The foolishness that “The Fed can save us.”(Denninger, et al)

Denninger's absolutely gruesome outlook	ray_heritage	12/30/2007 8:12:38 AM
Denninger's latest, The Year In Review And a Look Ahead for 2008, paints an absolutely gruesome outlook in the period ahead. Ifyou look at the Fed's most recent balance sheet and the Fed's mostrecent bank report you will find that The Fed has been de-leveragingits own balance sheet, and banks are hoarding “vault cash” (that is,actual MONEY!) while their regulatory reserve are below minimums. Why? THEY KNOW WHAT IS COMING It's a huge read. Some excerpts follow: Thereare many who argue that The Bear Market... not only did not arrive butthat we will rocket to new highs, and have a solid market in 2008. It is my view that they are sorely mistaken, and soon are to be not only dead wrong but dead broke.
RE: The Fed & "liquidity"	ray_heritage	12/30/2007 8:17:06 AM
"Let'sbe absolutely clear here folks – “Liquidity” is not “printing money”.It is not “inflationary”. Liquidity is a loan, it carries interest, andit has to be paid back – on a short term basis. In addition, theactual monetary inflation conducted by injections of real, hard, CASHinto the system has been miniscule all through 2007 (and prior years aswell.) You... hear reported that “The Fed (or ECB) has injecteda record amount of liquidity into the system” as if this is some“bullish” thing, but what they fail to mention is that the same – oreven more, in many cases, TOMOs have matured on the same day, makingthe net injection zero! We've dispensed with this foolishness that “The Fed can save us.” In fact, they cannot Theywant people to believe they can, however, because from that beliefderives literally all of their power. Should people actually come tounderstand the above paragraphs – the fact that “liquidity” is justreally a loan much like a pawnshop gives you, and that The Fed ispowerless to impact what is going on... they lose the only real weaponthey have: The power of the mouth. When you can't pay, thecreditor seizes your collateral and sells it. He gets out whole, and ata profit, if he manages to get more for the collateral than he gaveyou. But what if he gets less? Then money is effectively destroyed – and this, my friends, is deflation! And...if you wish to buy a car (or house), but see that the prices for carsare going down rather than up or remaining stable, assuming you do notimmediately need the car (your old one still runs) and you have thecash you are well ahead of the game to wait! After all, if cars will becheaper in six months, why buy now? This destroys demand,which in turn means that the guy who makes cars can't pay his suppliersbecause he hasn't sold his stock of vehicles. That results in moredefaults on debt which further deflates the money supply. This, inturn, causes prices to fall further, and on it goes! How much money is going to be destroyed, in total? Itis not possible to know exactly how far down the rabbit hole this goes,but we do have some information to base a reasonable guess upon. Oneof these facts is that about $6.5 trillion has been “withdrawn” fromhome equity over the last four years and spent. Most of that was spentnot on home improvements (which at least have some residual value) buton things like computers, plasma TVs, cars and exotic vacations(directly or indirectly by paying off credit card debt accumulatedpurchasing those things.) Of this $6.5 trillion perhaps onethird of it is now “underwater”, in that it is represented by “HomeEquity” loans (HELOCS) on houses that are now worth less than the totalof the mortgage and HELOC outstanding. This debt will almost certainlyeventually default in large part if not in total. This is somewhere between $1 and $2 trillion dollars. Nor is this stupidity limited to mortgages. It reaches through essentially all of consumer finance; auto loans and credit cards are the other two biggies.
RE: Collaterilized Debt Securities are Worthless	ray_heritage	12/30/2007 8:19:14 AM
Wehave seen only $100 billion or so thus far in actual write-downs bybanks and other institutions worldwide. This is 10% or less of theactual damage that has been already suffered, and we haven't evengotten to the knock-on effects that come from people waiting forcheaper prices – that is, the effect of deflation instead of the cause! Why has only $100 billion been recognized and written down when far more than that has already blown up? Simple– these banks and others are keeping their “marks”, or present value,of their holdings at artificially high levels because they hold theseCDS “insurance policies” which claim to insulate them from the effectsof the damage. But as noted above, there is no chance that these companies can actually PAY the face values of these polices. These firms typically have 0.1% or less of the “face” value of these written policies in available cash to pay claims. In short the CDS policies are WORTHLESS TOILET PAPER. Buffet, the Destroyer Buffettjust announced he is setting up a Municipal Bond insurance company.This will put a stake into the Monolines' hearts, taking all theirbusiness away that is profitable, and leaving them with structuredfinance which has huge embedded – and unrecognized – losses. Theannouncement, which showed up on the 28th, didn't send shockwavesthrough the market – but it should have. Effectively, Warren threw agrenade (minus pin) into the magazine of structured finance. Thisis the death knell for the few trillion in CDSs that are out there(and) can't be paid; there is no longer any reason to believe that thecompanies writing these things will be able to be recapitalized off“profitable” sides of their business! The “big story” in thefinancial markets for 2008, and the likely trigger for major turmoil,will be the implosion of the CDS marketplace... WHEN (not if),in the fullness of time, this becomes apparent there will be massiverestatements of earnings by the financials in the S&P 500 andbeyond. We will find that the S&P didn't have 10% profit growthover the last two years; they in fact had flat to negative profitgrowth. We will find that the S&P is not trading at “14 timestrailing earnings” it is trading at 30 and has been! We will find thatmany of these firms are well below regulatory capital minimums and somemay be outright bankrupt. This damage has already reached intoinvestment pools run by the states such as Florida and California. Itwill in fact be found to have polluted pension funds and othersupposedly “safe” investments all over the world. The underlying“assets” are American homes which have been inflated to twice their“true value”. As these values contract back to reality the damage thecollapse will spawn will spare nobody who is exposed to this toxicwaste, and our economy will contract to meet the new reality of actualearnings power, production, and shrinkage of the homeowner's “house”line on his balance sheet by an average of 30-50% from 2005 values.
RE: Negative on Gold	ray_heritage	12/30/2007 8:22:15 AM
“...ifyou believe in "hyperinflation" - why do you want to buy the clearLOSER of an asset that metals represent, when you can buy index CALLsand, if your thesis is correct, you will make an absolute stinkingFORTUNE!” "There are also a number of people whobelieve, despite all the evidence above, that the government (or "TheFed") will "hyperinflate" to "save the economy" (or at least try.)Typically these people also believe that the rest of the world willfare better than we will, and will come in to snap up assets in Americathat are "dirt cheap" as our dollar is debased. This is thecentral thesis of the "Gold Bug" paradigm; these folks all believe Goldis going to go to $1500 (or more) in the next year, and they urge youto buy some as a result. The problem is that if their thesis is correct they're total idiots to buy Gold! He then goes on to explain why...
RE: Let's see if Karl gets his 'strong dollar'	Jessel	12/30/2007 8:41:48 AM
...that's really where he's headed with this, now that "Nothing" (the pundit formerly known as 2ifByC) is his economic advisor. that's where Karl's head is at. We are going to have a deflation with a strong dollar, weak gold, and weak stocks. Well,let's see if we get it. Until then the trends are clear, and there isno use putting facts forward in the face of fervent belief. There is nomodel but japan for this crowd.
RE: There is the broader middle ground	Jessel	12/30/2007 8:49:11 AM
Why does inflation have to equal 'hyperinflation?' The broad ground of probability is for inflation of varying degrees, and a backdrop of stagflation. Don'tget me wrong. Deflation is a possibility. Hyperinflation is apossibility. that's the kind of latitude you get with a fiat currency. Buthis reasoning is pretty funny, and his description of how the Fed worksis some bizarro version of reality that he cannot even consistentlyhold. On one hand, the Fed doesn't have any power and doesn'treally move rates or money supply. on the other hand he blows a gasketand starts up a petition to make the Fed not lower rates (and weakenthe dollar) and Bernanke is destroying the economy. You can't have your intellectual lunch and eat it too.
RE: thx for post	compsult	12/30/2007 10:34:59 AM
deflationist theory seems to be a minority right now and I think his ideas make a lot of sense. I'mmore agnostic on the dollar than he is. I think currencies will revalueaccording to the underlying economic fundamentals and assets of eachcountry. While the US has lost a major amount of manufacturing, westill have a great deal of economic value. The way I see it, we have adeep pool of managerial talent, a decent legal system and more risktakers than many of our European counterparts. Plus there are a greatdeal of assets, ranging from buildings to intellectual property. Ithink as the economic crisis goes global, the dollar may sink furtherbut I have trouble imagining a collapse. If we piss off the Chinese,they may flex their economic muscle by causing a rout in the dollar.But if other investors see value, the rout would be contained and maybeeven reversed. As far as printing or monetizing goes, theChinese have already warned that lower interest rates would causeinvestors to search for higher yields else where. So how would they(and other creditors) react to news of the Fed monetizing? Not well andI think the Fed knows that. Helicopter speeches aside, I think the Fedis aware of the consequences of such desperate acts. It makes as muchsense as eating rat poison to spare yourself from the effects ofarsenic.
RE: Still Positive on Gold	Viking	NEW 12/31/2007 2:20:49 AM
Intheory, his thesis on gold is correct. In practice, I'm not so sure.For example, if you're an investment manager, with 60% stocks, and 40%bonds, and you believe in an inflationary bust (call it stagflation,hyperinflation, etc.), what's your incentive to invest in stocks?Amidst an inflationary bust, REAL revenue growth falls along withprofit margins, and ROE. This would not inspire me to buy equitysecurities, even if there's considerable currency inflation. Would youhold bonds? Cash? No. So what's left? Gold.
RE: absolutely gruesome outlook	qqq bear	12/30/2007 8:17:34 AM
note the charts on M2 amd MZM in Mauldin's piece
RE: He has a gift with a pen..	Bluzbear	12/30/2007 9:30:41 AM
and his blog has grown as a result. His posters are groupie like and are petrified to post inflation based missive's. Too bad he is so wrong. Heobviously does not understand gold as it is the LOSS IN CONFIDENCE infiat currency that moves gold. I seriously doubt that gold will go to$1,500 in 2008. I suspect it will continue to be a bucking bronco withwild swings and end the year higher. His groupies will take the other side of the bet and buy the dollar. He should start a church.
RE: He has a gift with a pen..	eswan	12/30/2007 6:04:54 PM
Denninger is good, but no one is right all the time. I think he is a wingnut, but really pretty good for a wingnut.
RE: Denninger's absolutely gruesome outlook	kahunabear	12/30/2007 11:42:28 AM
Interesting to weigh all of that with his(Genesis) predictions for the stock indices: Link