The Economy: Karl Denninger, “Who Remembers This?”
“Who Remembers This?”by Karl Denninger
To those who think that "it's all going to be ok" let me point out a few things I've said repeatedly since this entire mess began and The Ticker began publication:
• We're screwed - they're screwed worse. Greece anyone? Oops - it's not just Greece, it's also Spain and Portugal, and now we're seeing failed bond auctions. Ka-Boom!
• China will save us. Oh really? Why is it that China's government is talking about bailing out their own banks? What could possibly go wrong with average home prices in parts of China exceeding 80x average incomes?
• We fixed nothing with all the screwing around. All we did is let the clowns steal more money. There has been no cleaning out of the fraudulent securities. Some have been transferred to your tax account - that is, you will be forced to pay for them in the future. But even more remain out there. Fannie/Freddie anyone? FHA defaults? CDOs, RMBS and others that continue to come under pressure and suffer downgrades? Second mortgages (HELOCs and similar) that are functionally if not mathematically worthless? Who's taken account of all these and written them off? Nobody. "Extend and pretend" only works until the cash flow dries up. Then you're doubly-screwed because the value of what you hold has declined further.
• The economy is not improving. No jobs, no economy. We shipped all our good jobs overseas in the quest for $30 DVD players. We got 'em - but we lost the ability to employ people in other than asset-stripping jobs for more than $50,000 a year. We refused to address the currency and import/export imbalances and still are, despite all the jawboning.
• The book cooking continues. CISCO comes out with "great" earnings but hidden in there is the fact that they're writing their own financing - and holding it off-book. Banks are still carrying HELOCs behind underwater firsts at or near PAR, even when the first is non-performing. Those loans have a literal zero recovery value. What could possibly go wrong with hiding asset quality (or lack thereof) off balance sheet where nobody can see it? Nobody remembers Lucent? Enron? It wasn't THAT long ago. Will it get CISCO or these banks? I have no clue but this much I do know - nobody ever hides good news, they sing from the rafters. You judge what's going on here.
• We did not neuter the CDS monster and it is now threatening to stomp on more churches. They're blowing out again - this time on sovereigns. Greece, Spain, Portugal. Don't worry, they'll be back on banks too, perhaps on Britain, and what's next? The US, probably. We had the opportunity to flat-out declare these things illegal gambling contracts and tear 'em up. Yeah, it would have led to massive lawsuits. And? These damn things are toxic, they're an inherently fraudulent scheme in that nobody is being forced to hold margin against their exposure (and thus they cannot be paid as agreed) and they're a big cause of the mess snowballing, since they provide huge leverage and that can burn you just as badly as it "helps." I've been warning for a good long time on this, but nobody wanted to listen. Now we're seeing Round #2 over in Europe. This is not over.
• We have foolishly tried to prevent home prices from contracting and in doing so have fueled even more trouble. Now we've got people intentionally defaulting - following precisely the paths that banks are taking with places like the offices in California and the huge apartment complex in New York! If it's good enough for them, it damn sure is good enough for me! And why not? Are there consequences? Sure, in some cases you can get nailed with a deficiency judgment and your credit will be trashed in all cases. But the banks are partly responsible for this push-back as well - many of them have gone so far as to push on debtors to raid 401k or IRA accounts, which is outrageous - those assets are protected in a bankruptcy. That sort of pressure ought to be felonious (and prosecuted as extortion) - but of course it's not - if you're a debt collector.
• We claim that auto sales are "strong" but in fact they're down huge from where they were through 2006. There's no "great" market there. We're doing what - 10.5 million units? That's a number last seen in the 1980s but we have how many more million people in the US today? Truth: Auto sales are off 40% or more from the last decade's numbers - not just the "heyday" of 2006.
• We claim that the economy is "recovering" but consumers remain tapped out and continue to shed debt. Instead of addressing this and dealing with the fact that we built too much capacity into the economy (all predicated on "pulled forward demand") we instead are trying to reinflate a popped bubble and are peddling false hope. This in turn has led small businesspeople (especially) to make very bad decisions for which they will likely pay - instead of an orderly wind-up of their operations many have doubled down and will, in the next year or two, be financially destroyed. Responsibility for this false hope rests solidly on the shoulders of the ToutMedia and government "pumpers."
• We have in fact pulled forward the disasters in Medicare and Social Security. The Massachusetts Senate election didn't cause the selloff in the market because suddenly "health care wasn't going to be reformed." However, the federal budget now has a smoking hole in it where the fraudulent so-called "reform" was formerly going to provide hundreds of billions of dollars in additional tax money that was going to be literally stolen under the pretense of "health care" for the people later that was NEVER going to be delivered. Social Security and Medicare are now both either in or close to going cash-flow negative. These programs have been used for 20 years to lie about federal budgetary holes and now that chicken has come home to roost. We don't have the money, we can't tax the money into existence and we can't pay. We must have an honest discussion with the people of this nation regarding entitlements - the two-thirds of the budget that is currently "untouchable" - but we still refuse to do so. I thought we had another 5-10 years before this bomb blew up in our face. I was wrong - it's here and now. This is going to be one of the most-difficult issues to face and solve - even more so than locking up all the fraudsters on Wall Street. But this is a can that cannot be kicked any more. (There's an extensive Ticker in the pipe on this very subject - watch for it.)
Might this selloff that we're into now be "a blip"? Maybe. But it doesn't change the trajectory, nor does it change the fact that we didn't get the sorts of valuations and metrics that come with durable Bear Market bottoms in early 2009. As such we are vulnerable to not only a dive back down to those levels but materially below them if we do not deal with the underlying problems, and to date, there is no indication that our government or industry will do so.
Keep playing the Pax Americana theme folks. Reality is coming and it's a clue-by-four aimed straight at your heads."
• China will save us. Oh really? Why is it that China's government is talking about bailing out their own banks? What could possibly go wrong with average home prices in parts of China exceeding 80x average incomes?
• We fixed nothing with all the screwing around. All we did is let the clowns steal more money. There has been no cleaning out of the fraudulent securities. Some have been transferred to your tax account - that is, you will be forced to pay for them in the future. But even more remain out there. Fannie/Freddie anyone? FHA defaults? CDOs, RMBS and others that continue to come under pressure and suffer downgrades? Second mortgages (HELOCs and similar) that are functionally if not mathematically worthless? Who's taken account of all these and written them off? Nobody. "Extend and pretend" only works until the cash flow dries up. Then you're doubly-screwed because the value of what you hold has declined further.
• The book cooking continues. CISCO comes out with "great" earnings but hidden in there is the fact that they're writing their own financing - and holding it off-book. Banks are still carrying HELOCs behind underwater firsts at or near PAR, even when the first is non-performing. Those loans have a literal zero recovery value. What could possibly go wrong with hiding asset quality (or lack thereof) off balance sheet where nobody can see it? Nobody remembers Lucent? Enron? It wasn't THAT long ago. Will it get CISCO or these banks? I have no clue but this much I do know - nobody ever hides good news, they sing from the rafters. You judge what's going on here.
• We did not neuter the CDS monster and it is now threatening to stomp on more churches. They're blowing out again - this time on sovereigns. Greece, Spain, Portugal. Don't worry, they'll be back on banks too, perhaps on Britain, and what's next? The US, probably. We had the opportunity to flat-out declare these things illegal gambling contracts and tear 'em up. Yeah, it would have led to massive lawsuits. And? These damn things are toxic, they're an inherently fraudulent scheme in that nobody is being forced to hold margin against their exposure (and thus they cannot be paid as agreed) and they're a big cause of the mess snowballing, since they provide huge leverage and that can burn you just as badly as it "helps." I've been warning for a good long time on this, but nobody wanted to listen. Now we're seeing Round #2 over in Europe. This is not over.
• We have foolishly tried to prevent home prices from contracting and in doing so have fueled even more trouble. Now we've got people intentionally defaulting - following precisely the paths that banks are taking with places like the offices in California and the huge apartment complex in New York! If it's good enough for them, it damn sure is good enough for me! And why not? Are there consequences? Sure, in some cases you can get nailed with a deficiency judgment and your credit will be trashed in all cases. But the banks are partly responsible for this push-back as well - many of them have gone so far as to push on debtors to raid 401k or IRA accounts, which is outrageous - those assets are protected in a bankruptcy. That sort of pressure ought to be felonious (and prosecuted as extortion) - but of course it's not - if you're a debt collector.
• We claim that auto sales are "strong" but in fact they're down huge from where they were through 2006. There's no "great" market there. We're doing what - 10.5 million units? That's a number last seen in the 1980s but we have how many more million people in the US today? Truth: Auto sales are off 40% or more from the last decade's numbers - not just the "heyday" of 2006.
• We claim that the economy is "recovering" but consumers remain tapped out and continue to shed debt. Instead of addressing this and dealing with the fact that we built too much capacity into the economy (all predicated on "pulled forward demand") we instead are trying to reinflate a popped bubble and are peddling false hope. This in turn has led small businesspeople (especially) to make very bad decisions for which they will likely pay - instead of an orderly wind-up of their operations many have doubled down and will, in the next year or two, be financially destroyed. Responsibility for this false hope rests solidly on the shoulders of the ToutMedia and government "pumpers."
• We have in fact pulled forward the disasters in Medicare and Social Security. The Massachusetts Senate election didn't cause the selloff in the market because suddenly "health care wasn't going to be reformed." However, the federal budget now has a smoking hole in it where the fraudulent so-called "reform" was formerly going to provide hundreds of billions of dollars in additional tax money that was going to be literally stolen under the pretense of "health care" for the people later that was NEVER going to be delivered. Social Security and Medicare are now both either in or close to going cash-flow negative. These programs have been used for 20 years to lie about federal budgetary holes and now that chicken has come home to roost. We don't have the money, we can't tax the money into existence and we can't pay. We must have an honest discussion with the people of this nation regarding entitlements - the two-thirds of the budget that is currently "untouchable" - but we still refuse to do so. I thought we had another 5-10 years before this bomb blew up in our face. I was wrong - it's here and now. This is going to be one of the most-difficult issues to face and solve - even more so than locking up all the fraudsters on Wall Street. But this is a can that cannot be kicked any more. (There's an extensive Ticker in the pipe on this very subject - watch for it.)
Might this selloff that we're into now be "a blip"? Maybe. But it doesn't change the trajectory, nor does it change the fact that we didn't get the sorts of valuations and metrics that come with durable Bear Market bottoms in early 2009. As such we are vulnerable to not only a dive back down to those levels but materially below them if we do not deal with the underlying problems, and to date, there is no indication that our government or industry will do so.
Keep playing the Pax Americana theme folks. Reality is coming and it's a clue-by-four aimed straight at your heads."
- http://market-ticker.denninger.net/
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