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.'
'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.'
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:
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%
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.
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...