^NEW 2/16/2008 11:57:45 AM

WhatDoug wrote on the bottom of his page is very revealing and a mandatoryread if you are going to stay bearish. In fact, it is a more importantread if you are thinking of being bullish.

I recall that Dougclaimed a somewhat successful reflation in the system sometime aroundlate 2002 or early 2003. He turned out to be right, but he never quitfocusing on the real trouble, which was the credit bubble that modernphony finance was building. This thing is just starting and this is alot like the y2k crisis, the system doesn't know how to run on properfinancing and the stuff we have has turned to junk.

Maybe someof you guys don't think it is a big deal that a $330 billion financialshort term market just froze up, but I would imagine the investors whohave found what amounts to their money market money frozen thinkdifferently. This is the same thing that happened to the asset backedcommercial paper market. What happens when the rumors get out, rumorswe all know to have plausibility about FNMA and Freddie Mac (FNM andFRE)? They might not be able to auction paper suddenly. It doesn'tmatter that there is an implied government guarantee on this paper, itis implied, not specified. Also, the threat of having ones money frozenin a wait for government action is enough to keep a lot of people away.

The Port Authority of NY is paying 20% this time around theblock. They raise the issue of the monoline trouble keeping this paperfrozen, but that doesn't explain no bids for the paper. We are talkingabout the entity that runs Kennedy airport and the port of NY, not theHooterville water supply. There are no bids because the banks generallymake the bids if there are no bids and for that matter, there areusually others that want in. Suddenly there aren't.

What aboutthe idea this is a US problem and not a world problem? Well, it appearsthat Europe has to go to the US to get bonds issued. There are no bidsover there either. There are no bids for junk bonds, no bids fortakeover debt the banks took on to allow corporate acquisitions. Thereare going to be no bids for a lot of stuff? Why? Clearly there is nomoney. The banks, which originate the money have money problems oftheir own and they can't originate money.

We haven't seen thismarket turn bearish yet. We spent 5 years in extreme bullish territoryand we are headed the other way, where the bearish readings aren'tgoing to matter in the consensus reports. The bull are chomping at thebit, even the ones that say they are bearish. You can bet that whatthey mean by bearish is they buy Crammers defensive portfolio, ratherthan no stocks at all. When comments like came out of Berkshire theother day about looting the good part of Ambac and MBIA for a feedrives the market up 200 points, you can see there are a lot of fairweather bears that are looking to jump ship at any minute. They are allin.

This is the problem the bulls face, that all the money istaken. It hasn't sunk in yet that we are in for a long downdraft inliquid assets. The system is leveraged to the hilt in all directions inevery country. The banks are impaired, the monolines are impaired andthe system is looking to the banks to bail out the monolines, like theyare a bottomless pit. Those bailing out the banks are merely committingfunds needed to service debt owed to the banks and others. The USmarket is being supported by a weak dollar and the fact there isn't asafe place to lend money worldwide at this time and the USmultinationals are worth at least 50% of par in their minds.

Ithought this stuff was going to happen the last time around the bowl in2000-2001. Doug so much as says the same thing, that he was shocked bythe creativity of Wall Street finance. Well, that model has collapsedand trying to use it is like trying to use a broken board as a lever.The counter parties are going to pay big time. The hedge fundparticipants are headed toward the door, leaving less money to act ascounter parties. Many are finding their money is frozen too.

Whathappens if there is a lot of money, but it can't move? Well, suddenlywe find there isn't much money out there. I fear the next shoe to dropor the one that busts down the door will be the sudden insolvency of alarge money market fund. This would clearly cause a crash and a movetoward putting all this money in banks would in essence not work. Themoney market game isn't that much different than the SIV game. Workswell as long as there is liquidity.

The Fed couldn't rescue in2001 and they aren't going to this time. The only thing that rescued2001 was home equity and interest rates on longer term money. We aren'tgoing to see the fuel to the fire this time that lower long term ratesadded last time. Mortgage rates declining from a long term 7 to 8% toaround 5% is a lot different than mortgage rates rising to a short term6.5% from 5% and then going back to 5%. The first time around we hadtrillions in equity and debt refinanced at rates 2% lower. This time wehave marginal equity and plenty of debt that might get refinanced at 1%lower and we have a sizable part of the market that can't refinance atall.

The downgrade of FGIC yesterday was a big deal. Iunderstand they own the mortgage insurer PMI. My guess is the insurancehas to be as good as the paper or it gives the paper problems. FNM andFRE paper is conditioned upon a 20% down payment or coverage to roughly75% LTV if there isn't a down payment. You might note the spread onFNMA paper against 10 year treasuries is starting to widen. Are welooking at default risk of the insurers here? I venture we are.

Atwhat point is the government going to have to take care of itself andlet this mess drop? I would venture pretty soon. Moody's came out andsaid the US AAA credit rating was in trouble. The government isn'tgoing to be concerned with sustaining broadbased consumption very muchlonger and instead will be concerned with its capacity to wage war andstave off revolution and collapse. It will be food or TV's but notboth. Most people will find a TV in the dump and eat.

^NEW 2/16/2008 12:14:30 PM

Good article...nfm

^NEW 2/16/2008 12:23:45 PM

Whatsurprises me to no end is the amount of what I consider delusionalthinking out there including the captains of industry. I wonder howmany had all of these expansion plans in place because they think thepast is prologue because the FED is in control and we have a probusiness White House and are in for a very big slap in the face.Business has been nothing but normal since 9/11- 1% on the FED fundsfor 2 plus years, a rebate program in 01, a massive tax cut in 03, ahuge build up in defense spending, a failed SIV conduit, ABCP seeze up,subprime loans, a couple iterations of a housing bailout, and now theARS just to keep growth going at all costs?. I agree what next. Howmany things are happening now that the media have to say that thisevent x hasn't happened since the Great Depression or this event yhasn't happened since the Great Depression before reality slaps them inthe face.

^NEW 2/16/2008 12:33:29 PM

^NEW 2/16/2008 12:40:42 PM

i'mmostly all in short term treasuries right now even though i don't wantto be. there is just too much risk in the stock and bond markets. mybiggest fear is collapse of the dollar but commodities and all otherassets seem to be in bubbles including some currencies. no where tohide for me right now. i expect we could easily see Dow 7,000 withinthe next 18 months but it seems like no one is expecting this.

^NEW 2/16/2008 12:44:20 PM

7K- I would love to see that for an entry point of cash reserves. I hope you are right.

^NEW 2/16/2008 12:46:27 PM

Bearking,I think you would enjoy Don Coxes' webcasts to get a better picture ofcommdity "inflation" and "bubblery". He's a Canadian banker or bankconsultant and is thus used to being in commodity land. Commods havemore fundamentals behind them than any frickin stock market pump,believe me. Or rather, believe him.

http://events.startcast.com/events/199/B0003/#

^NEW 2/16/2008 1:01:11 PM

ifyou look at a 5 year chart of just about anything, you can see assetvalues took off when interest rates were lowered. conditions seem muchmore worse than 1999, so i'm guessing we hit five to seven year lowsbefore this is all over. Commodities could be the exception here. Insuch case, we stagflate and the market will definitely get killed.

^NEW 2/16/2008 1:42:54 PM

Ifany of this has any plausibility, then the result will be a significantdrop in demand for goods in the US. Any of you guys waiting for theworld to be floated on Chinese money, I would have a cemetery lot handyalong with funeral expenses, because you probably wait until you aredead. I think we lose all paper money before this is done, but it willbe a long time. This time around, I think a lot of higher ups are goingto realize that a lot of people are going to have to lose their money,that a dollar will go a long with at lower price levels and that acouple of years of bad times will be better than 25 years of stagnanttimes. If the worlds resources shift from producing goods to producingcommodities, it is obvious that the market will collapse. We aren'tdealing with shortages of 50% that are creating these run ups inprices, maybe 3% or less. Once the real recession hits, the price ofcommodities has only one way to go, down.

^NEW 2/16/2008 12:49:27 PM

remains. I want to say at the outset that your posts are always well-informed, well thought-out, and interesting.

You'veheard the phrase "if you owe the bank $1000, the bank owns you, but ifyou owe the bank $1million, you own the bank". We've seen this in thegovernment bailout of the real-estate speculators. I predicted thisevent well before it happened, although it did not take too muchreasoning to conclude that it would indeed transpire.

Supposethat there really were a major market decline. What would prevent theFed and Treasury from saying "since the health of the stock market iscentral to the health of the economy, we will make good anyone's lossesin the stock market beyond 10%" (or something like this)? Such anaction would be absolutely despicable, but the housing bailout in mymind is also despicable.

When the game is rigged, don't bet against the house.

^NEW 2/16/2008 1:01:18 PM

Raven,unless you are talking about something like 50%+ of US GDP expendedCASH in a year, there truly is NOT ENOUGH money in the US system tobail out banks, stockholders, bondholders, pretzelbenders and all theforeign banks invested in the US. The only thing that can belegitimately hoped for is that this thing deflates slowly so as not tothrow everything else into a catatonic fit.

^NEW 2/16/2008 1:35:16 PM

Iam trying to follow this Raven. The stock market was floated by thereal estate, not the other way around. The problem is, who is going tobail out the government? Then again, what real estate speculators gotbailed out? I am trying to figure that one out? The holders of propertyin DFW got totally wiped out in the 1980's. Trammel Crow might still bein business, but he got skinned and he was and is worldwide. Anyonethat knows anything knows that Donald Trump has been paid to be a frontman since crashed and burned years ago and that the lenders are makinghay out of having his name on the front of their properties. US Homeand General Home, the 2 largest builders in the US 25 years ago wentbelly up. Cadillac Fairview went belly up. Criswell went belly up inDallas. I don't recall a bailout.

This is a lot more complexin that the whole economy is now cross collateralized. You might recalla guy named Clint Murchison who owned the Dallas Cowboys from theirinception until he went broke in 1984. He was cross collateralized.Something went bad and his whole house of cards went down. Look atJapan? What makes the US different than Japan? Is it the fact we havebeen using free finance from around the world that needed all thedollars they could buy or is it because the American people have beenthrifty and hard working while the Japanese have squandered all themoney they made and sat on their asses?

The point here is themoney was coming from somewhere and it wasn't just printed intoexistence and thrown in the streets for the scavengers. The whole thinghas been run off 2 distinct entities which in fact is merely 1 entity,US real estate. The other entity, the US government basically has alien against US real estate and the activities that occur on it.

Therewas a lot of impetus coming out of the 1980's that isn't here today.For one, the real problems in lending in the 1980's was a backlashcaused by inflation. It was CPI inflation and it was curable. Houseswere going up 10% to 15% a year and commercial property was going upbecause there was inflation and it provided tax shelter, but these wereresponses. This time we are looking at a situation where the bottomhalf of the US population has been used as chattel property tocollateralize an asset bubble. Home equity has been hocked to feedcorporate profits. The union worker and all the skilled workers thatcarried the US in the past don't exist today and the country isn'tsupported on its capacity to produce, but on its capacity to createcredit to send to weaker and less developed economies.

Maybeyou grasp the answer to your question out of what I write, but the realproblem is they don't need our dollars as they are being issued anymore and an attempt by the Federal government to pull itself up by itsbootstraps will fail. When I mentioned the bailout in 1990, what Ireally meant was that they hit a sweet spot with it and it ended upbeing something that created leverage and it created the start of anasset bubble that created more leverage. But, the 1990 to 1992recession was in some ways one of the worst in history. Again that wasa contained problem and it was solved by giving the banks and otherentities government bonds and cutting interest rates to create a 3% to4% spread. How are you going to get a 3% spread out of 3.7% ten yeartreasuries and for that matter, how is a country going to bail itselfout with no equity?