My Mistake

Unlike the MSM, I will correct mistakes when I make them. It doesn’t hurt, its painless. You see, I misread the Fed’s statement yesterday. They are not committing to another $1.5 trillion in monitization of mortgage bonds but have reaffirmed their prior commitment do so. I read the excerpt of the statement published elsewhere instead of the real thing. That’s what happens when you don’t read the whole thing.

Checking the Fed data, so far they have purchased exactly $650 billion in MBS and $175 in treasuries. That leaves $675 in toto left to go and all this will go into the black hole of the mortgage market where deflation is so rampant that it will have no affect on general prices. Keep in mind that house prices fell an incredible 15% in second quarter. Apparently the other side of the world misread that statement too, resulting in commodities rocketing, but they have since fallen back, though the dollar continues to fall. This most likely is due to the shakiness in the stock markets.

Regardless, the economic data is still terrible. They keep trying to hide it, gloss it over, but they can’t since there are so many indices that refuse to confirm the boiled books, such as trade and shipping data which are not doctored. The big boomergangs in store for us this fall and winter will be the dismal corporate performance in 3Q and 4Q. Companies used the massive layoffs to pay for continued dividend payouts even while gross revenues were falling. Now the money gained from the layoffs is gone and there is no profit increase, quite the opposite.

A huge black swan may be in the offing next spring with the collapse of Fanny, Freddy and now Ginny, all of whom pose multi trillion dollar liabilities for the taxpayer. And, as Deninger and Middleton point out today, the hidden insolvencies of banks are beginning to re-emerge. There is a reason the Fed is propping up these monstrosities with $1.5 trillion, but is it enough to deal with over $7 trillion in garbage bonds should the market suddenly turn on them? Hardly. There’s not enough money anywhere to plug that black hole.

Additionally, the Fed has lost control of interest rates. MBS rates do not control mortgage rates no matter how much of that crap the Fed buys. It is the 7 & 10 year bond that controls those rates that are once again rising. Interest rates have to rise what with the USG sucking $2.5 trillion out of the economy annually. Plus, mortgage defaults are again on the rise and there is more than enough energy there to smash housing down even further. They tried to tell us that unemployment was “bottoming,” but today’s numbers put the kebosh on that. New jobless claims, once we cut through the bull are in the 600k range again, and that only counts those eligible for unempl insurance, no one else so the real numbers are vastly higher.

Another nail in the coffin for stocks is the Fed closing down some of its “liquidity” programs, namely loans to speculators, also known as banks, but a few hedge funds, too. So called confidence levels are extremely fragile now, so once the reality that the economy is resuming its fall takes hold, that giant sucking sound will be money exiting the stock markets leaving the banksters holding their leveraged money bags sans money. Since they control the majority of it, to whom can they sell when they want to bail? Answer: no one. Welcome to the wonderful world of programme trading – 1987 redux.

And in the news today for a repeat performance is the fact that 90% of the toxic assets that killed the banksters in the first place are still on their books. The brilliant geniuses from Goldman Saks still haven’t figured out how to turn a sow’s ear into a pile of gold, although they did manage to kite their stock prices just fine. As we all know, what the stock market giveth, it can also taketh away – often in a heartbeat. Ergo a big flush of big bad new news remains quite capable of toppling them over the edge once again. In other words, “Baby, there ain’t be nothin’ yet fixed. It be down dere hiden’ unner de rug.”While I really don’t want to get into bank situation, suffice to say that it still remains as the fulcrum on which the economy could tilt into Dante’s Inferno. It wouldn’t take any really big shocks to bring them back down, like a cancer patient killed by a cold.

All of which brings me to the inflation front again. Consumer credit continues to fall; savings continues to rise as does joblessness. None of this is hardly a formula for inflation. And yet many consumer prices are rising. In large part this is the result of falling supplies and capital investment, particularly in food and the metals. This has nothing to do with the government’s ridiculous productivity index that never seems to decline. How can it when you count government spending as productivity?

As for the dollar, if the markets reverse this will support the dollar since leveraging is back again on the rise with a vengeance. Yet rising interest rates and yields on bonds bodes poorly for equities. Will there be another “rush to safety”? Most likely since there are darn few who believe that the US Treasury is not bullet-proof. Yes this means another probable market crash with similar results to last fall; a treasury market that continues to defy gravity and goes right on levitating . . . until it doesn’t.

Commodities have been hinging on the stock markets lately, and when those markets falter so will commodities. The economy is continuing to decline; there never has been any uptick whatsoever. The so-called W shaped recession is really more of a wavy line down. There may have been a slight plateau, but that is the best can be said of an economy that will continue to decline with renewed vigor. The inflation/deflation debate will reignite once again and I shall be pleased to sit it out and let others eat their shoes.

At this point it would seem that any upward pressure on oil will come from the dollar; it will remain linked to stocks and same for most other commodities. US consumption spiked in early summer but has begun falling again, more proof of declining economic activity.

And what about more stimulus? That’s a wild card, but we can be sure that its effect on the dollar and bonds would be truly awful. The bamster will have to decide if he wants to bet the house on that one. Will he bet that another round of deleveraging will create enough slack for another batch of monopoly money? If so, he’ll be wrong.

Were I an astrologer, I’d have to say that the stars are all lining up for another crash.

And finally, the Bears and Contrarians will be vindicated.