Tuesday, November 25th, 2008.
WARNING: If you cannot stand the sight of nuclear explosions, people being pulled limb from limb, or dogs sleeping with cats, then please read no further as the math you are about to see is extremely graphic in nature.
That’s right, death by numbers – as in fiscal suicide – hence forth to be known as committing a “Paulson” (I only wish I could commit Paulson!). You see, math, unlike Freidman economics, is extremely unforgiving. Simply put, MATH IS A BITCH when the numbers work against you! We’re not even talking about upper level algebra here, just plain old simple math. But for this math, ladies & gentlemen, you will need to put your pocket calculator away and tap into your latest Pentium Processor as your little TI-1785 will run out of digits before we even get half way to entering in our first denominator.
First a little flavor…
Yesterday’s close saw the largest two day point gain in history. It left all of my short term stochastic indicators very over bought – usually a good entry point to go short, but I was careful knowing full well that we may be entering a more positive time frame, the ever elusive eye of the storm, a.k.a. Elliott Wave B up/sideways. The stochastic oscillator was overbought on the 5 minute, 15 minute, 30 minute, and 60 minute time frames, perfect for at least a scalp on the short side – so I took a poke at it just before the close. By the time I went to bed the futures were down more than 100 points – Booya baby, bread AND butter!
Oh, I can hear all of you 7th Day Economists thinking, “Evil short seller! Evil short seller!” But, frankly Scarlet… only Chris Cox gives a damn.
Then this morning I eagerly arose, spun up all three computers (now completely necessary to handle the math) and my jaw dropped to the floor with a THUNK when I saw the latest $800 billion headline! WTF, OVER? I regained my composure, and promptly sold my short positions. Now, normally I don’t just fold like a cheap suit, but come on, $800 billion? More?? This left me with only two options; attempt to trade this frenetic market – and probably give back some of my yearly gains, or sit on my hands and spend the day educating people about the horror show that is our economy… So here you go – Death By Numbers!
The latest $800 billion announcement created a new acronym to be added to the alphabet soup… you know, the TAF, the TARP, and now the TALF is the latest to be added in with all the other CRAP.
Here’s what the old ticker machine spat out about the TALF this morning:
*TREASURY SAYS AUTO, STUDENT, CREDIT CARD, SBA LOANS ELIGIBLE
*TREASURY SAYS CONSUMER ABS MARKET `ESSENTIALLY' STOPPED
*TREASURY SAYS TALF WILL IMPROVE ABS MARKET CONDITIONS
*TREASURY SAYS TALF MAY BE EXPANDED TO INCLUDE OTHER ASSETS
*TREASURY PROVIDES $20 BLN FOR CONSUMER ABS LENDING FACILITY
*NEW TALF FACILITY TO AID CONSUMER, SMALL BUSINESS LENDING
*TREASURY ALLOCATES FUNDS FROM TARP FOR NEW FACILITY
BULLET: FED: Federal Reserve says it will initiate program...
*FED TO LEND UP TO $200 BLN TO INVESTORS IN ABS :FNM US, FRE US
*FED SETS UP TERM ASSET BACKED SECURITIES LOAN FACILITY :FNM US
*FED TO BUY MBS THROUGH ASSET MANAGERS, STARTING BY YEAR-END
*FED TO START BUYING GSE OBLIGATIONS NEXT WEEK :FNM US, FRE US
*FED TO BUY DIRECT GSE OBLIGATIONS THROUGH PRIMARY DEALERS
*FED PURCHASES OF GSE SECURITIES TO BE OVER `SEVERAL QUARTERS'
*FED SAYS SPREADS ON GSE DEBT HAVE `WIDENED APPRECIABLY'
*NATE SAYS PAULSON IS AN IDIOT, DOESN’T KNOW MATH – OCCAM’S RAZOR
*NATE SAYS PAULSON AND CENTRAL BANKERS COMMIT LARGEST HEIST IN THE HISTORY OF MANKIND – ZEITGEIST
So, I get to THANK HANK for ruining what was probably the perfect short entry. Thanks Hank, you’re a true… ahhh, patriot! Yeah, that’s the ticket… a patriot who is actually a traitor who deserves to be swinging from the yardarm! But I digress; we are here to talk about math. Let’s start by wrapping our minds around a trillion dollars… Rev up those Pentiums!
A TRILLION DOLLARS: $1,000,000,000,000
That’s twelve, count them, twelve zeros! Move your cursor over the little Microsoft flag, select All Programs, Accessories, then Calculator if you want to play along. It’s easy, just type in a 1 and then count to twelve while you pound the shit out of the zero key! That’s it, calming isn’t it?
Okay, let’s go through a little math exercise: Let’s say that you are standing next to a huge pile of dollars bills ($1 trillion) and in front of you is a bonfire. Now let’s say that you are going to reach over to that pile and throw a dollar bill into that fire at the rate of $1 per second. How long do you imagine that you’ll be standing there throwing dollar bills into that fire? Five years? Ten years? Thirty years? Will you get done before you die? How about before your kids die? Their kids?
To calculate an answer, let’s start by determining how many seconds there are in a year, that will tell us how many dollars per year get tossed into the fire and then we can divide a trillion by that number to come up with the number of years. Sound simple? It is truly easy math, you just need a calculator large enough!
There are 60 seconds in a minute = 60
There are 60 minutes in an hour… 60 x 60 = 3,600 seconds per hour
There are 24 hours in a day… 24 x 3,600 = 86,400 seconds per day
There are 365 days per year… 365 x 86,400 = 31,536,000 seconds per year
Okay, now we’re getting somewhere! Now we take 1,000,000,000,000 and divide by 31,536,000 to come up with… 31,709.79 YEARS!
That’s right; you would be standing there for nearly 32,000 years tossing bills into the fire.
Now, if you are being charged interest at the rate of 5% per year, you will need 1,585 of your friends standing by your side tossing bills in with you for ETERNITY, JUST TO PAY FOR THE INTEREST.
Oh yeah, sure… we could stack ‘em to the moon, drive 100 miles by a stack of dollar bills 4 feet high, etc., but you get the idea. It’s an enormous amount of money.
This is where the 7th Day Economists jump in to remind us all that, “They said the same doomish stuff about a billion dollars 20 years ago, and when you compare it as a percentage of GDP it’s not that bad!”
Seriously, someone in this conversation has an Alice in Wonderland fantasy in their head – and guess what? IT’S NOT ME. How long ago was it that the entire world was making fun of how much money our military spent on the B-2 bomber? Remember that? The joke was that it stood for the $2 billion bomber! We couldn’t afford them then and now $2 billion sounds like a JOKE compared to the type of figures we’re throwing around just a few relative years later. That type of number growth – from talking billions, to talking trillions – is HUGE. It’s GIGANTIC, in that it shows that the number game of money has truly gone PARABOLIC. If you follow my writings, then you know what happens to all parabolic curves (they collapse under their own weight).
So, yesterday the media finally added up all the money and guarantees promised in all the alphabet soup programs in the past year. The tally? More than $7.7 trillion! And this morning we learn we get to add another $800 billion for a new total of $8.5 trillion!
$8.5 trillion! How much money is that? Well, the 7th Day Economists say, “it’s only a little more than half a year’s GDP!”
And here’s my response to that: Yes, but let’s get out our calculators, shall we? Let’s divide $8.5 trillion by the size of the entire population of the United States…
$8.5 trillion divided by 305,160,073 (current as of today) = $27,854 FOR EVERY MAN, WOMAN AND CHILD IN THE UNITED STATES.
For my family of four? That’s $111,416! Let me ask you this? Can the average family support that debt? If the answer is no, where do you think this all ends? But wait, that’s just the debts and obligations of the recent alphabet soup.
And before I get too far, I want to remind people that when it comes to comparisons to GDP, my bullshit flag is flying a mile high! WHAT DOES DEBT HAVE TO DO WITH GDP ANYWAY? The answer is NOT A DAMN THING! There is NO relationship, no tie whatsoever between debts and GDP and to make that comparison is pure ALICE IN WONDERLAND.
Here’s the same Alice in Wonderland argument, but in a different way: Let’s say that you live in a neighborhood of 100 homes. You and your spouse earn $100K per year (which is way above average). In addition to the $500k you owe on your house, you owe another $1,000,000 on credit cards! But you say, “in comparison to the GDP of my entire neighborhood, that $1 million is just a drop in the bucket so it doesn’t matter!
HUH? You owe a million bucks in unsecured debt but only earn one tenth that? How does that compare to the output of your neighborhood? It doesn’t!
Now let’s go back to the U.S. and our debt to GDP comparisons. Our nation’s businesses and people, NOT OUR GOVERNMENT, create about $13.5 trillion per year in economic activity (as measured by phony government statistics). But our government only takes in about $2.7 trillion per year in taxes or INCOME. Thus, Paulson and company have just committed the people of the United States to 3.14 years (Oooo, Pi) of INCOME down the drain, and that’s without interest.
Back to our neighborhood… if your personal debts exceed your ability to service those debts, there’s a term for that, it’s called BANKRUPT. It certainly doesn’t matter how much your neighbors PRODUCE, or even how much they EARN, it is YOU who is responsible for your debts. What matters is DEBT to INCOME, not DEBT to PRODUCTIVITY.
Did I mention that there are TWO and only TWO ways to pay back debt? That’s right, you can pay it back (with interest) or you can DEFAULT. That’s it.
Now, let’s really get into the scary math. No, we don’t want to talk about derivatives yet, we have to work our way up to that! Let’s continue to talk about debt.
ADDING UP THE DEBTS:
The following site keeps track of the nation’s CURRENT account deficit.
This is the number that is NOT based on GAAP accounting standards. You know, Generally Accepted Accounting Principles… the ones that your government requires you to adhere to but refuse to use themselves? Yep, that’s that one. GAAP accounting includes ACCOUNTS PAYABLE. For the U.S. that would include little things like Social Security and Medicare, but we’ll get to that in a minute. Here’s the latest from the debt clock site:
U.S. NATIONAL DEBT CLOCK
The Outstanding Public Debt as of 25 Nov 2008 at 08:12:50 PM GMT is:
The estimated population of the United States is 305,160,294
so each citizen's share of this debt is $34,968.08.
(NOTE: *this is the current figure above. When this article was written it was roughly $10 Trillion. At $12T the amount per capita is more than $40,000)
Uh, huh. Count the digits, there’s twelve of them following that 10! And, as you can see, the CURRENT account deficit is now up to basically $35,000 per man, woman, and child. When you add that debt to the debt that was just produced by all the alphabet soup programs (yes, a little of it is already in this number, but not much), the total is now up to $62,822 per man, woman, and child, or $251,288 for my family of four.
If you prefer to see the debt in chart form, here it is in all its beauty directly from the Fed:
Can you say, “parabolic?” Yes, I thought you could!
Oh, here’s a good one… note what’s been happening to the Federal Debt held by the pigmen (oops, did I use that term? I meant to say the banks that are actually privately owned, and not actually owned by the Fed. They are Fed in name only).
Federal Debt Held by Federal Reserve Banks: Hmmm… their Federal debts are going down while the nation’s debts are going up. Hmmm…
Okay, well our own Federal banks hold a half trillion in debt… gee, I wonder how much foreigners hold of our debt?
Ah ha! Foreigners hold nearly SIX TIMES the debt as our own “Federal” banks – niiice. So, we’ve established that this curve shape is parabolic, what happens to parabolic curves? Uh huh, that’s right! And what do you think will happen when this parabolic curve collapses? Think about it.
But I digress.
Now it’s time to talk about the future obligations of Medicare and Social Security. Before I get into the numbers, YES, WE CAN simply eliminate those programs and make them go away. WILL WE? YES, WE CAN cut our military spending in half to get back within some level of sanity… after all, we do spend MORE MONEY ON OUR MILITARY THAN THE REST OF THE WORLD COMBINED. But WILL WE? And again, who is the insane one in this fantasy that, unfortunately, is no fantasy at all?
Conservatively our own government admits that the obligations of Medicare and Social Security add up to about $56 TRILLION with Social Security being the much smaller problem of the two at “only” about $10 Trillion. Heck, President Bush spent more than $13 trillion with one signature when he signed Medicare Part D into law! By the way, when others calculate these obligations, they come up with numbers as high as $100 trillion, but let’s stick to the more conservative $56 trillion number, okay?
Now we’re talking some serious numbers, 56 followed by twelve zeros. Do the math, that adds another $183,510 for every man, woman, and child in the United States!!
Add that figure to the previous and now we are up to $246,332 for every person or $985,328 for my family of four.
Guess what? We have yet to even discuss personal or corporate debts. Do we want to go there? Okay, what the heck, I’m a glutton for punishment, let’s go…
Here’s a chart showing the liabilities of the household sector. In other words, personal debts. Note the little hook at the end, this figure just stopped growing.
Gee, that’s a BIG number and yet another parabolic chart! That would be about $14,000,000,000,000! Count the zeros, YEP, that’s 14 more trillion that the people of the United States are obligated for. Guess what, it’s the same 305 million people who owe it all. That’s another $45,901 for every person, bringing the total now to $292,233 per person.
Now, let’s talk about corporate debt. Yes, the same 305 million people are ultimately responsible for corporate debt too. Their debts, like all debts can be repaid in two and only two ways.
Below is the latest chart from the Fed… oops, they stopped keeping track of the number back in 2002, gee, I wonder why? And note that it doesn’t include the debts of the financial sector!! What is the shape of that chart? Oh yeah, it’s parabolic too!
Let’s just be ultra-conservative and go with the figure on the chart. That’s another $3.3 trillion in debts or about $10,820 per person.
This brings the total debt in America up to an astonishing $303,053 per person, or $1,212,212 for my family and every other family of four in America.
Guess what? We still have yet to consider debts owed by our state and local governments! And yes, the same 305 million people owe that debt too. Can the average American family support all this debt AND continue to produce enough to make headway?
The answer is clearly NO! The average American family cannot even service the INTEREST on their portion of the debt, let alone pay for food and clothing on top of it.
Now, you will say that there may be overlapping debts in there and that, ha ha, we might even “make money” on the crap the Fed is taking in (ha, ha, good one), and you say that that figure includes future obligations that the government will simply choose not to pay at some point? Okay, cut the figure in half… it’s still completely unmanageable! The math simply doesn’t work.
You can argue that we can grow our way out of it all you want, but math does not lie. The rules of economics are immutable, same as are the rules of physics and math. Now, let’s talk about the really GIANT numbers, the numbers of the shadow banking system.
Three decades ago modern derivatives did not exist. By 2006 the notional value of the world’s derivatives had grown to over $500 trillion and the highest report just prior to the latest collapse put the world’s notional value of derivatives at an astounding $1.4 QUADRILLION.
Now, just for comparison, the total output of all men and women of the entire globe last year was a GDP of a little over $60 trillion. $1.4 quadrillion is approximately 23 times global GDP! This is a very squishy number and is most likely much smaller now that the financial system is imploding, but it is still an unfathomably large number, in the many hundreds of trillions.
There is a notion going around that there are two parties, one on each side of the “bet,” and that those bets cancel each other out. That is true only to a limited extent. As all the bets unwind there will ultimately people who were not completely neutral and we WILL eventually find out who they are.
You see, not knowing who they are is one of the root causes of our financial problems, unserviceable debt being another.
As far as I’m concerned, there is NO LEGITAMATE reason for modern derivatives of any kind. In fact, 90% of our entire financial system provides NO service to society. My trading certainly doesn’t. Heck, writing this article is a FAR greater service to our society than my trading, that’s why I’m taking the time to write it. How many people do you think made it this far reading it?
Three years ago I gave our country a chance. We still had the option to do the right things that could have turned the math around. I no longer believe that option exists. Thus, OUR CURRENT FINANCIAL SYSTEM IS DOOMED. The debt will be defaulted and now that it has been transferred onto the taxpayer, you and me, we will default together, as in our entire nation. How long will it be? Let’s put it this way; you are not going to be passing these debts onto your grandchildren.
The people who know me, know that I am NO gold bug. Gold historically gets slammed during credit collapses as it has been during the first phase of this collapse, BUT our government’s actions are placing concrete boots on our currency and Paulson/Bernanke have thrown our currency overboard. That makes this a collapse something that’s on a higher level. I am now accumulating gold and silver and I’m going to give you one more reason why, just in case the above math doesn’t convince you…
In my last article I mentioned the mixed signals I’m seeing from my market indicators. Those mixed signals continue to indicate that the Fed could be buying up their own treasuries, in effect a stealth form of printing large sums. This is referred to as “quantitative easing,” which is just another way to say printing. Today saw a resumption of the 10 year bond moving down in yield while the dollar moved down and gold held on to its past two day’s of gains. Meanwhile the overall market treaded water and is working off short term overbought conditions. I am suspicious and am currently watching the markets from a safe distance.
I love America – it pains me greatly to see it and everyone suffer. I certainly do not enjoy passing along such gloom, but until we remove our collective brains from the Alice in Wonderland world in which we are currently living, real change cannot come. It is those who falsely claim to love her while they simultaneously rape and rob her that deserve your ire.