Tuesday, March 30, 2010

Elephants in the Womb

'Ask yourself whether the dream of heaven and greatness should be waiting for us in our graves - or whether it should be ours here and now and on this earth.' -Ayn Rand

'I may be going to hell in a bucket, babe, But at least I'm enjoying the ride.'
-Grateful Dead

'And the LORD said to him, Go through the midst of the city...and set a mark on the foreheads of the men that sigh and that cry for all the abominations that be done in the midst thereof. And to the others he said in mine hearing, Go ye after him through the city, and smite: let not your eye spare, neither have ye pity.'
Ezekiel 9:4-5

Sighing and crying it is then!

Doing a quick peek at the WSJ, FT and Barrons that had stacked up while on holiday for a week, one wonders why there isn't a Comic Code Authority regulating same, for their content is clearly inappropriate for more impressionable readers.

The pablum narrative is certainly striking up the band; banks returning to profitability, GDP ramping, and the consumer spending, as all signs of a V-shaped, scratch that, nascent, scratch that, oxymoronic jobless recovery.

Ah the banks. Soon the debate will fall on the continuum of a double-dip caused by the counterproductive populism of bankster bashing versus the political palliative of misdirection through scapegoating. Like most debates in today's public arena, the magician's ability to get folks to ask the wrong questions belies the need for coherent answers.

The name of the real game is this : 'Failure to liquidate the insolvent banksters has led to the liquidation of a large part of the productive economy.A taxpayer financed bailout of rich folks' bad speculative bets has resulted in zombie banks and zombie customers... a fiscal tide that lifts no boats.' (AM Rule #7)

At no time do their hands leave their arms folks; the middle class for their next trick as the 'vanishing bird' smashed at the bottom of the now empty cage.

How smashed you ask?

Well turn the page back to ancient history, say April 12, 2009, when the FT reported: 'Many, including the IMF, expect total global credit losses to approach $4,000bn as the economic slowdown means that more traditional forms of lending become toxic. Assuming banks account for three quarters of losses, and they have already torched $915bn, according to Bloomberg, that equates to 14-odd years of revenues.'

It was around this time that the Federales proclaimed the writedowns will be discontinued until morale improves.

And yet much like the old chestnuts of 'page views not profits', and 'deficits don't matter', the kicking the can , ostrich-arsed, 'don't look at the marks behind the curtain' approach won't and can't change the facts on the ground.

That truth being the banksters are still too bankrupt too go broke.

How broke you ask?

Here's a real simple example. Consider just the off-balance QSPE of three of the too-big-to-jail banks:

Smells Fargo

Total Qualifying Special Purpose Entities(09/30/09): $1,796,209,000,000
Total On Balance Sheet Assets(Grant's 03/19/10): $1,262,354,000,000
Total Tier 1 Capital as a % of QSPE : 5.2%


Total Qualifying Special Purpose Entities(06/30/09): $828,300,000,000
Total On Balance Sheet Assets(Grant's 03/19/10): $1,856,646,000,000
Total Tier 1 Capital as a % of QSPE : 15.3%

J.P. Morgan

Total Qualifying Special Purpose Entities(06/30/09): $574,000,000,000
Total On Balance Sheet Assets(Grant's 03/19/10):$2,031,989,000,000
Total Tier 1 Capital as a % of QSPE : 23.2%

So in other words, not counting the VIEs (Variable Interest Entities), which are also held off-balance, if Smells Fargo's QSPE's are, in actuality, worth less than 94% of par then they have no Tier 1 Capital, using the 'fingers and toes' accounting method. Considering that Florida and California is at least 20% of their book, do we need to elaborate further? A mark on Citigroup's QSPE of 85% or less and J.P. Morgan's of 77% or less and it's Tier None for them also. Pay no attention to the FDIC marks behind the curtain folks! Securitizations are not like snowflakes because each are unique but rather because they all melt fast when the heat of observation is applied.

And the other two 'news items', GDP ramping and the consumer spending, implying 'champagne wishes and caviar dreams'? In ancient times the headline was GDI not GDP. Why? Well because GDI counts the total income in the economy while GDP measures the output of the economy as the sum of expenditures — consumption, plus investment plus government spending plus net exports.

WSJ blog
By Justin Lahart

In theory, the two measures should equal one another, in practice they don’t quite, and Mr. Nalewaik, a Fed Economist presenting a paper Friday at the Brookings Panel on Economic Activity, argues that GDI is the better of the two.

He finds that when the Commerce Department’s Bureau of Economic Analysis revises its national income and product accounts, GDP figures move more closely inline with GDI. GDI also appears to have a stronger correlation with other economic indicators, and its recent movement around turning points suggests it more closely tracks the economy.

He notes that GDI fell far more sharply in the teeth of the recession, dropping at a 7.3% annual rate in the fourth quarter of 2008, and 7.7% in the first quarter of 2009. GDP, in comparison, fell by 5.4% and 6.4%. Moreover, while GDP showed the economy began to grow in last year’s third quarter, GDI showed it continued to contract.

(Zip-a-dee-boohah Mr. Grant. -AM)

(Fourth-quarter GDI figures aren’t yet available.)

“[T]he latest downturn was likely substantially worse than the current GDP… estimates show,” he writes. “Output likely decelerated sooner, fell at a faster pace at the height of the downturn, and recovered less quickly than is reflected in GDP… and in conventional wisdom.”

'Mr. Hand's strong dollar policy is the chimera of currency debasement masquerading as America's wealth exporting machine that is regularly promulgated by our leaders as an exceptional example of America's resiliency.' (AM Rule #5)

But wait what about the savings rate decreasing, it's all good right?

Only one glitch, incomes did not increase.

From the venerable Peter Atwater at Minyanville:

'As I type, mortgage delinquencies exceed 14% while credit card delinquencies are closer to 6%. And owner-occupied mortgage delinquencies now exceed non-owner-occupied delinquencies. (And, for what its worth, home equity and second mortgage delinquency levels are far below first mortgages.)

Those in the financial-services industry argue that consumers are acting irrationally. Of late, I'm not so sure. I think consumers may, in fact, be acting rationally irrational, making what appear to be the correct decisions for the short term while completely ignoring their long-term consequences.

While likely to make me unpopular within the Beltway, I think a lot of the behavioral change is a function of two new phenomena: the constant vilifying of the banks as well as Washington's seemingly endless desire to facilitate mortgage modifications to underwater mortgage borrowers.

While not suggesting either is right or wrong, both actions invite delinquency if not outright strategic default. And the higher the overall rate of delinquency, the higher the likelihood of some kind of "negotiated" settlement. To mix my metaphors, one quacking goose may be shot, but a cacophony of squeaky wheels will ultimately be greased.

At least, looking at the data, that's what underwater American homeowners are clearly betting.

In the meantime though, the payments that would otherwise be put in the mail to Countrywide and other mortgage lenders, are being used to pay down credit card debt at unprecedented levels and being spent on living expenses including, per a recent Wall Street Journal article, season tickets to Disneyland and Carnival cruises. Call me a skeptic but I don't think it's any coincidence that we've seen an improvement in consumer spending coincident with a rise in mortgage delinquencies.

(And lets insert here, to be clear, that with double-digit unemployment, a significant portion of the reprioritization of payments are out of sheer necessity.)

Consumers are acting rationally irrational.'

Or as previously written on this blog:

'Extend and pretend is the proposed means to mend. Pay no attention to the marks behind the curtain. What ever the banks want to show they show.

The Nancy Capitalists proclaim its' all good, and we all should support that which brings recovery home.

But a storm is being created.

What they fail to realize is that they are corrupting, not supporting the American Dream; through their desire to be prophets they have ceased to be makers of their own fate.

The American Dream is becoming the American Scheme as moral hazard is writ large.

With Mr. & Mrs. America feeling no compunction to walk away from their home if their neighbor does it, with the neverending Federales policy of exalting drunks and punishing the sober, with the phrase 'the whole thing's a Ponzi' being uttered by even the most ardent of conservatives at family functions - life is imitating the arts of the elites.'

OTC derivatives, Build America to expand muni debt capacity(a good idea??), pension shortfalls, are yet more examples of the elephants in the womb.

When wise folks say that you should be your own central bank, are they doing a Barkley? Being your own corporatocracy may be rationally irrational but life liberty and synarchy for all is one hell of a way to go through life son.

On that path most assuredly the devil will be paid his due.

It won't matter until it does.

And when it does...

When we get off Sugar Mountain...

Oh mama!


Anonymous said...

Dear AM,someone who publishes anon.is clearly someone who doesn't need public adulation,yet after reading through the blog archives this past week,I know I have not personally encountered anyone else who commands such a spectrum of knowledge.I have two awesome kids I'd sure like to make some wise financial decisions for.I have my life savings-and their college funds-sitting in cash.I am profoundly bearish.I cannot understand how the market rises every day-NOTHING is fixed.Our nation is still traveling down the wrong path,I don't think we can ever go back to an economy 70% based on people driving around buying things on credit that aren't made here.Every parent knows you can't reward bad behavior,and that is all our government can think of to do.Is it possible,AM,that I am wrong,that this won't end in a huge train wreck for the middle class?Is it somehow possible that I have missed something important-and indeed,a happy new bull market has begun?Thank you,Mark.

mark salerno said...

Dear AM,one other question,please.I have a safe deposit box filled with gold coins,bought slowly over the years for my kids.All this asset destruction is deflationary.All these bail-outs are inflationary.My head is hurting trying to figure out which way this will go for gold-will my children whoop with delight or groan with despair when they open this box on some day-hopefully well into the future?Thank you,Mark.

joe said...

Great to have you back.

Anonymous Monetarist said...

I am also in cash as a function of my call for this year: 'The Unbearable Brightness of Doing Nothing', and have three young children.

'Is it possible,AM,that I am wrong,that this won't end in a huge train wreck for the middle class'

Well most certainly the future is known to no one. However, I share your concern:

'We speak of a mild outcome to all this, a new normal, as we stuff the pig on the scale of fate. We are so far down the rabbit hole Alice, so arse over tit, that it is quite plausible that the power law being applied here is masquerading mild as wild as well as its' converse.

What if the mild prognostication is deflation or hyperinflation with either A cascading to B or B cascading to A?

What if the Black Swan is just, hope upon hope, muddling through?'

To quote the venerable Todd Harrison, 'to get through this we have to go through this' and although crashes are by definition rare events my gut is that either a crash in purchasing power or asset values is the most likely outcome.

My biggest fear is that 'deflation is the midwife to hyperinflation' and if we leg down hard the Federales will snap the rubberband again.

Am optimistic for our future for the promise of America still lives but gosh we are making it so much harder on ourselves by dismissing realities while ringfencing rich folks bad speculative bets.

Anonymous Monetarist said...


It was quite a rewarding trip.

Anonymous Monetarist said...


Well I am not an investment advisor and I did not stay at a Holiday Inn Express last night.

However as mentioned in another reply, 'Deflation is the midwife to hyperinflation.' We did not have deflation during the Great Depression we had disinflation.

Deflation occurs when inflation expectations are unanchored.

If inflation expectations are unanchored, then a severe recession can lead to a deflationary spiral. The logic is as follows: In the early stage of recession, the emergence of slack causes the inflation rate to dip. The resulting lower inflation rate prompts people to reduce their future inflation expectations. Continued economic slack causes the inflation rate to fall still further. If the recession is severe and long enough, this process eventually will cause prices to fall and then spiral lower and lower, resulting in ever-faster deflation rates. The deflation rate stabilizes only when slack is eliminated. And inflation turns positive again only after a sustained period of tight labor markets.

An alternative scenario is where inflation expectations are "well anchored" in the sense that they are consistent with the goals and policies of the central bank. In this case, even in a severe recession, people expect the central bank to take policy actions, it is of course at all times just a confidence game, that will restore a positive rate of inflation, and this expectation acts as a magnet pulling prices up. Although deflation will occur if the extent of slack is sufficiently large, a deflationary spiral only develops in the direst circumstances in which monetary policy is incapable of righting the economy.

The first model(unanchored) says you believe your lyin' eyes.

The second model(anchored) says you believe in wizards.

If a deflationary event occurs gold will be crushed. However, the path to $5000 gold is through $500 because deflation is the midwife to hyperinflation.

As above, so below.

The critical elephant in the deflationary womb is employment... here is a post for your review:


mark salerno said...

Thank you AM,for taking the time for my questions.Time is a precious commodity for a busy father of three.Much appreciated.Mark.

Anonymous Monetarist said...


No worries.
Just doing what I can :)

I-Man said...

And doing it quite well, if I may add.

It is indeed great to have you back, sir.

You spark my brain.

Anonymous Monetarist said...

Thanks I-Man.

“A mighty flame followeth a tiny spark”
-Dante Alighieri

Anonymous said...

you are coming out of hibernation?

Anonymous Monetarist said...

Yes ma'am ...

and growling!