The Associated Press calls them “fully invested bears.”
It’s the most unique phenomenon of this rally. They are the large and successful group of investors – both individual and institutional – who see the economic reality around them and are naturally bearish. However, they’re still fully invested.
That’s where we’ve all been in the past few months. We know the reality. We haven’t forgotten history will likely look back on this rally as a bear market rally. But we still have recommended buying stocks and continuing to do so until, there’s really no other way to put it, they start to go down.
Since the rally began, every week has been filled with reminders of the old trading adage – the tough trade to make (i.e. buying stocks when economy is down) is usually the better trade.
Still though, as the “fully invested bears” turn into “fully invested believers,” the most discerning investors are focusing on when this rally will end.
The Greatest Test of All
So far the rally has passed every “test” in the past few months.
Earnings seasons in the midst of a deep recession – no problem.
Bad news after bad news from the economy – no worries here.
Memories of the market decline from late 2007 through March of 2009 when the S&P 500 lost almost 68% of its value – totally forgotten.
Together they formed one of the greatest walls of worry in decades. The market has steadily climbed right over it in the past few months.
Now though, however, the markets are about to face the biggest test of all.
It’s a test that will likely determine the market’s next big move. It will signal where you’re going to need to have your money for maximum benefit. It will let us know whether the recovery is real or whether it’s the mirage we’ve expected in an otherwise desolate bear market.
The true test for this rally will be whether the market can hold on and add to its recent gains over the next few months. Here’s why.
Small Caps Lead Led the Way
Historically, small-caps lead the way when the markets recover from a cyclical bear market that coincides with a recession.
For example, small cap stocks (tracked by the Russell 2000 index) surged 95%, 55%, and 38% from the stock market bottoms in 1982, 1990, and 2002. In those rallies the Russell 2000 beat the Russell 1000, made up by the 1000 companies with the largest market cap, by 34%, 18%, and 14%.
The same has held true for this rally. Despite a recent pull back, the Russell 2000 is still up 73% from its March lows. Meanwhile the Russell 1000 is up only 53% for a difference of 20%.
The thing is though, as the chart below reveals, the past market rallies that coincided with genuine economic recoveries were spread out over time:
As you can see, small-caps continued to post solid gains in the 10th through 12th months following the start of the rally.
That’s why the big test will be what small-cap stocks will be able to do in the next few months. As they enter the final three of the 12 months following the rally’s start (which is just a couple weeks away), they’ll be signaling the economy’s – and eventually the stock market’s – next big move.
So far, the small cap stocks are signaling that our thesis that this rally is taking its last few breaths will be proven correct.
An Ominous Sign
Over the last few weeks the major indices have continued the uptrend. Lurking underneath the new highs for the Dow and S&P 500 though is a troubling sign in small-cap stocks. The Russell 2000 has declined from a high of 603 to a low of 586.
Although I wouldn’t call a 3% decline the end of the uptrend, the underlying catalyst for the downswing is signaling more trouble ahead for small-caps.
The problem is investors are pulling their money out of small-cap stocks.
Investors in the iShares Russell 2000 ETF (NYSE:IWM), which tracks the broad small-cap index, have pulled out more than $1 billion since the start of October. To put that in perspective, investors piled in more than $2.2 billion into the ETF between July and September.
If this trend continues, it would be a very bad sign for the continued strength of the rally. It signals investors are getting nervous and want the perceived safety (that’s a topic for another day) of large-cap stocks.
The Best Move to Make Right Now
Again, there’s no way to tell exactly when the rally will end. But history, however, will provide plenty of clues for the signs to watch.
In this case, the outperformance of small-caps in all past rallies, signal the market may be priced for an economic recovery, but it’s still not expecting it.
The next few months will be a big test for the markets. The recent weakness in small-caps, however, shows the markets may be ready to fail this test.
Still though, the best move to make is to continue to be part of the “fully invested bears.”
If you’re in, take what the market gives you and ride it for all it’s worth.
If you’re looking to get in, find the sectors showing some signs of strength and where the ratio of risk to reward is steeply tilted in your favor. That way if you’re right, you’ll do really well. If you’re wrong, you’ll take a very small loss and move on.
Opportunities like these still do exist. For example, in the next Prosperity Dispatch we’ll look at a group of overlooked and undervalued stocks which were one of the hardest hit when the markets came unglued last fall. Best of all, they have just started to recover. More to come soon.
11/28/09
Denninger goes off on Bernanke. Ben and the Fed need to go
It appears that Ben Bernanke has his knickers in a bit of a bind this morning....
For many Americans, the financial crisis, and the recession it spawned, have been devastating -- jobs, homes, savings lost. Understandably, many people are calling for change. Yet change needs to be about creating a system that works better, not just differently. As a nation, our challenge is to design a system of financial oversight that will embody the lessons of the past two years and provide a robust framework for preventing future crises and the economic damage they cause.
That's correct Ben. Indeed, the only people who aren't calling for change are those who have abused their power to loot, pillage, and violate Americans over the last thirty years or so. They're quite content with how things are now, and indeed, have gone so far as to threaten Congress with events that will lead to martial law if they don't get their way.
There is some history behind this, is there not?
The American Bankers Association secretary James Buel expressed the bankers attitude well in a letter to fellow members of the association. He wrote: "It is advisable to do all in your power to sustain such prominent daily and weekly newspapers, especially the Agricultural and Religious Press, as will oppose the greenback issue of paper money and that you will also withhold patronage from all applicants who are not willing to oppose the government issue of money. To repeal the Act creating bank notes, or to restore to circulation the government issue of money will be to provide the people with money and will therefore seriously affect our individual profits as bankers and lenders. See your congressman at once and engage him to support our interest that we may control legislation."
That would be 1890 Mr. Bernanke. More than 100 years ago. Once a viper, always a viper.
I am concerned, however, that a number of the legislative proposals being circulated would significantly reduce the capacity of the Federal Reserve to perform its core functions. Notably, some leading proposals in the Senate would strip the Fed of all its bank regulatory powers.
You should not have bank regulatory powers. The reason is simple: You have abused them and willfully ignored the abuses served upon the people, specifically:
The marketing of trash securities with alleged "AAA" ratings that you either knew or should have known were backed by no ability to repay on the original terms - indeed, the only hope of payment was the continued appreciation of property values.
The abusive practices of banks with regards to overdraft fees and costs - fees and charges that amount to the imposition of interest rates of hundreds of percent on terms that customers not only did not opt into but could not opt out of. This has generated more than $30 billion in illicit profits in the last year alone. Your belated half-hearted actions in this regard in the last two months come only after decades of abuse and threats to impose that which you would not do as a regulator by statute.
Likewise, the "rate jack" operations of credit card issuers has not come under attack or regulation by The Fed. Indeed, it was once again Congress that had to step in after years of willful blindness on your part.
Finally, The Fed refused to regulate various predatory lending practices - including but not limited to those targeting minorities and low-income persons in general.
In short, The Federal Reserve is one of the primary architects of the current economic malaise and indeed the credit bubble that led to it. For you to come to The People of this Nation and ask for more power and authority, say much less keeping that which you have had but refused to exercise in the best interest of the people, is an outrage.
The Fed played a major part in arresting the crisis.
You "arrested" the crisis through lies, chicanery and papering over the truth of insolvency. Not one step has been taken by The Fed since the inception of the crisis to address the root causes of the collapse, which are:
Excessive leverage - specifically, dodges and cheats on reserve ratios and Tier Capital, including but not limited to Sweep Accounts (first put in place by Greenspan), off-balance-sheet vehicles (Citibank alone has nearly a trillion dollars of alleged "assets" hidden in them) and advocacy of mark-to-myth rather than a strict standard of mark-to-market.
Shifting of apparent risk via derivatives purchased and sold without proof of ability to pay in the event of default. This was the proximate cause of the near-collapse of virtually all of the major banks in this country. While you did not have the authority to prohibit AIG (and others) from transacting in these instruments without sufficient capital to pay dollar-for-dollar of exposure, you did have the authority to prevent banks under your regulatory umbrella from transacting in them and counting them as valid "hedges" against other positions. You willfully and intentionally failed to do so, and still are willfully and intentionally failing to exercise your existing regulatory power to demand that each and every derivative be either with a counterparty that is proven to be able to pay or is disregarded as being "money good" by the bank under your jurisdiction.
In short The Federal Reserve has willfully and intentionally allowed the seeds of this crisis to be sown and grown while blithely reclining in somnescence, smug in the belief that it will be able to paper over any failures by shifting the cost thereof to the citizens of The United States.
The People have (rightly so) said "no f%#$ing way!" and are insisting that this sort of willful blindness and open conspiracy to defraud the public be stopped.
Adopting such a resolution regime, together with tougher oversight of large, complex financial firms, would make clear that no institution is "too big to fail" -- while ensuring that the costs of failure are borne by owners, managers, creditors and the financial services industry, not by taxpayers.
No it won't. Not without real capital constraints and a demand that lending only happens in a sound, secure, and collateralized environment.
Indeed, had The Federal Reserve exercised its already existing authority to demand that banks never lend out more unsecured than they have in "owner's capital" - that is, the total amount of bond and stockholder equity - there would have been no "systemic risk" or "crisis." Instead those who had done imprudent things would have simply gone bankrupt, as businesses do each and every day, but the banking system as a whole would have been just fine.
But The Fed didn't do that, because forcing Wall Street and other big banking interests to live within their capital would mean they would make less money when times were good.
Leverage multiplies both risk and reward. There is nothing wrong with using it, provided that the risk you take is your own - that is, it entirely belongs to the owners of the firm (the aforementioned stock and bondholders.) But when you allow leverage to extend beyond a firm's capital you force the risk on to other, non-affiliated and non-consenting parties.
This is an outrage, and yet it is part and parcel of The Fed's mantra for the previous twenty years or more. We have seen repeated instances of this, beginning with LTCM, extending into the Latin American and Asian debt crises, and then again into the Tech Wreck in 2000. Time and time again the solution has been to reduce the margins between systemic insolvency and operating leverage.
This time you went too far and the system failed. Rather than admit this, you now come to the people of this nation and demand even more control, after proving that you're a financial arsonist with both a big can of gasoline and an insatiable smoking habit.
We the people must say "no."
Working with other agencies, we have toughened our rules and oversight. We will be requiring banks to hold more capital and liquidity and to structure compensation packages in ways that limit excessive risk-taking.
No you haven't. The former 14:1 leverage limit on investment banks, lifted in 2004 at the behest of Henry Paulson, has not been re-imposed. You have not removed the Sweep Account exception put in place by Alan Greenspan. You have not demanded that all derivatives be cleared on a central exchange with a central counterparty, forcing nightly mark-to-market and posting of margin, thereby removing the ability of banks to falsely claim hedges for which the counterparty cannot pay. During the depths of the crisis you even demanded (and got) the right to set the required reserve ratio for a bank to zero - that is, you demanded and got the right to allow banks to take on infinite leverage. This was buried in the EESA/TARP legislation and I, along with just a handful of others, noticed it.
All of this you could have already taken care of under your existing authorities, or you could do all of this tomorrow - but you have done none of it, nor have you pledged to do any of it in the future as a condition of your continued existence as a banking regulator.
In short you are a bald-faced liar.
There is a strong case for a continued role for the Federal Reserve in bank supervision. Because of our role in making monetary policy, the Fed brings unparalleled economic and financial expertise to its oversight of banks, as demonstrated by the success of the stress tests.
The Fed's statements, including yours, demonstrate that you have absolutely no clue as to the path of the economy. In the months and years leading up to this crisis you repeatedly proclaimed that "subprime is contained", that "we will not slip into recession" and the biggest whopper of all, that "house price appreciation reflects strong demand and sound economic fundamentals." None of this was true. Indeed, you are a walking contrary indicator - whatever you pronounce the market would be wise to turn on its ear in terms of actual expectations for the future.
I made most of these points in April of 2008 - but of course you won't pay attention to anyone who gets it right, yes Ben? Nor will you answer those critics, except through Goebbels-style repetition of bald-faced lies.
Or should you read my August 2008 missive in which I cited specifics:
Just like you said "subprime is contained"? (3/07)
Or "we do not expect spillovers from the subprime markets to the rest of the economy or to the financial system"? (5/07)
Or "monetary and fiscal policies are in train that should support a return to growth in the second half of this year"? (4/08)
Or "our baseline forecast is for moderating inflation"? (7/06)
Or ".... expect energy and other commodity prices to flatten out"? (7/07, right before the insane run in these prices began!)
Or if you prefer, you can read about them right here:
Chairman Bernanke before the Congressional Joint Economic Committee on March 28th 2007, just a few days later: "Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear. The ongoing tightening of lending standards, although an appropriate market response, will reduce somewhat the effective demand for housing, and foreclosed properties will add to the inventories of unsold homes. At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency."
Chairman Bernanke at the Federal Reserve Bank of Chicago’s 43rd Annual Conference on Bank Structure and Competition, May 17th, 2007: "We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."
Chairman Ben S. Bernanke speech to the 2007 International Monetary Conference, Cape Town, South Africa, June 5th: "The troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system."
Chairman Bernanke to Committee on Banking, Housing, and Urban Affairs, U.S. Senate, April 3rd, 2008: "Clearly, the U.S. economy is going through a very difficult period. But among the great strengths of our economy is its ability to adapt and to respond to diverse challenges. Much necessary economic and financial adjustment has already taken place, and monetary and fiscal policies are in train that should support a return to growth in the second half of this year and next year."
Is it possible to be more wrong Mr. Bernanke? I think not.
Of course, the ultimate goal of all our efforts is to restore and sustain economic prosperity. To support economic growth, the Fed has cut interest rates aggressively and provided further stimulus through lending and asset-purchase programs.
Asset purchase programs.... do they have to be lawful Mr. Bernanke? As I have repeatedly pointed out you have very limited authority to purchase assets and yet you act like those limits don't exist. Specifically, Fannie and Freddie both explicitly disclaim the "full faith and credit guarantee" required under Section 14 of The Federal Reserve Act for you to buy their MBS and debt - yet you have and are willfully ignoring that requirement.
But all of this, Mr. Bernanke, belies the underlying problem - that is, mathematics. The "Ponzi Finance Indicator" tells you (and everyone else who cares to look) exactly what is and has been going on:
This is the underlying issue you refuse to face, because doing so means repudiating decades of bad monetary policy and taking the inevitable hit to your reputation, along with that of The Fed, that would come from doing so. It also would mean accepting an even deeper recession than we are in now - even a Depression.
But if we do not - and you do not - we will follow the path of Japan, which is staring straight down the barrel of government monetary failure. Not today, but tomorrow for certain.
The reality of our situation is quite stark. You cannot expand credit faster than actual GDP - that is, output. Yet GDP is manipulated and falsely reported, with plenty of double-counting. It thus is in fact presented as a much-more rosy figure than reflects reality.
But even with this distortion, credit is growing faster, and has been since 1953. The "spread" has been, on average, about 3%. And as you can see from the chart above, over the last 30 years it has gotten much worse.
The ultimate issue is that as debt grows faster than output the available money to service debt contracts. That is, an ever-larger portion of gross output must be paid in debt service costs.
If an attempt is made to prevent defaults, as you and Greenspan have done, you are forced to drive interest rates lower. This is inherently backward - as one's debt-to-income ratio rises, the demanded interest rate should rise, not fall, as the risk of non-payment increases.
By intentionally tampering with the relationship between credit risk and interest rates the margin between current operating leverage and insolvency narrows. Eventually you reach a zero interest rate.
But with a lower interest rate leverage rises exponentially. At a 10% interest rate the maximum leverage possible is 10:1. At 1% it is 100:1. At 0% you are attempting to divide by zero.
This forces you into "extraordinary" measures. But those are a chimera as well. Dividing by zero is impossible no matter how you try to disguise it, and yet that is what you, and Treasury, are doing.
The simple fact of the matter is that debt service ratios became unsustainable as a direct consequence of your and your predecessor's willful blindness and outrageous conduct. You don't want to admit this, because once again doing so means admitting that you have willfully ignored the math for more than a decade, but it is nonetheless true.
You cannot make a bad debt good by hiding it. Losses happen when bad loans are made, not when they're recognized. There is no escape from this fundamental reality of banking, and you know it.
Only by forcing the bad debt into the open and defaulting it can we clear the excessive leverage and cause debt-service ratios to fall back to sustainable levels. The proper way to do this is to let the market set interest rates based on risk, rather than tampering with liquidity as you have done, and let the market sort out the failures.
Yes, Ben, I recognize that you face a "Hobson's Choice." But it is one of your own making, and the lesser of the evils is to take the damage now while our government's credit is still strong enough to withstand the shock.
Japan took the other path, and they now have a real risk of an actual sovereign collapse. We are following them down the same road, and there is no evidence that you, or other policymakers, recognize not just risk but the mathematical inevitability of where that road leads.
It is time to stop bloviating and dissembling Ben. Our nation needs leadership and truth, not obfuscation and lies. This is not a matter of political will and desire. Mathematics bend to no one - not even Caesar, and should we refuse to acknowledge how and why we're here, along with taking concrete steps to address it, we shall discover that attempting to divide by zero will have disastrous consequences for our economic, monetary and political systems.
For many Americans, the financial crisis, and the recession it spawned, have been devastating -- jobs, homes, savings lost. Understandably, many people are calling for change. Yet change needs to be about creating a system that works better, not just differently. As a nation, our challenge is to design a system of financial oversight that will embody the lessons of the past two years and provide a robust framework for preventing future crises and the economic damage they cause.
That's correct Ben. Indeed, the only people who aren't calling for change are those who have abused their power to loot, pillage, and violate Americans over the last thirty years or so. They're quite content with how things are now, and indeed, have gone so far as to threaten Congress with events that will lead to martial law if they don't get their way.
There is some history behind this, is there not?
The American Bankers Association secretary James Buel expressed the bankers attitude well in a letter to fellow members of the association. He wrote: "It is advisable to do all in your power to sustain such prominent daily and weekly newspapers, especially the Agricultural and Religious Press, as will oppose the greenback issue of paper money and that you will also withhold patronage from all applicants who are not willing to oppose the government issue of money. To repeal the Act creating bank notes, or to restore to circulation the government issue of money will be to provide the people with money and will therefore seriously affect our individual profits as bankers and lenders. See your congressman at once and engage him to support our interest that we may control legislation."
That would be 1890 Mr. Bernanke. More than 100 years ago. Once a viper, always a viper.
I am concerned, however, that a number of the legislative proposals being circulated would significantly reduce the capacity of the Federal Reserve to perform its core functions. Notably, some leading proposals in the Senate would strip the Fed of all its bank regulatory powers.
You should not have bank regulatory powers. The reason is simple: You have abused them and willfully ignored the abuses served upon the people, specifically:
The marketing of trash securities with alleged "AAA" ratings that you either knew or should have known were backed by no ability to repay on the original terms - indeed, the only hope of payment was the continued appreciation of property values.
The abusive practices of banks with regards to overdraft fees and costs - fees and charges that amount to the imposition of interest rates of hundreds of percent on terms that customers not only did not opt into but could not opt out of. This has generated more than $30 billion in illicit profits in the last year alone. Your belated half-hearted actions in this regard in the last two months come only after decades of abuse and threats to impose that which you would not do as a regulator by statute.
Likewise, the "rate jack" operations of credit card issuers has not come under attack or regulation by The Fed. Indeed, it was once again Congress that had to step in after years of willful blindness on your part.
Finally, The Fed refused to regulate various predatory lending practices - including but not limited to those targeting minorities and low-income persons in general.
In short, The Federal Reserve is one of the primary architects of the current economic malaise and indeed the credit bubble that led to it. For you to come to The People of this Nation and ask for more power and authority, say much less keeping that which you have had but refused to exercise in the best interest of the people, is an outrage.
The Fed played a major part in arresting the crisis.
You "arrested" the crisis through lies, chicanery and papering over the truth of insolvency. Not one step has been taken by The Fed since the inception of the crisis to address the root causes of the collapse, which are:
Excessive leverage - specifically, dodges and cheats on reserve ratios and Tier Capital, including but not limited to Sweep Accounts (first put in place by Greenspan), off-balance-sheet vehicles (Citibank alone has nearly a trillion dollars of alleged "assets" hidden in them) and advocacy of mark-to-myth rather than a strict standard of mark-to-market.
Shifting of apparent risk via derivatives purchased and sold without proof of ability to pay in the event of default. This was the proximate cause of the near-collapse of virtually all of the major banks in this country. While you did not have the authority to prohibit AIG (and others) from transacting in these instruments without sufficient capital to pay dollar-for-dollar of exposure, you did have the authority to prevent banks under your regulatory umbrella from transacting in them and counting them as valid "hedges" against other positions. You willfully and intentionally failed to do so, and still are willfully and intentionally failing to exercise your existing regulatory power to demand that each and every derivative be either with a counterparty that is proven to be able to pay or is disregarded as being "money good" by the bank under your jurisdiction.
In short The Federal Reserve has willfully and intentionally allowed the seeds of this crisis to be sown and grown while blithely reclining in somnescence, smug in the belief that it will be able to paper over any failures by shifting the cost thereof to the citizens of The United States.
The People have (rightly so) said "no f%#$ing way!" and are insisting that this sort of willful blindness and open conspiracy to defraud the public be stopped.
Adopting such a resolution regime, together with tougher oversight of large, complex financial firms, would make clear that no institution is "too big to fail" -- while ensuring that the costs of failure are borne by owners, managers, creditors and the financial services industry, not by taxpayers.
No it won't. Not without real capital constraints and a demand that lending only happens in a sound, secure, and collateralized environment.
Indeed, had The Federal Reserve exercised its already existing authority to demand that banks never lend out more unsecured than they have in "owner's capital" - that is, the total amount of bond and stockholder equity - there would have been no "systemic risk" or "crisis." Instead those who had done imprudent things would have simply gone bankrupt, as businesses do each and every day, but the banking system as a whole would have been just fine.
But The Fed didn't do that, because forcing Wall Street and other big banking interests to live within their capital would mean they would make less money when times were good.
Leverage multiplies both risk and reward. There is nothing wrong with using it, provided that the risk you take is your own - that is, it entirely belongs to the owners of the firm (the aforementioned stock and bondholders.) But when you allow leverage to extend beyond a firm's capital you force the risk on to other, non-affiliated and non-consenting parties.
This is an outrage, and yet it is part and parcel of The Fed's mantra for the previous twenty years or more. We have seen repeated instances of this, beginning with LTCM, extending into the Latin American and Asian debt crises, and then again into the Tech Wreck in 2000. Time and time again the solution has been to reduce the margins between systemic insolvency and operating leverage.
This time you went too far and the system failed. Rather than admit this, you now come to the people of this nation and demand even more control, after proving that you're a financial arsonist with both a big can of gasoline and an insatiable smoking habit.
We the people must say "no."
Working with other agencies, we have toughened our rules and oversight. We will be requiring banks to hold more capital and liquidity and to structure compensation packages in ways that limit excessive risk-taking.
No you haven't. The former 14:1 leverage limit on investment banks, lifted in 2004 at the behest of Henry Paulson, has not been re-imposed. You have not removed the Sweep Account exception put in place by Alan Greenspan. You have not demanded that all derivatives be cleared on a central exchange with a central counterparty, forcing nightly mark-to-market and posting of margin, thereby removing the ability of banks to falsely claim hedges for which the counterparty cannot pay. During the depths of the crisis you even demanded (and got) the right to set the required reserve ratio for a bank to zero - that is, you demanded and got the right to allow banks to take on infinite leverage. This was buried in the EESA/TARP legislation and I, along with just a handful of others, noticed it.
All of this you could have already taken care of under your existing authorities, or you could do all of this tomorrow - but you have done none of it, nor have you pledged to do any of it in the future as a condition of your continued existence as a banking regulator.
In short you are a bald-faced liar.
There is a strong case for a continued role for the Federal Reserve in bank supervision. Because of our role in making monetary policy, the Fed brings unparalleled economic and financial expertise to its oversight of banks, as demonstrated by the success of the stress tests.
The Fed's statements, including yours, demonstrate that you have absolutely no clue as to the path of the economy. In the months and years leading up to this crisis you repeatedly proclaimed that "subprime is contained", that "we will not slip into recession" and the biggest whopper of all, that "house price appreciation reflects strong demand and sound economic fundamentals." None of this was true. Indeed, you are a walking contrary indicator - whatever you pronounce the market would be wise to turn on its ear in terms of actual expectations for the future.
I made most of these points in April of 2008 - but of course you won't pay attention to anyone who gets it right, yes Ben? Nor will you answer those critics, except through Goebbels-style repetition of bald-faced lies.
Or should you read my August 2008 missive in which I cited specifics:
Just like you said "subprime is contained"? (3/07)
Or "we do not expect spillovers from the subprime markets to the rest of the economy or to the financial system"? (5/07)
Or "monetary and fiscal policies are in train that should support a return to growth in the second half of this year"? (4/08)
Or "our baseline forecast is for moderating inflation"? (7/06)
Or ".... expect energy and other commodity prices to flatten out"? (7/07, right before the insane run in these prices began!)
Or if you prefer, you can read about them right here:
Chairman Bernanke before the Congressional Joint Economic Committee on March 28th 2007, just a few days later: "Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear. The ongoing tightening of lending standards, although an appropriate market response, will reduce somewhat the effective demand for housing, and foreclosed properties will add to the inventories of unsold homes. At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency."
Chairman Bernanke at the Federal Reserve Bank of Chicago’s 43rd Annual Conference on Bank Structure and Competition, May 17th, 2007: "We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."
Chairman Ben S. Bernanke speech to the 2007 International Monetary Conference, Cape Town, South Africa, June 5th: "The troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system."
Chairman Bernanke to Committee on Banking, Housing, and Urban Affairs, U.S. Senate, April 3rd, 2008: "Clearly, the U.S. economy is going through a very difficult period. But among the great strengths of our economy is its ability to adapt and to respond to diverse challenges. Much necessary economic and financial adjustment has already taken place, and monetary and fiscal policies are in train that should support a return to growth in the second half of this year and next year."
Is it possible to be more wrong Mr. Bernanke? I think not.
Of course, the ultimate goal of all our efforts is to restore and sustain economic prosperity. To support economic growth, the Fed has cut interest rates aggressively and provided further stimulus through lending and asset-purchase programs.
Asset purchase programs.... do they have to be lawful Mr. Bernanke? As I have repeatedly pointed out you have very limited authority to purchase assets and yet you act like those limits don't exist. Specifically, Fannie and Freddie both explicitly disclaim the "full faith and credit guarantee" required under Section 14 of The Federal Reserve Act for you to buy their MBS and debt - yet you have and are willfully ignoring that requirement.
But all of this, Mr. Bernanke, belies the underlying problem - that is, mathematics. The "Ponzi Finance Indicator" tells you (and everyone else who cares to look) exactly what is and has been going on:
This is the underlying issue you refuse to face, because doing so means repudiating decades of bad monetary policy and taking the inevitable hit to your reputation, along with that of The Fed, that would come from doing so. It also would mean accepting an even deeper recession than we are in now - even a Depression.
But if we do not - and you do not - we will follow the path of Japan, which is staring straight down the barrel of government monetary failure. Not today, but tomorrow for certain.
The reality of our situation is quite stark. You cannot expand credit faster than actual GDP - that is, output. Yet GDP is manipulated and falsely reported, with plenty of double-counting. It thus is in fact presented as a much-more rosy figure than reflects reality.
But even with this distortion, credit is growing faster, and has been since 1953. The "spread" has been, on average, about 3%. And as you can see from the chart above, over the last 30 years it has gotten much worse.
The ultimate issue is that as debt grows faster than output the available money to service debt contracts. That is, an ever-larger portion of gross output must be paid in debt service costs.
If an attempt is made to prevent defaults, as you and Greenspan have done, you are forced to drive interest rates lower. This is inherently backward - as one's debt-to-income ratio rises, the demanded interest rate should rise, not fall, as the risk of non-payment increases.
By intentionally tampering with the relationship between credit risk and interest rates the margin between current operating leverage and insolvency narrows. Eventually you reach a zero interest rate.
But with a lower interest rate leverage rises exponentially. At a 10% interest rate the maximum leverage possible is 10:1. At 1% it is 100:1. At 0% you are attempting to divide by zero.
This forces you into "extraordinary" measures. But those are a chimera as well. Dividing by zero is impossible no matter how you try to disguise it, and yet that is what you, and Treasury, are doing.
The simple fact of the matter is that debt service ratios became unsustainable as a direct consequence of your and your predecessor's willful blindness and outrageous conduct. You don't want to admit this, because once again doing so means admitting that you have willfully ignored the math for more than a decade, but it is nonetheless true.
You cannot make a bad debt good by hiding it. Losses happen when bad loans are made, not when they're recognized. There is no escape from this fundamental reality of banking, and you know it.
Only by forcing the bad debt into the open and defaulting it can we clear the excessive leverage and cause debt-service ratios to fall back to sustainable levels. The proper way to do this is to let the market set interest rates based on risk, rather than tampering with liquidity as you have done, and let the market sort out the failures.
Yes, Ben, I recognize that you face a "Hobson's Choice." But it is one of your own making, and the lesser of the evils is to take the damage now while our government's credit is still strong enough to withstand the shock.
Japan took the other path, and they now have a real risk of an actual sovereign collapse. We are following them down the same road, and there is no evidence that you, or other policymakers, recognize not just risk but the mathematical inevitability of where that road leads.
It is time to stop bloviating and dissembling Ben. Our nation needs leadership and truth, not obfuscation and lies. This is not a matter of political will and desire. Mathematics bend to no one - not even Caesar, and should we refuse to acknowledge how and why we're here, along with taking concrete steps to address it, we shall discover that attempting to divide by zero will have disastrous consequences for our economic, monetary and political systems.
11/27/09
11/26/09
SPX futures at 1083 below 4wk ema at 1093 above 10 wk ema at 1071
Precter has a 200% short call out and Dubai defaults along with Japan rolling over should make for an interesting short trading day Friday. Markets close at 1PM Friday. Currently Europe is selling off 2 to 3%
11/25/09
11/24/09
11/23/09
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