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http://market-ticker.denninger.net/...nninger/P1.html
Thursday, October 9. 2008
Posted by Karl Denninger at 22:18
(Page 1 of 277, totaling 553 entries) » next page
** POTENTIAL ECONOMIC SEIZURE DEAD AHEAD **
Ok folks, this is serious stuff.
This is now a national emergency.
Seven trillion dollars of wealth has been vaporized in US Stocks in the last seven days alone, with five of it since the passage of that ill-designed and foolhardy "bailout" bill.
The selloff this afternoon is the "real deal." It was not caused by the stock market getting "mad", it was caused by the short-term credit market along with the Treasury market suddenly dislocating at a few minutes before the bond pit closed at 2:00 PM.
Worse is also the fact that institutional lending has essentially disappeared - both between banks and now it is choking off commercial short-term credit across the board.
It doesn't get any more serious than this. To repeat: short-term commercial credit is threatening to completely disappear from the American scene.
Every action our government has taken thus far, including repealing mark-to-market requirements have made the situation worse by further destroying confidence.
In the overnight market the futures are imploding once again; the Osaka exchange was closed in Japan after hitting its "lock limit" within minutes prior to the Nikkei opening; the Nikkei is now down ANOTHER 10%, for a total loss of nearly 20% in just two days, with Japanese banks trading "offer only" - that is, NO BID. There are rumors of government bond market fails in parts of Europe, and Iceland has essentially been cut off from the rest of the world Interbank marketplace.
Japanese banks are now firewalling themselves from European and US claims; the interbank market is about to explode. Iceland has effectively defaulted on sovereign debt and today there was a rumor that Hungary had a failed bond auction, effectively defaulting as well.
Key: Sovereign debt (that is, Treasuries from various nations) has become infected with trash - unfortunately including ours now that Fannie and Freddie were nationalized and TARP has been passed - and may fail in a cascade-style fashion across the world. If this occurs our ability to fund our government will be cut off as well, leading to a need to reduce government spending by $800 billion a year immediately. This means huge and immediate cuts to Social Security, Medicare and Military budgets - by as much as half.
Over a year ago I warned in my writings that this could happen if we did not take action. If we did not force accountability through Congress and onto our financial system. If we did not force the thieves, liars and thugs on Wall Street to take their medicine.
Instead of taking action we have sat on our collective asses and allowed Congress to pass bailout after bailout - now our stock market is down close to 40% from the top with 20% of that loss coming in just over one week!
We are facing a global DEPRESSION and the cut-off of essential goods and services in this nation if we do not stop this lunacy immediately.
Please understand - the TRUCKER who has a full load of food headed for your grocer REQUIRES commercial credit in order to fill his truck with diesel.
The local GAS STATION owner REQUIRES commercial credit to fill his underground storage tank.
The local CAR DEALER REQUIRES commercial credit to have cars - and parts - in his dealership. No credit, no car - and no car repairs.
The manufacturer over in China REQUIRES commercial credit (letters of credit from the buyer's bank) to be able to ship those goods to America, where you can buy them. If the bank over there won't take the LOC from the bank over here, suddenly you have no tires, DVDs and other similar products to buy.
IF THESE MARKETS DO NOT IMMEDIATELY UNFREEZE THE CONSEQUENCE WILL BE THAT FOOD AND FUEL, ALONG WITH ALL OTHER MANNER OF CONSUMER PRODUCTS, MAY NOT FLOW TO YOUR GROCERY STORE AND GAS STATION.
Think about that very carefully and then consider whether YOU can afford to sit on your ass for one more second, or whether you have an absolute NEED to get on the phone, fax, and whatever else RIGHT NOW to your elected and appointed representatives and, if you do not get in response that they will IMMEDIATELY resolve this matter whether you will vow to band together with every one of your associates and friends, form a group consisting of everyone in your local city or town, and call a GENERAL STRIKE, refusing to both work and permit commerce to be conducted UNTIL THE LIARS ARE FORCED INTO THE OPEN, DEALT WITH, AND THE SYSTEM IS ABLE TO CLEAR.
We are quite literally out of time. This freeze in the markets WILL continue around the globe unless something is done NOW.
Every "intervention" and "promise" made by our government thus far - all of them - have been LIES.
Our government has done NOTHING to alleviate the problem and in fact every one of their "solutions" have made the situation worse - going back for more than a year.
We have "pumped liquidity" and even bailed out firms with taxpayer money, and yet the markets have not unfrozen.
They remain frozen because the root cause of the problem is that banks and other financial firms have been lying for more than a year, each quarter claiming to have "kitchen sinked" their losses only to report more the next quarter, and in some cases have gone on national TV to proclaim they're "well-capitalized" only days or weeks before they collapse!
The first question anyone asks when someone wishes to borrow money is whether or not they will get paid back. If the lender does not believe they will be able to be paid back then that loan will not be made, no matter how much money someone has available to them.
It really is that simple folks and yet this fundamental principle has been willfully and intentionally ignored for more than a year.
YOU MUST CHOOSE RIGHT NOW, TONIGHT, AS AN AMERICAN WHETHER YOU ARE GOING TO GO TO WORK TOMORROW AND PRETEND THAT NOTHING IS WRONG, OR WHETHER YOU ARE GOING TO ENGAGE IN PEACEFUL BUT FORCEFUL PROTEST IN DEMANDING THAT THIS CRISIS BE ADDRESSED NOT WITH "MORE OF THE SAME" BUT BY ARRESTING EACH AND EVERY ONE OF THE CROOKS, BY FORCING BALANCE SHEET TRANSPARENCY FOR EACH AND EVERY FIRM IN THE UNITED STATES, AND BY THEN FORCIBLY RECAPITALIZING VIA DEBT-TO-EQUITY "CRAMDOWNS" EACH AND EVERY INSOLVENT BANK AND OTHER FINANCIAL INSTITUTION, WITH TREASURY STEPPING IN WITH TAXPAYER MONEY ONLY AFTER THE TRUTH (OR FALSEHOOD) OF SOLVENCY IS ESTABLISHED IN PUBLIC WHERE WE CAN ALL SEE IT.
THIS IS NO LONGER JUST ABOUT YOUR RETIREMENT SAVINGS AND HOUSE (although that's important) IT NOW IS, QUITE LITERALLY, ABOUT THE ABILITY OF ORDINARY COMMERCE TO CONTINUE AND ESSENTIAL GOODS AND SERVICES - FOOD AND FUEL AMONG THEM - TO REACH OUR MARKETS.
YOU LITERALLY MUST CHOOSE NOW, AS THE TIME TO DAWDLE AND THINK ABOUT IT HAS EXPIRED.
Update 7:30 AM CT 10/10 - Overnight LIBOR has come in dramatically, but 3 month dollar LIBOR has not - in fact, it went higher. This tells you that while people do not believe the market is due to implode tomorrow - an improvement over yesterday - they also don't believe that anything will be fixed in the next few months. Thus, as of this time, the nightmare scenario remains on the table.
8:00 AM - Trading desks (from the forum and a quick check) are reporting agencies being dumped by Chinese holders. Don't be too quick to call this "screw those evil Americans" - this smells like have to sell as opposed to want to sell. LOC seizures mean goods aren't moving which means you have to sell what you can, irrespective of price. Ditto for the price dislocation in the Treasury market. Say goodnight to what's left of the housing market - as I expected would happen - its done.
9:53 - Again, for the second day, no OMO (Open Market Operations) at The Fed. Read this report carefully. Note that there are no Agencies and no Treasuries left on The Fed's balance sheet. All gone. All that is left is $80 billion of crappy MBS. Bluntly, without printing raw money, The Fed is out of Treasuries with which to lend into the market, and thus cannot perform OMO any more; they must do "other things" (like print money.) We are now officially into the twilight zone and Fed Solvency is an issue on the table. President Bush spoke again but none one word about forcing transparency among financial institutions. Raise cash now and be prepared for potential essential good and service disruptions as the supply pipelines could begin to go dry on these as soon as early next week.
Thursday, October 9. 2008
Posted by Karl Denninger at 07:38
(Page 1 of 277, totaling 553 entries) » next page
What The Media *Didn't* Cover
So yesterday the "news" was all about the long end of the Treasury curve rocketing higher (yield), which many people believe is about "risk acceptance" and The Fed (along with other central banks) cutting rates by 50 basis points.
Uh huh.
Let's talk about what's really going on.
First, our rates. The EFF (Effective Fed Funds) rate has been trading at 1.5% now for a couple of weeks. Two percent schmoo percent; a target rate only in name is no target at all. In reality the 50 bips cut, even though it resulted in an instantaneous 40 handle rocket shot in the /ES futures Wednesday morning, was entirely a CONfidence game (with the emphasis on "Con"!)
The RTS (Russian Market) is down 87% YTD, and is closed until further notice. The Nikkei is trading below the DOW - that's not good. Indonesia's stock market was shuttered Wednesday and remains closed after tripping "lock limits" within 90 minutes of the opening bell. As of Thursday morning the RTS was closed again after Putin allegedly strong-armed a whole bunch of Russian wealthy to "stick it in" (to the stock market); this sort of v-fib in a market does horrifyingly bad things to ordinary investors who find themselves out just before the market rockets higher without underlying economic cause.
Iceland has essentially melted down. Their currency went straight into the toilet and two of the three largest banks were nationalized - all in the space of 24 hours. The culprit? Bad loans. Where have we seen this movie before?
Mexico's peso has fallen some 40% in days against the dollar. Great if you're traveling there as an American. Sucks severely if you're a Mexican. That alleged fence on our southern border is going to need reinforcements.
Wednesday morning Britain and the EU zone all announced major bank rescue operations. Same deal - "throw money at it, paper it over."
Nowhere a mention of forcing balance sheet transparency and truth.
Except in one place - here in the US! Plans to standardize CDS contracts and force them onto an exchange are actually under way. This is a major positive move and fulfills one of the three prongs of my view of how to solve this problem, once implemented. We'll see how much pushback we get, and whether OTC derivatives are actually banned (as they should be), or whether the big trading houses and banks insist on being able to play "pick pocket" along side the "regulated" world.
The NY Fed announced plans to extend a further $39.6 billion credit line to AIG. The tab is now almost $120 billion dollars. Where did the other $80 billion go? Has it been vaporized trying to raise capital to pay down CDS contracts that have gone the wrong way on them?
Speaking of which, Thursday is D-Day - D standing for either "derivative" or, if things go sideways on people, "detonation."
See, this is the day that Lehman's CDS contracts are supposed to be resolved. Since Lehman's bonds are trading at ~20-30% recovery (horrible, on balance) the writers may have to fork up 60 to 70 cents on the dollar.
The $64,000 question is how many of those contracts net out. The real liability is what's left once everything is "balanced" (a long and short held by the same guy net to zero, assuming that both contracts are "money good", leaving the holder with no liability - and no asset)
This has the potential to be a big "nothingburger", a minor tremor, or a 250' high tsunami that washes over Lower Manhattan (and the City) tomorrow. There's no good way to know in advance which outcome will manifest, since nobody (at present) knows what the true netted-out open interest is. This is one of the problems with not having a public exchange; lack of knowledge.
The bright light of reality will shine tomorrow......
The architects of this, by the way, are the folks who took the cuffs off the banks, going back to the Gramm-Leach-Bailey law and the repeal, piece-by-piece prior but finished by GLBA, of Glass-Steagall. GLBA, by the way, was passed in 1999 - just as the Internet bubble was in full force. Coincidence? No. The root cause of this mess? Right there. Thank Congress, and make sure you include those members who have been around for the entire thing, including John McCain.
On the equity market side shorting is once again available, the order having expired. The lack of shorts was a definite factor in the stiff selloff that we've seen, and Chris Cox owes investors in America an apology - on the air. This was an objectively stupid decision, as shorts provide necessary liquidity during serious downturns. Without them you get "no bid" circumstances, and they sporadically appeared during the last few days in financials, which certainly exacerbated the selloff.
In the bond markets Treasury refunded some "off the run" bonds and got an ugly surprise - the market didn't want them. They had to pay a 40 bips "tail" to get them to go, which may be the start of a really troublesome trend. See, Treasury is now throwing over $100 billion a week into the market, and this only works on days when the market is crashing. THEN you can get people to suck up all you puke out, but the rest of the time you're going to have to pay up, and Treasury has had to do so - dearly.
This may be the start of the "bond market dislocation" that I have long feared. I hope and pray not, but if this trend continues Treasury is going to find that it cannot sell its debt into the market without slamming rates higher, especially on the long end of the curve, which means an instantaneous implosion of what's left in the housing market.
The ugly is that 3-month LIBOR widened today, as did the TED Spread. Both should have come in. They did not. LIBOR is essentially unsecured lending and the bad news is that a lot of corporate (and some personal) borrowing is indexed off it. If you are, you're screwed.
Why has LIBOR refused to come in despite these "coordinated" effort? Its simple: the underlying trust issue has not been addressed, and nobody is seriously proposing to do so.
Paulson and Bernanke now are truly caught in the box, as I have been talking about for more than a year. As they introduce and fund these silly programs like the "TARP" each new program produces more foreclosures by depressing home values and thus tightens the spiral.
See, as long rates go up house prices go down, since the value of a home for most people is Dependant on what they can finance, and that is directly related to interest rates. Get out your HP12C and run the principal value change for a fixed payment if interest rates change from 6% to 8% or 10% - that's the impact on the value of your house from these changes that are occurring in the Treasury marketplace.
This outcome is what I warned of in "Our Mortgage Mess" back in April of this year; a potential ramping of borrowing costs for government debt, which will not only make sustaining government spending (and perhaps government operation) impossible, but in addition destroy private credit by driving costs in the private sector skyward as well.
Simply put, the "TARP" or "EESA" must be repealed here and now.
It is unacceptable to risk Treasury Funding destruction in order to bail out some bankers. And make no mistake - there is and will be no benefit to taxpayers.
We are also now entering into earnings season, and Alcoa was a warning blast. They missed badly. That won't be the last.
This is the "value trap" problem that many investors fall into. You see the market down 30% and think its a great buying opportunity.
It is a great buying opportunity only if earnings going forward can be sustained. But in this case, they cannot. It is flatly impossible; with Treasury borrowing money like a madman, tacking on more than 20% to the national debt in the space of months, carrying costs will inevitably rise as will taxes. Both of these have a multiplier effect (in the wrong direction) on corporate profits, and in addition the "faux profits" from financial engineering have all disappeared at the same time.
The S&P 500's profit, in terms of gross dollars, are almost certainly going to come in by 50% from the highs, and that assumes we get a garden-variety recession and not something worse. This of course puts "Fair Value" on the SPX down around 750, or another 25% down from here.
The ugly stick potential is what I discussed yesterday, and that risk is very real. Treasury borrowing cost ramps can produce a 1930s-style dislocation in credit, and if it happens then you will see mass bankruptcies not only in corporate America but among individuals as well as borrowing costs ramp to the point of shutting down the marketplace for credit.
Treasury and Bernanke claimed that "credit markets seized"; this is only half-true. Credit markets always close to those who are lying, because there is no reason to loan someone money if you're not reasonably sure you will get paid back.
But there is a second form of seizure and this is the frying pan into which we've now jumped - that is a credit market that prices beyond what the market can bear at its imputed rate of return. In that market credit is available but it does not matter, as you can't make enough profit to generate a positive carry on the borrowed money, and consumers in that environment fall into a vortex of interest payments that spiral faster than they can borrow to stay ahead of them.
That rabbit hole is how we got the 1930s, and it is the danger we now face. Congress was in fact conned by Treasury, George W. Bush and the banking industry (including Ben Bernanke), who instead of forcing the malefactors into the open and exposing those who were bankrupt (or just plain corrupt - notice the common stem on both words?) threw them a line - unfortunately, the line is cleated to the entire economy of the United States, and they have enough negative buoyancy to drag us all under the waves. |
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