Here It Comes! (And No, "It" Is Not QE2)


Pretty amazing when you see something intelligent out of China – that we, and the rest of the so-called “Western World”, refuse to do:

The assets linked to wealth management products provided by trust companies must be shifted onto banks’ balance sheets by the end of 2011, the people said, declining to be identified as the matter isn’t public. Lenders should prepare provisions equal to 150 percent of potential losses, they said.

No more off-balance sheet games in China?  Banks must hold reserves equal to 150% of potential losses?

Gee, how come we don’t have that sort of program here?  Oh yeah, that’s right – in China the government exerts its authority, in America the banks exert theirs.

The “USA Way” is, of course, backward.  Banks are supposed to exist in the shadow of the law – both the common law that says “thou shalt not defraud people, including investors”, but the statutory law that allegedly governs capital ratios, reserves, and honest accounting.

In the US we get none of the above.  The FDIC proves it every Friday, when it seizes banks and shows “expected losses” that are 20, 30, even 40% of alleged “assets” that were declared just day or weeks beforehand.  In other words, we get proof every Friday that the banks are lying about asset valuations – and this proof has been presented to us literally on a weekly basis now for the last two years – but nothing has been done about it.

Then of course there’s this:

“But to the extent that they signal the Fed’s concerns and what direction they are, and the Fed’s willingness to take actions given the signal of their concerns, they could have big effects.”

Investors would see new Fed efforts as foreshadowing more dramatic steps to come, including large-scale asset purchases, said Goodfriend, a professor at Carnegie Mellon University’s Tepper School of Business in Pittsburgh. Weaker job gains at U.S. companies since April and a slowdown in growth last quarter are among signs the recovery is stalling, increasing pressure for more Fed easing.

And what would that do?

Interest rates for banks are already at or near zero.  It hasn’t “spurred lending”, because there’s nothing to borrow for.  Too many homeowners are underwater and those that aren’t are seeing their friends and neighbors drown in debt and lose their home, car, job – in short – everything.

Businesses refuse to hire, because there’s no reason to take the risk.  Consumers are over-levered, which means it is just a matter of time before “funemployment” and similar largess runs out – and when it does, so will the spending.  Hire someone and train them only to throw away the investment?  Why would anyone do that?

States, for their part, blew up their budgets during the bubble years and now are cooked.  Our local school district is a prime example – they’re now asking the citizens to approve a 8.3% increase to the sales tax – to fund replacement and repair of aging infrastructure, in some cases things that are 30 or 40 years old.  Four years ago and indeed as recently as last year, when tax revenues were at record highs, why wasn’t the money spent then doing this rehabilitation instead of blowing it on things like smart boards, Wii video games and adding staff expense in the form of salary and benefit costs? 

Then there’s the Federal Government.  It had spending increases that were multiples of inflation in discretionary programs, and in the 2000s we added Medicare Part D, an entirely-unfunded welfare program that there is absolutely no ability to pay for.

The Fed has nothing it can accomplish that doesn’t involve trying to give people incentives to borrow money.  But at times like this, when there is nobody willing and able to borrow, their policy becomes ineffective.

Small business has had it.  They simply don’t believe that any of the structural issues are being addressed (they’re right) and that instead what The Fed and government are doing is forcing yet more mainlined Credit Heroin into the veins of the economy (they’re right on that too.)  The market has responded with a delirious rally since March of 2009 entirely-unsupported by the economic facts – rather, it was the original belief when the “unconventional policy” began that just as in 2002 and 2003 “they could fix it.”

But in 2003 Greedscam and Bernanke (who was, if you remember, at The Fed at the time) fixed nothing.  They blew a huge bubble in housing and literally destroyed the wealth of a quarter of the people in this country in order to save their buddies in the banking system who had extended credit to non-viable Internet-based businesses that never had a prayer in hell of being able to operate profitably. 

We cannot excuse, however, the American Public’s role.  Remember that one must be both willing and able to borrow.  While the pusher can stand in front of you with a loaded syringe full of credit heroin and beckon you over to his side of the street, you, Joe Sixpack, are the one who must cross the street and allow that needle to go into your arm.

Yes, the “Fat Cats” on Wall Street, enabled by the criminal class in Washington DC, made it all “easy”, while burying the risks and facts (that is, the destruction of your financial life) in the fine print on page 237 of a 2″ thick document stack just as in the infamous PSA on predatory lenders that has run on TV for the last several years.  But that doesn’t change the fact that you wanted that Escalade and $500,000 house and you willingly participated in the scheme, even though you make $50,000 working in a middle-class job.  Why, we’re the greatest nation on earth and every middle class family can afford a $500,000 house and at least one brand-new $50,000 car, right?

Well, no, you can’t.  At least not in the long term.  Sure, you can hock your future for a while, if you catch a bubble, and appear to get wealthy off asset price inflation (which the government will dutifully ignore when it computes inflation!) but you won’t wind up owning any of these things – the banks owns them all and you will never see a clear title – that is, ownership – for any of it.

Oh sure, Bernanke can cause a short-term rally in the market by mainlining more Credit Heroin into a screaming Junkie.  For a (short) while.  But not that each of his “prescriptions” and “pronouncements” of “extended periods” and similar claptrap has produced smaller and smaller gains over shorter and shorter times, exactly as does the “high” from drug abuse.  Soon the junkie, with sunken eyes and emaciated jowls, comes not looking to feel good, but to avoid feeling bad, and the pusher provides not to provide a “high” but to avoid being killed by an enraged junkie suffering withdrawals.

We’re there as a nation folks, and if we don’t withdraw we will suffer the next fate.

As a junkie’s habit becomes more and more about pain avoidance, he gets closer and closer to the “coffin corner.”  That is, the dose required to avoid the pain continues to rise over time (just as it is with these “unconventional” measures and credit “pumping”) but there is a physiological point of poisoning.  Should that point of poisoning be reached, of course, the body dies.  As these two points converge the junkie is left with only two options: detox or die.

Bernanke and our financial system are rapidly approaching that point.  He has produced a sharp rally based on false hopes.  We could have used that time to force the banks to remove the bad assets from their balance sheets and sell equity to the markets.  But the banks refused and the government in turn refused to stick its jackbooted foot on their collective necks – a right the government has, since the entire reason that a bank can profit from fractional reserve lending is due to the granting of a privilege by government – a privilege it has every right to condition on ethical and proper behavior.

What Bernanke can’t do is create production.  He can only spur people to borrow, and at the point debt saturates in the private economy, he’s impotent.

We never left the recession folks, and the graph that I keep showing proves it:

Note that this is the first actual recession since the 1990s.  No, 2000 was not an actual recession – actual private GDP never went materially negative, and as-reported GDP never went negative at all!

This time around as-reported GDP did go negative – by a tiny 2% annualized ratio.  In real terms GDP has been down by an average of more than 10% for the last two years (8% in 2008 and 14% in 2009) but due to the government’s outrageous “borrow and spend” binge reported GDP was down a minuscule 2% in 2009 – the only annualized negative rate of change.

That we have seen employment and private activity go straight in the toilet with a mere 2% GDP decline (as reported) and 30% of the equity market value has disappeared tells you exactly how bad things are.  Our markets and economy cannot withstand even a 2% nominal decline in GDP without having a literal heart attack?

The coffin corner is here and “in your face” folks.  We can no longer avoid the necessary detox, and the longer we try, the worse the outcome is going to be.

The Market-Ticker