Podcast

The broad stock market is now testing the recent lows.  But the real story is in the financial stocks themselves.

This is as close to an all out breakdown as I can imagine.

For starters, I have been keeping a close eye on Citigroup because they hold massive amounts of both derivatives and so called "Level III assets", those unknowable piles of junk assets that management gets to park off to the side at whatever value they want to put on them because there is no open market for them.  

This chart says "bankruptcy coming soon."

Well, that didn’t take long.

First Paulson wanted unlimited funds, sorry funds limited to only $700 billion at any one time, to buy troubled assets, then he used the funds to give directly to banks with no meaningful strings attached and now he’s saying that the funds will be used in another way entirely.

He wants to use the funds to unlock the consumer credit markets turning the program into CCRP, I suppose.

On the one hand I suppose it is a good thing that he’s willing to admit when a program isn’t working.  On the other hand it makes it look like they really don’t have a very good handle on the crisis at all and are just flailing about.

As fast as the Federal Reserve and US government have shoveled money into the Wall Street machinery, it has been disappearing even faster.

The evidence is contained in the falling prices of:

• Houses
• Stocks
• Most bonds
• Commodities
• A rising dollar

The problem with deflation is that it is a certified bummer.  Falling asset prices mean a negative "wealth effect," which depresses both additional borrowing and spending by consumers.  Less consumer spending means falling revenues and falling profits, and then falling employment.

I am trying to maintain a very level-headed approach to the changes that we are seeing. However, from time to time the looting operation becomes just a bit too obvious, a bit too overt, and I find my level of cool slipping.

This is one of those times. 

Here are the dots that I am connecting that have me concerned, if not angry.

There is a world of difference between a tiny island nation of 300,000 souls and the world’s largest economy and reserve currency.

The Dow Jones is up roughly 225 points on the news that 240,000 people lost their jobs in October.  This perverse sort of reaction defines how Wall Street works.  Wall Street cheers this sort of news, because it implies that another rate cut is on the way.

So the logic boils down to this: The worse the news, the greater the chance that the Fed will shower us with even more cheap money.

In a more perfect monetary system, good news would be rewarded and bad news would be punished but that is just not how Wall Street works.  Quite the opposite.

At the local Old Navy store, in a big mall, a very strange thing was recently spotted… the floor space of the store has been cut in half, using fabric curtains hastily hung from the rafters.

When asked, the manager said, "We’ve downsized; this is how big the store is now."

Excuse me, but what?

What kind of a strategy is that?

All that saves is a small bit of inventory carrying cost and perhaps a couple of employees. But unless they renegotiated the lease rate, their fixed overhead burden just shot through the roof. 

Goodbye, profits.  Hello weird, unsettling shopping experience.

At the time, some thought that my characterization of the bailout as a "looting operation" was too strong, and told me so.

I am more certain of that language than ever.

A friend of mine in the RV business, who has owned his own place for 35 years, says that his business has never dropped off as far or as fast as it has over the past 6 months. Manufacturers in his industry that have operated for more than 50 years are simply shutting down. 

Even as the nation focuses on an election and the "improving credit markets" the real economy is still spiraling downward at a fast rate.

The 45% "decline" in GM’s sales are a stunning drop-off more consistent with the worst recession (depression?) in several generations than a simple "decline".