent change was revised from -1.5 percent (±0.5%) to -2.3 percent (±0.3%).

Oh, it did! Now we know where the revision to the previous month came from - stores closed in the present month and their sales loss was intentionally dropped from the current month.

Cute folks, cute. This intentional omission of stores that fail to report for the current month but did for the previous, instead of counting a closed store as the zero that it is, mean that so-called "improvements" by competitors who pick up the previous store's traffic are not balanced by the loss of the failed store.

As such the report intentionally overstates results and you cannot obtain an accurate magnitude for the distortion. You can, however, detect that it happened by the negative revision to the previous month's data - and in this case, we got a big one.

If you were wondering how we can possibly have "improving" retail sales data when sales tax information from the states refuses to reflect this alleged "improvement" in retail sales, along with how states can post double-digit sales tax declines while "retail sales" are down by a much smaller percentage, you now understand. The Census Bureau intentionally lies by omitting the "zero" for a store in the month it closes - that loss of sales is never reported - not even retrospectively in a revision the next month.

The Market Ticker once again dissects The Goebbels Information Bureau residing in our Government.

To The Barkers: Answer This Question

nospam@example.com (Karl Denninger) — Sun, 15 Nov 2009 00:01:00 -0500

"The recession ended in June": Dennis Kneale

"The recession was definitely over in September": Any one of a number of people.

Ok. Let's say that I accept all this at face value, even though while driving through my definitely-beach-oriented local town here this afternoon I noted even more closed-and-gone storefronts than there were a couple of weeks ago, and last night at the local open-air mall, although the evening was absolutely gorgeous, you could have fired a 155mm Howitzer down the "main drag" without killing anyone - because there was almost nobody there, and literally not one shopping bag was in evidence.

I simply have to ask the pundits and the carnival barkers, of which CNBC is the worst (but certainly not the only sinner) the following - why do we need any of these programs if in fact the economy is growing again:

Zero interest rates from The Fed. Isn't 2%, 3%, 4%, 5% more consistent with economic growth? If indeed the economy is expanding, why do we need "funny money"?
$8,000 home-buyer tax credits. And not just first-time credits either - those were recently expanded, and the NAR has said quite clearly that "but for this program housing would collapse." Is this consistent with an economic recovery?
FHA underwriting mortgages at 3.5%, their default rate is going parabolic, their reserves are down to well under half of the mandatory minimum and there is no evidence in sight that their performance metrics are improving. With the aforementioned $8,000 "credit" and the FHA's willingness to monetize it, you can once again buy a home with "zero down", just as we did in the bubble. Is this consistent with an economic - and housing market - recovery?
The dollar carry trade. It's obvious and starting in June of this year the correlation between the dollar's move and the S&P 500 became nearly 100% on an inverse basis. Consumer confidence numbers were far below expectations Friday, yet as soon as that hit the dollar, the market rose - into worsening economic data. Again, is this consistent with an economic recovery?
"Cash for clunkers" - and oh, by the way, what happened to auto sales when it ended? Is the near-vertical drop-off in GM's sales as soon as the program ended consistent with an economic recovery? Is a claimed 10m expected 2010 units consistent with economic recovery when in 2005 and 2006 the industry sold nearly 17 and 16 million vehicles, respectively?
29.9% interest rates on credit cards via "jack-up" letters and other outrageous actions. Again, is this sort of gouging consistent with economic recovery?
Declining consumer credit demand. I've published the graph before and will reproduce it below. Is this consistent with economic recovery?

The Carnies and other Barkers have their desire to make you think things are just peachy. Then again, so did Japan after their debt-fueled property crash. The Nikkei surged on the back of the carry trade, just as has the S&P 500.

But a huge part - perhaps even the ultimate cause of the meltdown that took our stock indices down some 60% from their highs from October 2007 to the spring of 2009 - was the unwinding of that very same Yen carry trade.

The dollar-based carry trade, when (not if) it unwinds, will do even more damage than the Yen-based carry did. And unwind it will.

Remember that everyone was certain that the Yen would not unwind, because Japan was not going to raise rates "any time soon." They in fact didn't raise rates but it didn't matter - as soon as the first person yelled "FIRE!" the entire game came apart, as the unwind was self-reinforcing and margin calls produced yet more margin calls.

PIMCO has talked about "sugar highs" boosting the stock market. The problem with sugar highs is that they wear off, and worse, they're full of calories and thus make you fat, destroying your ability to be mean and lean - to run and change direction quickly - later on.

Consumers are having none of it. Confidence came in dramatically below expectations, and the reason is simple: there are no good-paying jobs unless your idea of "employment" is playing games with other people's money by being an "investment banker." Call centers are all over in India, manufacturing is all over in China, we've got Starbucks coffee-servers, McDonalds' burger flippers and WalMart "greeters" - all jobs that pay 1/4 what the old manufacturing jobs did.

The funny thing about all of this is that one of the chief barkers Tweeted me yesterday to ask if I was "still selin (sic) doom."

First and foremost, I don't sell anything. I don't run other people's money, and The Ticker is free. Unlike the barkers and their crowds, I don't depend on the advertising dollars of stockbrokers (just watch CNBC for an hour and catalog who butters their bread!) to survive.

Second, as I have repeatedly noted, I was an unabashed Bull from 2003-2007. Why? Because the economic numbers were there to back the advance. Oh sure, it was a liquidity-driven move, but the fact remains that 2000-2001 wasn't even a recession from a consumer point of view - there was no over-levered consumer problem, there was no issue with debt defaults in housing or credit cards, and consumer credit y/o/y never went below zero on a rate-of-change basis. Indeed, even approaching zero has only happened during severe recessions, as the following chart shows:

There was reason to be bullish coming out of the 2001 time frame. The Federal Reserve programs worked - they spurred economic activity - real economic activity by real people - as is evidenced by the above graph. Consumer credit consumption spiked higher, then leveled off at the 5% growth run rate - exactly as intended by The Fed.

While the policies put in place sowed the seeds of our current disaster in the short term they were effective. But those same policies - zero interest rates (nearly so in 2001, truly so today) have failed to send consumer credit consumption - and true economic activity - higher.

Why not? Because in previous recessions we had a buffer between the carrying capacity of debt and the total amount outstanding in the consumer and business world. This is evidenced by the fact that these previous busts were inventory-led, not credit led. That is, they were a matter of oversupply in the market (e.g. the Nasdaq bubble, etc), not excessive leverage - that is, too much debt for the income available to service it.

In 2007 the latter situation asserted itself. That made the tonic prescribed by Bernanke and pals ineffective. They tried it anyway, and they continue to do so - even though there is no evidence that it has - or can - work.

The M1 "Money Multiplier", after appearing to stabilize just below 1.0, has resumed it's plunge. The tonic that was allegedly going to restore credit creation in the economy - the raw printing of money via "Quantitative Easing" - has done no such thing:

China has woken up to the danger of the US Dollar Carry, as evidenced here:

“The continuous depreciation in the dollar, and the U.S. government’s indication, that in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation,” he told reporters in Beijing today at the International Finance Forum.

Liu said this has “seriously affected global asset prices, fuelled speculation in stock and property markets, and created new, real and insurmountable risks to the recovery of the global economy, especially emerging-market economies.”

His view echoes that of Donald Tsang, the chief executive of Hong Kong, who said the Federal Reserve’s policy of keeping interest rates near zero is fueling a wave of speculative capital that may cause the next global crisis.

“I’m scared and leaders should look out,” Tsang said in Singapore Nov. 13. “America is doing exactly what Japan did last time,” he said, adding that Japan’s zero interest rate policy contributed to the 1997 Asian financial crisis and U.S. mortgage meltdown.

Yep. It did not work in Japan and it won't work here. You cannot fix a drunk with a case of whiskey, and you cannot solve a credit-led problem with more credit - that is, more debt.

You can't replace consumer activity with government borrowing for very long. You can try in the short term but it won't work in the intermediate and longer term. More proof is found in our trade balance, which despite massive dollar devaluation is now at the worst since January, while the dollar has plummeted. Dollar devaluation was supposed to improve our balance of trade. It failed to do so, just as the printing of money has not spurred credit creation and capital formation as we were told it would.

It would be nice if the policy prescriptions followed thus far could work, but in a saturated debt market they cannot.

All modern monetary systems are credit-based.

This is about mathematics, not "feelings" or "beliefs."

All we have now is the carnival barkers claiming that "prosperity is returning!" even while storefronts are darkening and debt is defaulting.

It hasn't worked this time, and the policymakers know it, just as they knew it in 1930.

But policymakers didn't stop lying in the 1930s and it appears they're not going to now.

If any of the policymakers believed what they were selling neither the $8,000 homebuyers "tax credit" or the zero percent Fed Funds rate would still be in place.

More than two years into this mess with myself and a few others warning that the policy path elected was both futile and destructive, we are finally seeing foreign governments wake up as they realize that Japan's ZIRP was bad, leading to two bubbles and then crashes in the global equity markets and one in property markets that served up enormous pain.

If we don't stop with our boozing on "free money" for the banksters (which is NOT filtering to the common man!) the resulting crash will have consequences for our nation and indeed the world akin to liver failure rather than a hangover.

Bernanke and the United States Government must stop their madness, and do so today. We have done nothing but made the pain and "creative destruction" that must come worse than it would have been in 2007, and far worse than it would have been in 2000.

Those who made the bad loans cannot be protected from their foibles and the just consequences of their bad decisions. We must ring-fence the Federal Government, withdraw the excess liquidity, and force rates high enough to kill the dollar carry - even if it hurts.

It is better to lose a limb than your life.

In economic terms that's the choice folks; the gangrene is spreading and if we do not amputate it will reach our torso.

If it does our economic and quite possibly our political system will die.

President Obama's Asian Problem

nospam@example.com (Karl Denninger) — Thu, 12 Nov 2009 15:38:00 -0500

William Pesek opines:

Barack Obama sure has lots to discuss on his maiden voyage to Asia as U.S. president. Yet all this is just conversation compared with the real issue on Asia’s mind: a wobbly dollar that’s putting the region’s money at risk.

Think of this trip as a visit to America’s banker, and an unpleasant one. Asia wants assurances that the U.S. can repay its fast-mounting debt and prevent a dollar crash. The reality dawning on Asia is that Obama can’t offer them such a pledge -- not with U.S. borrowing so out of control.

Unfortunately this sort of misdiagnosis is common - that The US is borrowing in an "out of control" fashion on its own initiative.

Nope.

America could not dream of borrowing $2 trillion a year in new commitment, and meeting the debt service on $14 trillion (current + next year's deficit), if interest rates were at 10%.

This simple fact puts the lie to any claim that we have an "independent central bank." We have no such thing, and as a consequence all the whining and crying about "Audit The Fed" bills is not just misplaced - it is an outright misdirection and scam.

The Fed has never truly been independent, save once - under Paul Volcker. Never before or since has The Fed acted without due regard - on its knees if you will - before Congress and The Administration.

Volcker did it because despite the heat he knew he would take (and he did) it was necessary. This is where the much-vaunted "independence" claim has arisen from.

But that was one man, not a structure.

It was one person with conviction and willpower, not the pantywaists that now infest The Fed.

I have often opined that the issue is not now and never has been a gold standard or lack thereof. Hard money monetary systems have been subject to the same "boom and bust" nonsense that we have experienced since the 1970s, and in fact, they were just as common and often more damaging. 1873, for example. Or Tulip Mania. South Seas bubble? Asian Tiger?

The problem is always the same - what I call "The Wimpy Syndrome". Left to their own devices, politicians, when confronted by a desire to spend money they don't have, will always resort to eating the hamburger today and trying to pay next Tuesday.

The theory behind an "independent" central bank is that it is supposed to be immune to The Wimpy Syndrome, in that it can control borrowing costs through liquidity actions.

That's a mighty big knob they got....

No, not the monetary policy one. The other one - attached to Dodd, Frank, Obama, Ways and Means, Pelosi (well ok, not Pelosi) and Reid.

Since Volcker's time at The Fed the executive and legislative branches have willingly turned a blind eye to the scam machine known as "Wall Street." Oh sure, Wall Street has legitimate functions - capital formation is important, as is floating bond sales. No problems there. The issue comes about when the 50 basis points is no longer enough and greed starts to press people to look for 55, then 60, then 100 - and the only way to do it is to lie, cheat and steal. The campaign coffers fill up and the byzantine world of Federal Law and Regulation come out to protect the cheaters, even if only by obfuscation.

Likewise when the politicians want to spend more money. Normally you'd have to tax more to spend more, but that's not politically acceptable. So we float some more bonds, claim everything is ok, and off we go spending money we don't have. "Deficits don't matter" becomes the mantra, and despite the fact that many Democrats bemoaned Dick Cheney mouthing those words, President Obama and Pelosi's House have done nothing to change that viewpoint. Instead they have accelerated the unsupportable spending - full throttle.

What is supposed to happen to scammers is that when they get caught they go to pound-you-in-the-butt Federal Prison (not the "Club Fed" golf outing style) and the companies they run lose their corporate charter, as (effectively) did Arthur Andersen.

What is supposed to happen to the government when it tries to spend more than it makes is that the "Bond Market Vigilantes" show up. That is, to fund ever-rising debt the bond market will ordinary demand more and more coupon (interest), thereby serving as a brake on unsustainable government spending trends.

This presumes The Fed doesn't interfere in the latter, and the crooks don't manage to find the means (legal or not) to get The Federal Government to ignore their scams.

That's a very nice fantasy you see there Mr. Magoo.

So let's cut the crap. If the Asians don't like us borrowing so much money stop lending it to us. Cut the crap with the circle-jerk mentality that mercantilist political schemes are in some way compatible with honest and fair dealing. They're not, any more than the vendors in Shanghai hawking software .et.al. are all selling "fully licensed and legal copies."

This nonsense about the dollar ever having been "safe" is a bad joke. Certainly the corrupt politicians in China, Japan and elsewhere are well-aware of the principle of seigniorage - that is, the "value" of money less the cost of printing it. Why would they believe our political machine wouldn't exploit the very tool they have used themselves? Such hubris.

At the same time if The Fed and its members are "concerned" about the destruction of the only thing they have to sell (dollar-based credit) then pull the system liquidity down until rates move higher. A lot higher. Keep doing it until the crap stops - until Congress either stops spending or the auctions fail and they're forced to cut it out and the carry trade is made unprofitable and thus is unwound.

The issue is not now and never was about the economy. When I ran MCSNet I could have grown the company 10x faster by using leverage - that is, debt - than operating on a cash basis. I refused, because while I might have wound up with 10 times as much money, I might have also wound up with a big smoking hole in the ground where my firm once was. Debt is not necessary, other than self-liquidating trade credit, in the operation of a firm, and indefinite geometric growth is not possible in any space of finite resource - like this rock of finite size we all live on.

That doesn't mean there aren't responsible uses of debt. There are. But playing Wimpy writ large to the tune of $12 trillion dollars isn't one of them, nor is operating a financial institution at 20, 30 or 40:1 leverage (that is, with just over $2 in capital for every $100 in "assets".) The latter only makes sense if you have reason to believe that if you blow it (remember, as little as a 3% loss in such a situation wipes you out!) the taxpayers will step in and "save" you.

That's exactly what they both expected and got for the most part, right?

Economic contraction isn't necessarily bad, nor is deflation. Both can be, but both squeeze out the bad actors - the scam artists and those who simply promised the impossible - and make them pay through bankrupting them. That's exactly what is supposed to happen on a somewhat-regular basis, and in fact it is necessary to have a sustainable economy - the scammers and imprudent need to be flushed on a regular basis or they crowd out all the legitimate business people (after all, you can always make more money stealing!) until only the scammers are left!

Until either Asia or Bernanke grow a pair, shut their jawboning, lying yaps about "concerns" and act we will see no meaningful change - or reform.

That is, you, the average American, will continue to be asset-stripped, you will see your real standard of living decline, and ultimately, you will be tossed into the street and onto the public dole, until that too collapses under its own weight.

Welcome to reality.

Better Late Than Never.....

nospam@example.com (Karl Denninger) — Thu, 12 Nov 2009 09:31:00 -0500

For two and a half years The Market Ticker has pointed out the foibles of The Fed and other claims of "help" for the economy - when the prescription for "help" is just an extension of the same failed policies that created the mess in the first place.

But now we are starting to see this show up in the so-called "mainstream media", with the latest being The Wall Street Journal:

It takes similar reasoning to reconcile the elation felt across America every time the stock market rises—partially replenishing personal investment portfolios and 401(k) retirement plans—with the uneasy feeling that we are being set up for yet another big financial disappointment. We dare to hope that the economy is growing solidly once more, that the Federal Reserve has superior knowledge about providing liquidity, and that the U.S. Treasury knows what it's doing by guaranteeing money market-fund assets.

But what if the Fed's efforts to stoke a recovery are merely creating asset bubbles in equities and elsewhere? What if government guarantees—explicit and implicit—are encouraging high-risk investment behavior rather than restoring conditions for normal market returns? What if excess dollars produced here are being channeled by speculators into foreign stock and bond markets as part of a currency play?

No, really? Did you get that from the correlation charts of the dollar and S&P 500? You know, this one, showing correlation from March onward:

Judy continues to opine:

Deflation is seen as the bugaboo of Keynesian economics. But it can actually serve to spur economic activity as lower prices enable struggling consumers to get back in the game, and enterprising individuals can build businesses using tangible assets that yield valid profits.

But the Fed seems to think that prices should only go in one direction—up—no matter the circumstances. It's this bias toward inflation that is revealed by the FOMC's reference to "stable inflation expectations"—which is less a paean to price stability than an inadvertent oxymoron.

What Judy misses (perhaps because she's unaware of it, or perhaps because she simply doesn't feel comfortable saying it) is that deflation destroys over-levered debtors. It forces them into bankruptcy.

When that happens to the "little people" (that is, you and I) it doesn't matter to the oligarchs and robber barons on both Wall Street and Washington DC.

But defaults also destroy lenders who made imprudent loans. That's unacceptable as a matter of Washington DC's bought-and-paid-for policy, which is why we have Treasury Secretaries and the Chairman of The Fed corralling Representatives and Senators in a room and literally threatening them with the collapse of America if they don't fork up $700 billion of taxpayer funds for an open-ended, one-page slush fund that includes absolute legal immunity for whatever might be done with it.

If this had ended at $700 billion it would have been bad, but it didn't. No, The Fed then continued onward to announce the purchase of $1.2 trillion dollars (that's $1,200 billion more!) of debt and securities that, according to Section 14 of The Federal Reserve Act, they are not lawfully allowed to buy. (Section 13.3, often cited as justification, only allows the making of loans - not the purchase of assets. All purchase authority rests in Section 14.)

The FDIC then stepped outside of its legal mandate as well, "deciding" to guarantee bond issuance by banks - something that has absolutely nothing to do with depositor insurance. Why? Because once again, it is unacceptable in the Washington DC establishment if those who make bad loans - on purpose - have to eat them. Only the borrower - that is, the "ordinary Joe" - is allowed to have his future destroyed. The lender, who is supposed to also lose his money when he makes a bad decision (thereby providing a strong disincentive to making bad loans) is to be protected by the taxpayer, thereby screwing the borrower twice - first by bankrupting him, then demanding that he bear the cost for the lender who made the bad lending decision as well!

Keynesian Economics and it's offshoot ("Chicago" economic theory) is, at its core, a scam. Not because the idea is invalid, but because it dictates that during times of plenty ("booms") the government must raise taxes and pay down debt - not just "decrease deficits." Yet in the post-war era we have never managed to run a material surplus, not even during Clinton's years despite the claims of his boosters - he, like all other modern administrations, cheated by "banking" FICA and Medicare deposits (which are pledged against liabilities in the future!) The boosters of Keynes refuse to discuss the fact that they're not even following his claimed theories, but rather are playing "black sharpie marker" with the parts they don't like.

Now here's the scary part: Even though more than half of all American households now own equities directly or through mutual funds, an increase in equity prices does not figure into the Fed's calculation of inflation. So while measures of core inflation (which exclude food and energy) carefully register minute gains in the price of a fixed basket of goods and services meant to reflect what a typical family buys to achieve a minimum standard of living, they ignore massive price surges in what has effectively become a widely held consumer good: stocks.

Moreover, the Fed's inflation-targeting approach overlooks price increases for real estate and rising commodity prices. Don't even mention gold, which has gone from $707 to $1,114 since a year ago.

Of course not.

But again, this is by design. The Fed is intentionally applying the wrong standard for the construction of the monetary base, because if it were to not it would have to recognize the asset price moves that underlay the actual economy in its economic numbers. This, in turn, would have led housing price increases to have been reflected in monetary aggregates and people would have freaked out starting in about 2004 - instantly derailing the bubble before it could get going.

As I have repeatedly argued if you get the original premise wrong everything else you do from that point forward is also wrong.

The monetary base in a credit-based monetary system is not "M0", "M1" or "M'" (M-prime.) It is the unencumbered assets against which one is both willing and able to borrow.

Further, the definition of sound lending is not predicated on some leverage limit or wildly-distorted view such as Basel-II. It is in fact very simple: if one never lends unsecured beyond one's capital there is never a systemic risk that can arise.

Here's the problem with all the games once one gets down to brass tacks: you cannot screw people indefinitely and expect them to come back for more abuse. Oh sure, you can occasionally con people a second time, but since these "big interests" rely on a continued volume of business.....

As just one example, how many municipalities will buy interest-rate derivatives from one of these "big banks" after the disclosure that Jefferson County overpaid by 400% - and a good part of that overpayment went to bribes? Further, it has become clear that the municipal government didn't understand the risks involved - and one can reasonably presume that was because those risks were intentionally hidden - probably by the bribing parties, the recipients of the bribes, or both.

There are solutions here but it is increasingly obvious that if Government doesn't step in the market will. All I have to do is look at volume - the percentage that is represented by "high frequency computer trades" has gone sky-high since last fall, yet volume has been dropping dramatically since March.

When the market degenerates down to a handful of trading houses with high-frequency trading computers passing the same 100 shares back and forth between themselves as the remainder of the market participants have gotten tired of getting reamed on a daily basis due to the cheating and decide to take their ball and go home, how do the "big trading houses" make money?

We're witnessing the destruction of the capital markets as the system is imploding from within as a direct and proximate consequence of willful blindness and outright fraud.

More On Lies - Strong Dollar

nospam@example.com (Karl Denninger) — Wed, 11 Nov 2009 11:53:00 -0500

Just a quick note..... and quick chart - both from this morning.

10 handles came off the S&P 500 in less than 30 minutes (a 1% move) when the dollar strengthened by about two tenths of 1%.

What would be the impact of the dollar moving higher by 10%?

This is the problem with the carry trade. The leverage that gets deployed, once it gets going, is typically in the range of 5:1, 10:1 or even more compared to the equity markets. (Absolute leverage in the FX markets is frequently 100:1 - in fact, even retail traders can run 100:1 leverage at most FX brokers!)

Just remember folks, ZIRP and it's pals are always exploited by the politicians to issue debt "free" into the markets. But once issued that debt has to be rolled over (since governments almost never run an actual surplus allowing them to pay down that debt), which means that the issue is not whether you can make the interest payments today, it is whether you can make them tomorrow given the possible changes in interest rates.

If interest expense ever exceeds income, you're finished, just as was the "buyer" who took out an OptionARM and then had his payment reset to more than his income. Instant Boom.

The same thing happens to nations.

The problem is that nobody knows exactly where the line is, because that debt must be rolled, and it is the future cost of that rollover, not today's interest rates, that determine where the wall is.

Have we reached the wall? Probably not yet. But if we keep issuing debt into artificially-suppressed interest rates, we will hit it with certainty, and the carry traders are betting (successfully so far) that government will not stop issuing debt (spending more than they make) and Bernanke will not pull enough liquidity to cause short rates to rise by even 1 or 2%.

Better hope all those "ands" and "buts" hold up folks.

(PS, if you think they will: Sold to you.)

Repeat After Me.... "There Is No Carry"

nospam@example.com (Karl Denninger) — Tue, 10 Nov 2009 10:45:00 -0500

From this morning's open (there have been many essentially-identical charts over the last months...)

You can argue anything you'd like, but this - the chart of the SPX cash and the dollar, overlaid - put the lie to any claim that "there is no carry" at play.

Today, as with many days before (and I'm sure will be since) is stunning evidence that indeed there is a monstrous carry being perpetrated against the dollar and our nation, Bernanke knows it, and there is exactly one way to stop it.

Remove enough liquidity so as to cause short rates to rise where it becomes unprofitable - 2% should do it.

Bernanke is causing this trade to be intentionally put on, and the only people profiting from it are the big banks that can borrow at or near the fed funds rate.

You and I are forced to borrow (if we want to, which we'd be nuts to do) at 29.9% on our credit cards.

This is just another means by which the big banking oligarchs steal your money America.

There is no actual "rally" in the stock market as a consequence of fundamental improvement in the economy. Rather, the "rally" is a consequence of the dollar carry trade - a destructive Godzilla that has infested our capital markets as a direct and proximate result of Bernanke's and Geithner's policies.

Greenscam - More Senility

nospam@example.com (Karl Denninger) — Tue, 10 Nov 2009 09:29:58 -0500

You have to love the mendacity of this clown:

“We have been very fortunate that the stock markets moved back” and are “re-liquifying the whole process,” Greenspan said at an event in Edmonton, Alberta, presented by Abu Dhabi National Energy Co., the state-controlled energy producer known as Taqa.

Oh please.

If I print up $12 trillion in direct funds and guarantees - not based on production but rather based on intentionally overpaying for "assets" (that have a true character and value closer to that of used dog food) and then tell the primary dealers that I transact with that they are "too big to fail" and that I want them to buy risky assets (implying or outright stating that if they're wrong they won't be held responsible for the losses) of course I can drive the stock market higher.

For a while.

But I don't think anyone expected it to do THIS:

I certainly didn't.

But heh, that's me. I know, I know, The WSJ has their own data center claiming the P/E is "only" 69 and on "forward estimates" is 17. But their computational format is not published and is from a third party (Birinyi Associates), while Standard and Poors actually runs the S&P index. Who do you trust? I choose a firm that has nothing to sell and designed the index itself. You pick whoever you wish.

But left unsaid is how this "liquidity" gets into the broader economy. Oh sure, for the banks that are trading with your money, and a "can't lose" proposition, they make a nice chunk. Their employees get big bonuses, which they can then spend.

But this is a tiny fraction of the broader economy and population - not enough to matter.

Lending to ordinary people and businesses has not improved.

Now let me be clear: We are in this mess because we lent too much money to people who couldn't pay. That is, we "created" a false economic view, a false belief of sustainable economic activity (GDP) that in fact was simply compound pulling forward of demand. We did this by extracting equity everywhere we could find it, and then when that wasn't enough we allowed negative equity to not only develop but be pressed further! Indeed, the very premise of the "guidelines" published recently for FDIC bank examiners include allowing banks to count underwater commercial real estate loans as "perfectly fine" if they're cash-flowing - never mind the fact that the mortgage is for more than the property is worth, and thus if the cash-flow ceases for any reason (like, for instance, the tenants in the place going bankrupt or leaving for cheaper quarters!) the bank will suffer a huge capital loss.

But the idea that Greenscam is promoting - that "we're getting better on the back of asset appreciation in the stock market" - is nonsense. As any trader or investor that lived through last year will tell you, gains are not real until you reduce them to cash - "paper profits" are in fact no profit at all. Just ask those who had $1 million in their portfolios in October of 2007, yet even after the "huge rally" are still looking at a $700,000 balance!

Paper changes in balance sheets do not translate into spendable cash; at best they lead to another bubble just like home price "appreciation" did when people start borrowing against that so-called "value." This in turn leads to another collapse when the "value" disappears, just as it did with housing.

"Margin call Gentlemen" is not something you wish to hear, but it appears to be what Greenscam wants to see happen to millions of Americans.

Don't fall for this blatantly senile BS.

Oh Yeah, It's Improving (A Compendium)

nospam@example.com (Karl Denninger) — Tue, 10 Nov 2009 08:12:00 -0500

First, let me say it again, since people seem not to read The Ticker often: The Market Ticker is not a short-term trading log. If you're looking for that, you can find it with a gold star on Tickerforum. End of (short) rant.

Those who claim that the macro environment is improving - fit these pieces in your models and smoke 'em. We'll start with the Credit Survey:

Credit remained especially tight for commercial and industrial loans, commercial real estate loans and credit cards. Some banks were beginning to ease standards for residential mortgages.

Most banks said they would tighten standards for credit cards in reaction to recent legislation that outlawed some practices Congress said were abusive to customers.

That's not so good. But it pales compared to this:

Banks that tightened credit requirements for business loans did so for the same three reasons cited in earlier surveys: reduced tolerance for risk, an uncertain economic outlook, and problems specific to industries.

Heh wait a second! I thought the economic outlook was improving? Not according to the banks it isn't!

The details? A scant two percent of banks eased standards for prime residential mortgages, and 4% were more willing to make consumer loans. For all others lending standards remained the same or tightened.

Next, if you think the mega-sized profits and bonuses of the "too big to fail" are going to stay, well, perhaps not. Of course the big boyz will fight it, but perhaps - just perhaps - someone's been reading Tickers on The Hill....

"What you will have is another public utility sector, with banks growing roughly 4% a year, funded by deposits," Richard Bove, a financial-services analyst at Rochdale Securities, said in an interview.

That could change things.....

Finally, there's this:

To some lawmakers it's nothing more than a photo op to help Paterson get re-elected. But the governor is dead serious. He said if the Legislature doesn't cut the budget now the state could run out of money by next month.

"We're going to run out of cash in four and a half weeks. We are going to run out of money. Unless we do something about it, (it will) threaten generations," Paterson said.

That's New York! Uh, wait a second. I thought Wall Street was back to their tax-paying, bonus-giving ways? What's this?

The governor says $3.2 billion in cuts must be enacted how -- or else. The cuts range from $500 million in agency spending to over $1 billion in already committed in aid to school districts and hospitals.

Hoh hoh hoh - Merry Christmas, especially given....

But Senate Democrats, with their tenuous 32-30 hold on the upper house, are terrified to make school and hospital cuts because, they said, the cuts could mean increases in local property taxes.

That's right, your property value goes down but your taxes go up! Isn't that special?

Of course government never wants to deal with things like gold-plated (and diamond-studded!) pension plans, or double-dipping "retirees" that come back as "consultants" or even take a second job (to get a second pension!) and other similar games. Why no!

The average American is supposed to tighten HIS or HER belt, but government? Hoh hoh hoh - no, we'll pick your pocket instead!

(Let's not forget that NY State increased spending last year - into the maw of this mess - by some $12 billion. That was smart, no?)

I have a solution to this - Tax these bonuses at a 90% marginal rate:

Nov. 9 (Bloomberg) -- Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co.’s investment bank, survivors of the worst financial crisis since the Great Depression, are set to pay record bonuses this year.

The firms -- the three biggest banks to exit the Troubled Asset Relief Program -- will hand out $29.7 billion in bonuses, according to analysts’ estimates.

That ought to cover it. After all, none of these firms would exist were it not for the extraordinary help they received. Since they're taking the "I don't give a damn" position, NY State should do the same, and enact a 90% marginal rate on their bonuses - including stock awards - to be paid in cash, up front.

Then there's Illinois:

The Minority Report is a data-grounded call for gutsy leadership to modernize the pension system that Illinoisans can't sustain: "Just to keep the unfunded obligation from growing, the state should be funding pensions to the extent of about $8.3 billion (per year) out of operating revenues."

That approaches one-third of the current state budget. Can't be done.

But heh, I'm just a pessimist, right?

First California, now New York, all as a consequence of allowing "the mighty" (whether they be public unions or banksters) to rob the government and public wholesale.

I guess I shouldn't be surprised; after all, Washington DC set a perfect example by ripping off the taxpayer - nearly literally at gunpoint - for $700 billion last year.

What's a few more billion between "friends"?

Finally, a bit of (possible) tin - a claim that "peak oil" is much closer than claimed in the Guardian (UK):

The world is much closer to running out of oil than official estimates admit, according to a whistleblower at the International Energy Agency who claims it has been deliberately underplaying a looming shortage for fear of triggering panic buying.

The senior official claims the US has played an influential role in encouraging the watchdog to underplay the rate of decline from existing oil fields while overplaying the chances of finding new reserves.

If that meme gains traction into an imploding dollar I hope you like paying $6+/gallon for your gasoline. Let's not talk about heating oil or diesel fuel (the same thing really), especially going into the winter months....

What does Warren know?

White House LIES: CFC

nospam@example.com (Karl Denninger) — Fri, 30 Oct 2009 15:39:17 -0400

This is ridiculous and anyone who believes it deserves to eat The White House Dog's used food:

The administration's blog post argued that Clunkers helped to lower auto prices on the rest of the vehicle market as well, a fact the administration said Edmunds ignored.

What a total load of crap.

First, I personally walked into dealerships during the "CFC" program time, and every single one of those dealers was literally screwing everyone who walked into the door.

Normally, you can buy an American car for $100 or so over invoice price. I have, in fact, not purchased one vehicle for more since I started buying cars! My last "new" American vehicle, a 2002 Suburban, was bought during the 0% "craze" following 9/11 and even with the 0% financing I bought it for $1,000 UNDER factory invoice. I saw no dealer willing to sell at anything approaching that number this time - they were all selling at full sticker, and two had their own "supplemental rip-off stickers" on the windows that they refused to negotiate on yet were full of junk (the usual "undercoating" and "fabric protection" for $250 garbage.) People literally got robbed to the tune of $2,000, $3,000 and sometimes more than the rebate was worth on these so-called "deals."

Second, this "program" destroyed the low end resale market. It literally took all those cars and crushed them! If you were in the market for such a clunker as the only car you could afford they all disappeared for the duration of that program. This did severe damage to sections of the used-car market and the consumers dependent on it.

This program was nothing other than a royal screwing of the American Consumer and a sop to the UAW, and that's a fact. Edmunds got this exactly right and the White House is pissed off that they got called on their incessant lies by a very influential auto industry publication.

Well, boo-freaking-hoo Barry.

Is The Press Waking Up?

nospam@example.com (Karl Denninger) — Fri, 30 Oct 2009 08:04:00 -0400

In a piece in The Dallas Observer, James Lieber opines:

Where did our wealth go? How do we claw it back? And when are we going to punish the culprits?

Heh, my refrain being sounded in the "mainstream media": Where are the cops?

He also calls out President Obama and the usual litany of campaign lies, including:

The Obama video portrayed John McCain as Keating's stooge and likened the S&L crash to the 2008 Wall Street meltdown, except that the current crisis is global and its bad guys are bigger and badder. Today's corporate villains were flashed on the screen, among them AIG, Bear Stearns, Lehman Brothers, Fannie Mae and Freddie Mac. The opening narrator was Bill Black, a Ph.D. criminologist and former lead lawyer at the Office of Thrift Supervision who helped steer the brilliant federal effort that cleaned up the S&L industry and won more than 1,000 felony convictions of senior insiders while recovering millions of their ill-gotten dollars.

Those watching the compelling attack ad (still online) had every reason to believe that Obama's approach would be just as hard-edged and that felon-busting G-men would rout the crooks and recover our money.

This was not to be.

Yep. In point of fact President Obama immediately post-election installed people who were personally responsible for the mess and were either complicit in or blind to the looting that happened during President Bush's Presidency, including Geithner, Shapiro, Summers and more.

Of course the looting has continued since, and in fact has picked up pace, since the "honest buck" is rather hard to make in a lending environment with no qualified and willing borrowers!

We've also got this:

So, where is the justice in the current crisis? Why have there been so few prosecutions and only feeble attempts, at best, to claw the money back? One reason may be that, in such infamous cases as the Lehman Brothers collapse and Bank of America's absorption of Merrill Lynch, the Fed and the Treasury were intimately involved with the financial elite's deal making at the time. It's difficult to prosecute others for securities fraud if you condoned the deals to begin with.

Ah, recognition of reality! In the mainstream press no less. Congratulations. Better late than never!

More important, the nation's new top prosecutor, U.S. Attorney General Eric Holder, has a history of preferring that deviant corporations be held to no more than a "voluntary cooperation" system in which they investigate themselves privately.

Under the "Holder Memo," which he wrote in 1999 as deputy attorney general in the Clinton administration, bad-boy executives and their corporations who turn over evidence to the government qualify for lenient sentences and fines and, sometimes, for settlements without even indictments. The consequences of their crimes often amount to only the cost of doing business.

Oh, it gets better....

Black vents particular ire at Tim Geithner, who, as New York Fed chair, fiddled while Wall Street imploded; Henry Paulson (and Geithner again), who, as Treasury secretaries, refused to enforce a key banking law; and Alan Greenspan and Ben Bernanke, who, as Fed chairs, were supposed to regulate banks, especially the renegade mortgage units. The two Fed chairs closed their eyes to excess and continued to blow easy money into the bubble.

The key statute that the Treasury flouted under Paulson and Geithner is the Prompt Corrective Action (PCA) law. Congress passed it in the wake of the S&L scandal in 1991, and the first President Bush signed it. It's probably the best, fairest and clearest piece of financial legislation since the New Deal.

.....

The message from the Bush administration was clear: The PCA "ceased to be applied to the big boys," says Camden Fine, president of the Independent Community Bankers of America.

Gee, what's The Ticker been talking about for the last two+ years?

He continues....

Eventually, it became clear that "nothing was happening to the big banks, and everyone knew they were sliding south," Fine says. When four majors—Wachovia, National City, Bank of America and Citigroup—became critically undercapitalized, Fine went to FDIC Chairwoman Sheila Bair to ask why they weren't being subjected to the PCA law, which could have resulted in replacing their executives or even breaking them up. Fine likes Bair, who has a populist streak of her own and whom he finds to be a candid, "hard-as-nails regulator." But he says she "basically gave a non-response": that there were complicated issues and that, perhaps, if she had a free hand, action would be taken. "She was very sympathetic," he says, but what he gathered was that there "was great resistance from the political community."

It is called "regulatory capture" and it is what happens when you have NAKED BRIBES called "campaign contributions" and "lobbying" in Washington DC.

Yet this is exactly what we have had over the last twenty years in this country. Justice? Where? Fair play? Where? Honesty? Where? No, what you have instead is a monstrous snake pit that occasionally spits out one or two vipers that are "sacrificed" to appease the masses.

The Dallas Observer gets the naked credit default swap issue right too:

Geithner told Congress that the government was "blindsided" last year by the explosive risk of the derivatives market, but can regulate it now. That's wrong on both counts. Everyone in Washington knew or should have known the risks in 2000, when the government stopped regarding these complicated bets as felonies and started calling them "investments." Then, as now, the main argument was that if American markets won't clear such swaps, someone else will. But two wrongs don't make a right; nor do a trillion.

Ding ding ding ding!

The danger that is being left unsaid - and unrecognized - is as I have asked repeatedly - is the government a cop or a felon?

Should the people come to the conclusion that The Government is in fact a felon - should there be no enforcement at the state level, no real move to "take back" authority vested in The Constitution, returning it to the states and to rein in the crooks, subjecting them to the just desserts for their crimes, there is a very real risk that The People will decide that there is only one way to obtain justice: through the actions of their own hand.

Lest you think this is an unrealistic view, I direct you to Mexico, where the police have become so corrupt that the people are now catching burglars and torturing them on their own. Vigilante justice is swift, certain, and brutal.

But it is the logical and expected outcome when the people reach the breaking point. Those who believe it "can't happen here" are deluded - it both can and will if our government does not stop condoning and in fact conspiring with the crooks that have robbed the people of this nation. In the collapse of the 1870s there were multiple instances of bankers being pulled from their desks by angry mobs and strung up on the lamp-posts, and while I will not condone this sort of justice being meted out I can and do certainly understand it.

The States can step in and take this ball from The Federal Government in the prosecutor's arena, but whether this happens at the level of Eric Holder or in State AG offices it had better start soon. Irrespective of claims that "the economy is improving" the facts on the ground are nowhere near that complimentary - job loss continues to accelerate, banks continue to operate that should have been shut down two years or more ago, and those who can pay are being looted to cover the debts of those who cannot.

Exactly where the breaking point of The American People lies is impossible to determine in advance, but once that point is reached it is too late to do the right thing.

Monday's Reverse Repo Test?

nospam@example.com (Karl Denninger) — Wed, 21 Oct 2009 10:57:00 -0400

Gee, who could have seen this coming?

On Monday the Federal Reserve held a major reverse repo test, as was announced by the NY Fed and by Zero Hedge. We have subsequently received several unconfirmed reports that the conducted test has been a disaster (we have calls into the Federal Reserve to confirm or deny this, we are eagerly awaiting their reply).

How do you do a reverse repo when there's no cash to tender?

Bottom line: JP Morgan/Chase appears to have only $21 billion in actual cash. Their "Cash" position as stated on Yahoo Finance and other places includes deposits with banks and fed funds - that is, cash "equivalents" that are not actual money in their possession.

That, of course, doesn't count when The Fed wants to drain liquidity and needs to drain actual cash.

It also belies a bigger question - what is the true leverage ratio of JP Morgan/Chase, if their actual cash is only $21 billion? Oh, that's kind of an ugly question, especially with some $700 billion in debt outstanding....

Are people really this dumb over at The Fed?

It appears so, and begs the question - how big of a disaster are we about to undergo?