Is Creating Zombie Banks Better than Letting them Die?

Would you rather be dead or a Zombie? I'm taking dead, I've seen a lot of movies and it seems the life of an average zombie isn't too great.

All levity aside I am a little bit hot about the Federal Government squandering what time we may or may not have to shore up the financial system. It has been a year since Lehman Bros collapsed and we have done bupkiss to prevent it from happening again. I am not saying that it will happen again but it isn't a statistical improbability.

So instead of breaking up Citi, JPM, BofA, Wells Fargo and all the other systemic risk banks we mortgage our childrens futures to prop these insolvent POS's up so they can roam the countryside looking for brains errrrr overdraft fees. I just don't understand the thinking here, we only have a finite amount of resources to combat economic crisis. IF we have another one it will really suck when Uncle Sam has to tell the American public "I'd love to help but I'm tapped".

Unruly mobs on the street with pitchforks and torches might be the "Systemic Risk" the Government is talking about next.

Baltic Dry Index as a Proxy for Santa's Sled

Caught up in all the hype about the recession being over and stocks going to the moon is the fact the consumer has disappeared. It's understandable, like Pavlovian Dogs we have gotten conditioned to the credit bubble business cycle. Downturns are shallow and to be used as an opportunity to reload the shelves with cheap...errrr... inexpensive Chinese goods. It is natural for us to assume that economy is going to continue racing forward in 2010. I truly want this to happen, that would be fantastic but this little thing called reality is anchoring to me sober view.

Christmas is going to be rough for the retailers this year. The have put their bets on no one showing up in the stores. I know this because of the Baltic Dry Index which tracks the rates that sea going vessels charge on the open market. It is down....big. This tells me there is slack demand for container ships, which translates into less G-unit Gangsta Style Urban Parka's on the store shelves. So even if the consumer had their Credit Card limits restored and interest lowered to non mafia levels AND showed up to buy, buy buy! There would be nothing to buy.



This just isn't limited to the retailers, pick a sector of the economy and the story is the same. No sales begets no profits begets no earnings. It will be rough for stocks.

The Great Recession of 2008 is Over, but at what cost?

Today the "Leading Economic Indicators" came out for August 2009 and they showed a very slight improvement over the previous month. The economy has hit bottom and is bouncing, this is good news as I personally like a strong economy.

When all is said and done this "Recovery" will be regarded by historians as artificial because of the massive Government interference in the free market. I am not arguing that the interference was unwarranted, it was. Point blank the entire banking system would have collapsed worldwide within days. It probably needed to but I don't see anything good coming of that, "Gold Star" for the governments of the world....tight work.

This potential collapse of the banking system was the result of an easy credit bubble deleveraging. The only way to sustain the growth between 1990 and 2008 was with lots and lots of leverage.

So the US Government made liquidity available for banks and large businesses so that they wouldn't go under. I get that. What I don't understand is why they aren't writing off the losses that need to be written off in an ordered and measured fashion. The bubble still has to deflate. The only way to prevent the bubble from deflating is to blow a larger bubble. The Internet bubble begat the Housing bubble begat the commodities bubble. Each succeeding bubble requires more capital borrowed from future generations and this is only sustainable for a finite period of time. A Ponzi scheme can get only so large before every man, woman and child on the planet is a member of it and further growth is impossible, leading to it's collapse.

So right now we are borrowing growth from the future to finance such things as cash for clunkers, home buying credits, reduced payroll taxes, and the "stimulus" package. This is breathing life into the economy and we have bounced off the bottom. Good Times!

We really shouldn't, we should let the market have it's correction. It won't be fun and many people will be hurt, I would hope that we would spend some of the Government Largesse helping these people, but it needs to happen. We are going to spend our children's inheritance making sure the zombie banks of Citi, JPMorgan, BofA and Goldman Sachs can continue to not lend, loose buckets of money and pay obscene bonuses. Dismantle them and let them go under, they are no longer competitive. Where I'm from we don't reward businesses that make reckless decisions with taxpayer give aways.

Recessions aren't bad, they just are. They perform the necessary job of doing away with inefficiencies in the market place and lay the groundwork for the recovery. You cannot suspend the laws of economics, we are manipulating them right now but you can't cheat them. Business cycles are going to happen, if we push off a recession until later all we are doing is making it worse. This is the best example I can think of.....

Long before there were planes, helicopters, Federal Lands, Firefighters, and People there were Forest Fires. Because there were no people, when lightning struck a dry forest a Forest Fire would erupt. Some were small and I'm sure some altered the Seasons for the entire planet. It's not good or bad it just is. I'm not sure all Forests survived, some probably got burned down to the ground and that was it for them. Over the course of millions of years this dance played out again and again. There is no stopping this phenomenon only delaying it. We used to be under the impression that all fires were bad and had the technology to stamp them out immediately whenever they reared their ugly head. It turns out that we did nothing to help the forests but did them immeasurable harm and the brush built up and when fires did start they exceeded their historical proportions. The law of unintended consequences will get you every time.

The Danger of the US Dollar Losing Reserve Currency Status

There are rumblings that the US Dollar may loose it's membership in a very exclusive club, that of the "World's Reserve Currency". You're thinking "Big deal, who cares?" You should.

If the US Dollar looses it's reserve currency status then we wouldn't have to print $1 more to have massive inflation. What Reserve Currency means is that other countries are using the US dollar to back up the value of their money. For example, one of the reasons the Ruble has value is that Russia has 401 Billion dollars sitting in the back room. It's like gold but much more papery. As best I can tell there is about 6 TRILLION US Dollars locked up in back rooms.

A comparison to Global Warming would be apt. Right now there are giant Polar ice caps made out of US Dollars. As long as the economic environment doesn't change they basically are going to stay put, with some yearly variation of course. As we speak it is getting uncomfortably warm. These ice caps are melting. Countries are looking at our current debt and national deficit and migrating away from dollars.

TIC Flows, flows of funds from other countries into the US Treasury, is one of the best ways to make "Polar Ice", unfortunately the demand is starting to slow down. Drip, Drip, Drip.....

From Mortgage Daily News:

TIC Flows Show Foreign Demand for US Debt Waning

by Patrick McGee on

The Treasury’s latest measure of international capital flows failed to match the optimism in economists’ forecasting charts.

Foreign demand for long-term Treasuries was just $15.3 billion in July, a quarter of what analysts were expecting. Total figures including short-term securities showed an outflow of $97.5 in the month versus -$56.8 billion in June.

“An optimist might note that long-term U.S. securities purchases by foreigners in July were better than two of the prior four months, but beyond that silver lining there wasn't much to cheer about in the latest TIC Flow report,” said Eric Lascelles, chief rates and economics strategist at TD Securities.

Lascelles noted the total outflow figure was the “worst outcome since January,” and downward revisions to the prior month’s data only poured salt into the fresh wound.

Appetite for Treasuries was still robust among the United States’ two biggest clients. China increased its holdings by $24.1 billion in July and Japan absorbed $12.7 billion.

So while I could personally care less whether corn & crude oil are priced in US Dollars, Euros, Rubles or Real at the end of the day if we loose our Reserve Currency Status the Polar Ice will end up returning home as a Tsunami of Dollars. Hello $7 gasoline?!?!

What will happen if the Debt Ceiling isn't raised?

Here it is folks, we have 6 weeks before "we" default on our loans. That is unless we raise the 12 TRILLION dollar debt ceiling. Let's walk through this.

Right now America is extremely pissed at the Fed and Treasury for being lied to about the 700 billion "loaned" to them to prevent financial Armageddon. Throw in some obfuscation and stonewalling under oath about how the money was spent and I think the battle to raise the debt ceiling will be all uphill. This really is the proverbial line in the sand: To willingly destroy our currency or not.

Wall Street and the World are already pricing in the possibility of the monetization of debt. (It is monetization because raising the debt ceiling just allows us to sell more T-bills to retire the old T-bills and since we are buying them from ourselves this is the Fractional Banking equivalent of turning on the printing presses.) All tangible items are up right now including stocks and the dollar is being taken out to the woodshed and beaten daily.

For the sake of arguement let's say America doesn't want to turn the dollar into the peso and refuses to raise the debt ceiling. What to do, What to do?

I will offer some advice to Uncle Sam as I have found myself in this position previously. Large bill and credit lines tapped out. Here are the avenues out: Default, collect receivables, sell something raise income, reduce expenditures and pay above average interest rates for a short term loan (a pay day advance if you will). If the ceiling isn't raised after Washington has moved Heaven and Hell to scare the shit out of us then some combination of the aforementioned will be required. Really either outcome sucks but one is a prohibitive favorite to lead to revolution in under 3 years...

So we have our ingredients let's make some soup!

Default: This would be bad but would be ballsy. Sorry Chinese you should have known better than to lend us money. The problem with this is that it would have the exact same outcome as if we were just to print a whole bunch of new money, that is the dollar would be worthless. To be honest it would also be a lot less confrontational just to print the money, nobody wants to go to war.

Collect Receivables: Hey somebody owes us money right? Maybe.....Maybe not. But there would be no better time to shake the money tree than right now. Germany, Japan, England, United Nations I know times are tight but I really need you to pay back that X billion(s) you borrowed awhile back, you know the rentman's knocking.

Sell Something: Amtrak, the Post office, Gold, Alaska, Hawaii, we've got alot of stuff. Hey I like Hawaii too but times are tight and it's kind of a luxury isn't it.

Raise Income: Hello "National Sales Tax"

Reduce Expenditures: LMFAO....never gonna happen like asking a crack head to tell the truth.

Payday Loan: I'm sure we could make a little accounting magic happen by borrowing from the "Social Security Trust Fund" or "Medicare Trust Fund" or perhaps enter into the securitized market by selling future periods of National Income Tax income.

I can't claim to know what is going to happen. I hope we as Americans get a spine because we can only push the problem forward for so long and each time we push it forward the problem gets exponentially larger. I urge you to call, write, email or text your Congressperson and tell them you ain't skerred and to vote down the debt ceiling increase.

Open Letter to Timothy Geithner

Resign.

I will try to be nice about this but you need to go. I will use a football analogy, it will make you feel better about doing what you need to, there are some great assistant coordinators in the NFL. They do a great job and get their team to the Super Bowl errrr.... "The Big Game" and their reward for that is an NFL Head Coaching job.

They get to be the big banana and it turns out they suck. That is you Mr. Timothy Geithner.

It's not your fault you suck and quite frankly I don't care why you suck. You just do.

I'm not sure what your policies are. If it is a "strong" dollar policy you are either failing miserably or have a very nuanced definition of "strong". Whatever, it isn't working.

Mr. Geithner you don't inspire confidence. You just don't, not to anyone. You always look like you should get two for flinching and you should. I will put it this way, I would feel for a room of Chinese College Students if they laughed at Michael Keller Ditka or Bill Cowher.

To review: Resign, the sooner the better

Not your Grandfather's Deflation

Gold broke $1,000 this week, no surprise. It turns out that China wants to buy more gold, this will skew the price, no? Throw in "Indian Weddding Season" and September being an unusually bullish month for Gold and I'm not surprised with the price breach.

Where I have found amusement is that the equities and commodities have taken this information and twisted to mean a vote of no confidence in the Greenback. Oil is above $71, the S&P 500 is making new highs and the dollar is making new lows. One could argue that this makes a compelling case for inflation but they would be wrong.

First with unemployment at 10% and factory utilization at 60% there isn't demand, this acts as a kind of regulator on inflation.

Second, Consumer Credit is in Freefall the numbers from July came out and they were ugly. From the New York Times:

Consumers Won’t Borrow

The consumer credit numbers that came out Tuesday are impressive. It is not that the numbers fell for one month; these figures can be volatile. But it is that the numbers are coming down repeatedly. July was the sixth consecutive month that consumers as a group paid down what they owed rather than borrowing more. Since interest is accumulating every month, that is an impressive accomplishment.

Some of this is, no doubt, involuntary. But a lot of it is by choice. Credit markets have eased some this year, and of course financial markets have soared. But consumers are still hesitant.

Over those six months, here are the annual rates of change in various measures of consumer credit.

Seasonally adjusted
Total consumer credit: -7.1%
Revolving credit (credit cards): -10.2%
Nonrevolving consumer credit: -5.2%

Not seasonally adjusted
Consumer credit held by commercial banks: -14.5%
Consumer credit held by finance companies: -12.1%
Consumer credit held by credit unions: 0%
Consumer credit held by federal government and Sallie Mae: +9.7%
Consumer credit held by savings institutions: -21.9%
Consumer credit held by nonfinancial businesses: -17.4%
Consumer credit held by pools of securitized assets: -5.5%

Total consumer credit is declining at the fastest rate since World War II. Revolving credit is falling at the fastest rate since counting began in 1968.

Given how overextended many people were, this should be viewed as good news, at least over the long run. This is probably not enough to quickly derail the economic recovery, which is based in large part on manufacturing and trade recovering from levels that were below even reduced demand. But consumer demand seems unlikely to provide the next leg up.

(http://norris.blogs.nytimes.com/2009/09/09/consumers-wont-borrow/?hp)

And finally if the dollar is going to be toilet paper next year I would hope you would get a decent interest rate on any money you gave the government to hold but that just isn't happening. Bond sales are booming right now. From CNNMoney.com:

Long-term bonds jump ahead of auction

Prices for 30-year U.S. debt surge one point amid hints of foreign demand for Thursday's $12 billion offering and a drop in stocks.

NEW YORK (Reuters) -- Thirty-year U.S. Treasury bonds rose a point Thursday as a downturn in stock prices supported the bid for safe-haven government securities.

Ahead of the 30-year Treasury auction at 1 p.m. ET, there was also talk of foreign demand for the maturity.

"There's talk of foreign demand and stocks lost momentum," said Chris Rupkey, chief financial economist at Bank of Tokyo/Mitsubishi UFJ in New York.

The 30-year bond climbed a point, its yield easing to 4.27% from 4.33% Wednesday.

The Treasury will sell $12 billion in 30-year bonds in a reopening of a previously sold issue. In when-issued trading, the 30-year yielded 4.284%.

(http://money.cnn.com/2009/09/10/markets/bondcenter/bonds.reut/index.htm?section=money_markets)

It may take a couple of days for the market to figure this all out, they're pretty bright guys over on Wall Street.....

Gold to Break $1,000 an ounce

Gold has been consolidating for months now and a large move has been expected. The big question is whether it is going to be up or down. The Jury is still out on that but Gold has been an absolute beast the past two days up over 3.5% with the biggest move since March. As I write this Gold is $992/oz just $8 shy of $1,000/oz.

$1,000/oz is HUGE. It is the upper technical boundry for the consolidation triangle and it is a giant psychological boundry. Gold could very well hit $999.99 and start heading back down but I wouldn't bet against it right now, every dip is being bought.

So why is it going to $1,000/oz? Fear. Fear of a crash, Fear of Inflation, Fear of Deflation, and Fear of Counter Party Risk (Paper Money). Very rarely do so many camps agree on one asset class but the stars have aligned and right about now it looks like destiny.

Retailers Report Back to School Results: Not God Awful...Just Bad

August 2009 "Same Store Sales" came out for the retailers today, they were considered an upside surprise. August is traditionally the month in which parents run frantically around town looking for dry erase markers, tissues and "pants that fit" for their youngins. It is expected that these sales would be down from a weak 2008 back to school season and they didn't disappoint. Starting next month we get an apples to apples comparison as both months will be post crash, although I suspect next month will be a "beat" also as the entire system was locked up in September 2008.

Back to the chart above, lifted from www.ZeroHedge.com, it shows me that the consumer is still deleveraging. This means that spending is generally down and specifically up at where the consumer gets the most bang for his/her buck. I don't suspect this will change anytime soon.