Monday, May 4, 2009

Reality Brought to You via Truth Tellers…

Let’s start with David Tice, former manager of the Prudent Bear Fund. Sorry to the sunshine crowd, but David has been correct and is correct in what he says here, especially his comments about debt and the government’s debt bubble Ponzi dynamics.

People like the bull in that video keep talking about the “solid fundamentals,” but they are simply selling you their product. There is only one fundamental that you need concern yourself with that underlies our economy and that is DEBT. It is growing exponentially and that is not sustainable – period. Incomes already cannot service existing debt levels, much less service more and more and more. It’s over, sorry. This is the only chart that you really need to know in concerns to the fundamental underpinnings of this country (HT – Maize, thanks):

And that chart does not include unfunded future liabilities that more than double that amount of debt!

It is INCOME TO DEBT THAT MATTERS, and it is completely unworkable: Death by Numbers.

Many of Tice’s comments come as a result of the work of his colleague, Doug Nolan, who had this to say in his recent article, “The Greatest Cost:”

First of all, while it often appears otherwise, finance provides no free lunch. The mispricing of Credit and misperceptions of risk in the marketplace have deleterious effects, although their true impact may remain unexposed for years. Indeed, the more immediate (and always seductive) consequences of loosened financial conditions tend to be reduced risk premiums, higher asset prices, and a boost to economic “output”. Conventional analysis of monetary policymaking still focuses on “inflation” and “deflation” risks. I would strongly argue that our contemporary world has already validated the analysis that acute financial and economic fragility are major costs associated with market pricing distortions.

When the Federal Reserve collapsed interest rates following the bursting of the technology Bubble, the results seemed constructive. Stock and real estate prices inflated; a robust economic recovery ensued. There was at the time some recognition of the potential for real estate excesses. But this was seen as such a small price to pay in the fight against the scourge of deflation. It was not until 2007 that the nature of the true costs of a massive “reflation” began to come to light.

Many would today argue that it was simply a case of the Fed’s failure to take the punchbowl away in time. Such analysis misses a key facet of Bubble dynamics. Once the Mortgage Finance Bubble gained a foothold there was absolutely no way policymakers were going to be willing to risk bursting such a consequential Bubble.

I see ample support for my view that Bubble dynamics have taken root throughout government finance. This unprecedented inflation includes Federal Reserve Credit, Treasury borrowings, Agency debt, GSE MBS guarantees, FHA and FDIC insurance, massive pension and healthcare obligations, the myriad new market support programs, etc. This Government Finance Bubble is domestic as well as global. Amazingly, the scope of the unfolding Bubble dwarfs even the Mortgage Finance Bubble. And, importantly, it is reasonable to presume that the Federal Reserve will find itself in the familiar position of being trapped by the risk of bursting a historic Bubble.

So I see the probabilities as very low that the Fed will reverse course and impose tightened liquidity conditions upon the marketplace. Actually, reflationary pressures may force the Fed to increase its Treasury holdings in an effort to maintain artificially low interest rates. At the same time, I don’t see higher inflation as the greatest cost associated with this predicament. Much greater risk lies with the acute systemic fragility that I believe is inherent to major Bubbles. Similar to mortgage finance 2002-2007, the marketplace is significantly mispricing the cost - and failing to recognize the risks - of a massive inflation of government finance. And while every Bubble has its own dynamics and nuances, the unfolding Government Finance Bubble has even more precarious Ponzi Finance dynamics than the Mortgage Bubble…

Tice and Nolan are correct. The debt bubble has not gone away, it has simply been made even bigger as it has been pushed onto the government, and makes the risk belong to all of us. And unfortunately it’s a risk that is a for certain sure loser over time.

And here’s another truth teller, Martin Weiss with his latest thoughts:

The Next Mammoth Failures - Why The Stock Market Rally Will End

By Martin D. Weiss on May 4,

Just in the past few days, the United States has moved dramatically closer to the final fork in the road that I set forth in my online video of April 7th:

Either a prolonged, agonizing depression that dooms our country to decades of stagnation, decline, and poverty … or a painful-but-shorter depression that paves the way for a wholesome, sustainable recovery.

Either a government that pursues the dogma of “too-big-to-fail” to the bitter end, rewarding wild risk-takers and punishing taxpayers … or a government that pro-actively guides the natural process of failure, rewarding those who save for the future and can reinvest in America.

I’ll tell you which way we’re headed - and how it will impact your investments - in a moment. But first, an update on what we’re doing about it:

Yesterday, we printed out your petitions appealing for the better scenario; and tomorrow, I will deliver them to Capitol Hill.

I had hoped readers would sign at least 10,000 petitions; instead, they signed 53,547. I had hoped we’d get a good number from the most populous states; instead, we got large participation from all 50. I had expected only U.S. residents would join; instead, citizens residing overseas joined from 45 different countries around the world.

The most urgent and pressing issue …

What to Do With Failed Corporate Giants, Monoliths, and Mammoths

The great dilemma today is not just companies that have already filed for Chapter 11 like Chrysler … but also those that would be in bankruptcy today had it not been for taxpayer bailouts - Fannie Mae, Freddie Mac, Merrill Lynch, General Motors, Citigroup, AIG, and others.

The great debate is not merely what to do with big companies that have already hit the skids … but also how to deal with those that could meet a similar fate in the not-too-distant future - Ford, JPMorgan Chase, Wells Fargo, Goldman Sachs, SunTrust, Fifth Third Bank, and many more.

And the greatest challenge of all will not be strictly about the failure of giant corporations. It will also be about the next big shoe to fall - the failure of the U.S. government to fund its bailout follies without severe consequences.

Where do we stand? I see two phases in the evolution of this crisis:

Current Phase: Prolonged Agony

Right now, we have nearly all the pain of failure but little hope of resolution. And nowhere is this “worst-of-both-worlds” outcome clearer than in the Chrysler failure …

First, despite the infusion of another $4.5 billion in taxpayer money to finance Chrysler in bankruptcy, its Chapter 11 filing last week is wrecking havoc on the auto industry anyhow:

We have a supposedly “temporary” - but TOTAL - shutdown of Chrysler production, pushing U.S. auto-parts suppliers to the edge of bankruptcy and disrupting the flow of parts to General Motors and even Ford.

We see Chrysler auto dealers going broke in large numbers.

And we see a new phase in the collapse of auto financing, as lenders recoil in horror.

Second, despite massive commitments of taxpayer funds to back up the warranties on millions of Chrysler and GM automobiles, consumer confidence in the ailing auto industry has plunged, helping to drive all auto sales even deeper into the gutter.

Every major auto maker, whether failing or not, has reported dramatic sales declines from year-earlier levels: Not just Chrysler, which got whacked with a massive 48 percent loss in sales … but also General Motors, down 33 percent … Toyota, down 42 percent … and even Ford, supposedly better off, suffering a 32 percent hit to sales.

Third, despite hopes and assurances that the Chrysler bankruptcy will be “quick and easy,” we can already see signs of an imminent barrage of creditor lawsuits and claims hitting the courts. Their demands: Liquidate the company! Sell off the assets! Distribute the cash based on the contractual pecking order that gives first dibs to secured creditors!

In sum, we have BOTH a huge burden to taxpayers AND widespread pain for all those who rely on the auto industry for their livelihood!

In the final reckoning, the bailouts have bought nothing more than prolonged agony.

Next Phase: Tougher Love

The true pessimists of our time are those who assume the current pattern will simply continue indefinitely.

These pessimists include former U.S. Treasury Secretary Paulson, who literally dropped to his knees last September to beg Congress for $700 billion to save the nation from a Wall Street meltdown.

They include Treasury Secretary Geithner, who’s so terrified of bank failures that he’s zealously pursuing the crazy goal of guaranteeing ALL bank credit.

They include Federal Reserve Chairman Ben Bernanke, who’s so plagued by Depression-era nightmares that he’s been willing to abandon the Fed’s history, destroy the Fed’s balance sheet, and sell the nation’s monetary soul to the devil of unbridled money printing.

Plus, among them are all the Wall Street pundits and cheerleaders chanting for more.

In contrast, I am an optimist in this sense: I am very confident their days are numbered and our nation will soon step up to the tougher task of truly putting this crisis behind us.

My optimism is not derived from wishful thinking or armchair philosophizing. It’s steeped in practical, hard-nosed realities:

Hard-nosed reality #1
The market is not dead!

Even the most elaborate of government bailouts are not immune to powerful market forces. That’s why Fannie Mae and Freddie Mac shares plunged to zero. That’s why Bank of America and Citigroup shares have lost over four-fifths of their peak value (even after the recent rallies). And that’s why Chrysler finally wound up in bankruptcy court last week, despite repeated government promises to the contrary.

“Isn’t the government fighting to intervene massively in the market?” you ask.

Yes, of course. But fighting is one thing; winning is another. The undeniable fact is that the markets are not dead. They’re still alive, kicking, and massively powerful. Despite delusional bureaucrats who may think otherwise, it’s the marketplace - and not their mad-science experiments - that’s ultimately driving the course of history.

Hard-nosed reality #2
Easy to promise, hard to deliver!

Anyone in power can step up to a podium, make speeches, and say they’re going to spend or lend trillions of dollars. But even if directives are written and laws are passed, what’s promised on paper is not the same as what actually happens in practice.

Right now, for example, the total tally of the government’s bailout operations and commitments is $14.7 trillion. But among that, only $2.5 trillion has actually been spent or lent so far. Meanwhile, in 2008 alone, U.S. households lost $12.8 trillion according to Fed data, or over FIVE times the bailouts thus far.

Hard-nosed reality #3
No free lunch!

Anyone who thinks all the funding for the bailouts is going to simply appear out of thin air must also believe in the tooth fairy. The facts:

Congress cannot raise taxes without sinking the economy even faster.

The Treasury can’t borrow the money without driving interest rates through the roof for everyone.

And the Federal Reserve can’t print the money without destroying global confidence in the U.S. dollar and credit markets, gutting the economy even more.
Each of these - singly or in combination - will sabotage the same bailouts they’re seeking to finance. Each, even if pursued initially, will soon backfire.

Hard-nosed reality #4
The truth always comes out!

Last week, I told you about Six Egregious Lies perpetrated by Washington and Wall Street.

But I also showed you how the truth has already begun to pour forth - via leaked confidential memos, such as AIG’s confessions of a likely insurance industry collapse, and dire official forecasts like the IMF’s latest prediction of a massive global decline.

Hard-nosed reality #5
Not everyone is stupid!

There is a fast-growing, informed minority - skeptical investors and independent citizens - now rising in rebellion against federal bailouts.

That’s why our petition drive against senseless bailouts has been such a resounding success!

That’s why, two months ago, Thomas M. Hoenig, President of the Kansas City Federal Reserve, defied his own chairman … declaring that the “too-big-to-fail” doctrine has failed … recommending regulatory tough love for any failed bank, no matter how big. (See his paper “Too Big Has Failed.”)

That’s why, one week ago, FDIC Chairman Sheila Bair demonstrated equal defiance against her fellow regulators, stating, point blank:

“The notion of ‘too big to fail’ … is a 25-year-old idea that ought to be tossed into the dustbin …

“[It has] eroded market discipline for those who invest and lend to very large institutions. And this intervention, in turn, has given rise to public cynicism about the system and anger directed at the government and financial market participants. …

“Everybody should have the freedom to fail in a market economy. Without that freedom, capitalism doesn’t work. … Ultimately, this would benefit those better managed institutions and make the financial system and the economy stronger and more resilient.”

Finding it hard to believe that one of our nation’s top regulators is openly attacking the shaky thesis underlying most of the government’s bailout operations? Then read her speech for yourself.

This doesn’t mean we agree with everything these voices stand for. But it does go to show how the days of unlimited bailouts are numbered … and the epic fork in the road is now rapidly approaching.

The Consequences for Investors

This is bad news for investors who are again taking risks - and good news for all Americans willing to make the sacrifices needed to get this crisis over with as soon as possible.

It means that:

The supposedly “too-big-to-fail” banks like Citigroup or corporations like General Motors WILL ultimately be allowed to fail after all; their shareholders, wiped out; their creditors, suffering massive losses.

In the stock market, the seven-week rally we’ve seen will end; the financial stocks will give up all their gains and the broad averages will plunge to new lows.

Credit markets will freeze up once more, the government’s stimulus package will be overwhelmed, and any pause in the economic decline will be over.

But it also means that any temporary revival of inflation will soon die … the dollar will ultimately remain viable … and we can still look forward to a real recovery in the future.
That’s why I’m optimistic and why I’m delivering over 53,500 petitions to Washington tomorrow.

Sorry sunshine rally people… reality and the TRUTH does not match up to your marketing strategy of pressing endless debt into society. Buy the rally if you wish, my tune has not changed and will not until that debt to income graph above changes.

The securitization of debt process caused the greatest bubble in the history of mankind (with the Fed’s help of course) and is now in the process of collapsing. Exponential growth will not be renewed at this time despite their greatest efforts. It’s a lousy Ponzi dynamic… Hopefully, we’re never going back again!

Fleetwood Mac - Never Going Back Again - Live 1977