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April 18, 2009
Issue 42  -  Don’t Fall for It

The bottom is in.  That’s what one would think based on the chatter coming from CNBC and the President.  “Shoots of green” are supposedly being seen and “glimmers of hope” are filling the economist's heads with visions of a strong recovery that is “just around the corner”.  Don’t fall for it.  It’s all a charade.  Smart money selling to dumb money.  Don’t be the dumb money.  Our country is in a perilous condition and getting worse in many ways.  Nothing goes straight up or down and this current rally is just a blip in the road before we resume our secular down trend.

Why do I believe this?  Two words…the data.  I’m looking at the data honestly, not with rose colored glasses.  The data is horrible.  Some of the statistics have “improved” but that is only on a comparative basis.  If last month housing starts went down 10% and this month they only went down 9%, is that a cause for celebration?  I don’t think so.

Goldman Sachs announced that they want to pay off their TARP loan and they are going to sell stock to facilitate that.  Their price has rallied from under $60 to over $120.  Do you think they are selling this stock because they think the price will go up?  Didn’t think so.  If that was the case, they would be BUYING back their stock.  This is a major head fake.  They don’t want to pay back the TARP money, they want to unload a boat load of stock at the top of their price channel.  That is the definition of smart money selling to dumb money.  After they unload the stock it will be allowed to fall and Goldman will announce they aren’t going to be able to pay back the TARP.  This is how these guys work.  Lies and subterfuge are their main tools.
Then the rumors that the Government is going to "force" the banks to let us convert their debt into stock equity.  Some are outraged that this is a back door to nationalization.  Wrong.  Sounds good, but the thing is, we've ALREADY nationalized them.  No, this is about one thing, getting rid of this debt so that it will never have to be repaid.  Remember, if a company goes bankrupt, and believe me, these banks are all bankrupt, the debt holders are first in line to get any remaining morsels of value.  Who stands at the back of the line?  That's right, the shareholders.  If the Government converts the debt to stock ownership, and that is the plan, then once the inevitable bankruptcy occurs, the taxpayers, get NOTHING.  You see how this works, they borrow money and then never pay it back.  Great deal for them, another bend over and take it moment for you.
Why do I think things will get worse?  What does the data say?  How about this from the San Francisco Chronicle:

“State unemployment rate highest since 1941

Tom Abate, Chronicle Staff Writer

(04-17) 12:06 PDT SAN FRANCISCO -- The state unemployment rate soared to 11.2 percent in March, the highest since before World War II, leaving a record 2.1 million Californians out of work, according to a report issued Friday.
Employment Development Department spokeswoman Patti Roberts said the March figure surpasses the 11 percent rate that occurred during the 1980s recession and brings California close to the jobless level of January 1941, when unemployment stood at about 11.7 percent.

Roberts said unemployment is estimated to have been as high as 25 percent during the Great Depression. The highest reliable figure in state archives is the 14.7 percent rate in October 1940.

The U.S. unemployment rate for March stood at 8.5 percent.

" California's higher rate of job loss is primarily the result of greater exposure to the housing downturn," said Stephen Levy, with the Center for the Continuing Study of the California Economy in Palo Alto.”

Now how are we coming out of this when the nation's largest state by population has its highest unemployment in  nearly 70 years?  Obviously we aren’t.  Look, there is no chance that this is over.  The damage is too great and structural in nature.  We have years of retooling and recouping before a sustainable recovery can take place.  All the debt and overcapacity  must be worked off, savings restored and then growth can begin again.  The current plan offers virtually no hope at all as voiced by this economist:

“Stiglitz Says Ties to Wall Street Doom Bank Rescue (Update1)


By Michael McKee and Matthew Benjamin

April 17 (Bloomberg) -- The Obama administration’s bank- rescue efforts will probably fail because the programs have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz said.

“All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview yesterday. The people who designed the plans are “either in the pocket of the banks or they’re incompetent.”

The Troubled Asset Relief Program, or TARP, isn’t large enough to recapitalize the banking system, and the administration hasn’t been direct in addressing that shortfall, he said. Stiglitz said there are conflicts of interest at the White House because some of Obama’s advisers have close ties to Wall Street.

“We don’t have enough money, they don’t want to go back to Congress, and they don’t want to do it in an open way and they don’t want to get control” of the banks, a set of constraints that will guarantee failure, Stiglitz said.

The return to taxpayers from the TARP is as low as 25 cents on the dollar, he said. “The bank restructuring has been an absolute mess.”

So this guy says the plan is to help the banks.  Is that true?  Of course.  Need more evidence?  Let’s look at this snippet from Contrary Investor:

"Although we’re not telling you something you don’t already know, the US needs to focus on sustainable job creation if it is to ever hope to spark a sustainable economic recovery. But we see exactly the opposite as we look at what the Fed/Treasury/Administration (the F/T/A) are doing right now.

Let’s take a really quick tangent and look at the resources (printed and borrowed money) the F/T/A has committed as of the end of the first quarter of this year. The bottom line is that first the numbers are staggering from a nominal dollar perspective. Secondly, it’s staggering how little is directly focused on potential job creation. The numbers come to us from our friends at Bloomberg.

Bailout/Stimulus Commitments To Date

Source Of Commitment

Amount ($billions)

Federal Reserve








Very quickly, the numbers you see above are announced commitments. Will all of this money be spent? For now the jury remains out, but we have the feeling every nickel and more will ultimately indeed be spent. Inclusive in the Fed total is AIG money, commercial paper facilities, currency swaps, money fund guarantees, Citi and BofA bailout dough, the current US Treasury buyback amount (destined to grow much larger), and the acronyms (TALF, TSLF, TAF, etc). The FDIC commitments are primarily liquidity guarantees, Geithner’s new PPIP program, Citi, BofA and GE guarantees attributable to the FDIC, etc. Finally, under the Treasury numbers is included the actual two stimulus packages in addition to a half trillion line to the FDIC, as well as FNM/FRE money. Anyway, as we see it, here is the very important bottom line. Out of the total of $12.5 trillion in bailout/stimulus commitments, exactly $955 billion is economic stimulus money - that already spent under Bush and the new Obama package yet to be spent. ALL of the remainder is financial sector and credit market bailout dough. That’s right, of $12.5 trillion in committed money, a monumental 7.6% of the total is being directed to areas that “might” create jobs for a time, and we’re being very generous in that characterization as a lot of the stimulus money is tax credits, extended unemployment benefits, etc. Only $190 billion is earmarked for so-called infrastructure money and that spreads from here until 2018.
Does this give you a sense for the wild mismatch we are looking at here in terms of funding the financial sector versus funding the real economy? It better. The bottom line is that the incredible wave of money will do very little to stimulate job growth let alone create the environment for sustainable US domestic job growth ahead. As you already know, this tidal wave of money can easily find its way into financial asset prices for a time. We just need to keep the facts of what is happening firmly in mind. In no way are we trying to say that the current equity rally is crazy set against the reality of the numbers we have described above. Rather, what we believe is important to our investment decision making is keeping the facts front and center so as to have a better sense of risk management in the investment decision making process ahead. Implicitly, as we have been discussing heavily as of late, rising equity prices are discounting a better economy to come based in good part on the largesse and magnitude of F/T/A spending. But it is clear that 93% of what is being supposedly thrown at the economy is really being thrown at the financial sector. Unless, of course you believe the financial sector is the economy and then everything will be fine. Haven’t we disproved that notion over the last year and one half?”

Absolutely incredible.  Only 7% for what the politicians say REALLY should be done.  To make matters worse, there is only $190 billion for infrastructure, arguably the only part of this plan that has merit which works out to only 1.5% of the total!  1.5%!!!  Change you can believe in, my ass.  The only change here is the acceleration of the theft.  Taxpayers will NEVER pay this off.  The collapse will be breathtaking.  This cartoon  shows the position of a good portion of Americans:

By the time this is over, most Americans will see themselves clearly in that picture.  There is just no easy way out anymore and we as a nation have gotten VERY used to the easy way out.  The time has come for hard work.  Saving.  Scrimping.  Avoiding luxury items.  Making do.  These are not the watch words of our very materialistic society, but they will be, mark my words.

Here’s another glimpse into the future.  Look at this graphic, again from Contrary Investor:

What you have here is the results of a survey involving company CEOs.  These guys know better than anyone what is going to be happening in the near future.  What they see is terrible.  These guys are rarely wrong and I don’t think this will be one of those times. Another thing that is being unreported is how bad the unemployment numbers really are.  Remember that those out of work for more than 18 months are taken off the books and counted as employed.  Also, if you get a part time job, no matter how low paying, you are counted as employed.  Clearly, that's just nuts.  Here is a very startling chart, again from
 This chart shows the amount of people going to get part time work for economic reasons.  In other words, they need money to make ends meet.  Their credit is being squeezed and they have no other choice.  This number is at a 52 year high!  Sorry, things aren't getting better and the chances of someone being able to talk things into a better condition is nil.  Start scaling out of stocks over the next couple months in preparation for the next BIG down leg.  Believe me, it's on the way and there is no avoiding it without massive inflation.  That's why you have gold, right?  Have a great week!