US Equity Charts in the Babson Style

The Incontrovertible Truth About Debt, Deleveraging, Devaluation and Recovery

It is incomprehensible that any informed economist does not understand this difference between deflationary deleveraging and a cyclical recession.

And if they do, how could they possibly justify giving trillions of capital to the banks to support them in their excess so that they might freely make loans again, when it was their reckless lending and speculation that brought us to this point?

And the economists also know full well that the real cure lies in devaluing the currency and restoring the balance sheet of the individual households through an increase in the median wage and the debt relief of bankruptcy.

There must be reform, a change in the system that spawned these repeated bubbles and epoch of voodoo economics and malinvestment.

"Basically what happens is that after a period of time, economies go through a long-term debt cycle -- a dynamic that is self-reinforcing, in which people finance their spending by borrowing and debts rise relative to incomes and, more accurately, debt-service payments rise relative to incomes. At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren't adequate to service the debt. The incomes aren't adequate to service the debt. Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring. General Motors is a metaphor for the United States.

The process of bankruptcy or restructuring is necessary to its viability. One way or another, General Motors has to be restructured so that it is a self-sustaining, economically viable entity that people want to lend to again.

This has happened in Latin America regularly. Emerging countries default, and then restructure. It is an essential process to get them economically healthy.

We will go through a giant debt-restructuring, because we either have to bring debt-service payments down so they are low relative to incomes -- the cash flows that are being produced to service them -- or we are going to have to raise incomes by printing a lot of money.

It isn't complicated. It is the same as all bankruptcies, but when it happens pervasively to a country, and the country has a lot of foreign debt denominated in its own currency, it is preferable to print money and devalue....

There will be substantial nationalization of banks. It is going on now and it will continue. But the same question will be asked even after nationalization: What will happen to the pile of bad stuff?... (More precisely, who will take the loss? If it is not those that took the profits, then you have injustice, transfer of wealth - Jesse)

The Federal Reserve is going to have to print money. The deficits will be greater than the savings. So you will see the Federal Reserve buy long-term Treasury bonds, as it did in the Great Depression. We are in a position where that will eventually create a problem for currencies and drive assets to gold....

Everything is timing. You print a lot of money, and then you have currency devaluation. The currency devaluation happens before bonds fall. Not much in the way of inflation is produced, because what you are doing actually is negating deflation. So, the first wave of currency depreciation will be very much like England in 1992, with its currency realignment, or the United States during the Great Depression, when they printed money and devalued the dollar a lot. Gold went up a whole lot and the bond market had a hiccup, and then long-term rates continued to decline because people still needed safety and liquidity. While the dollar is bad, it doesn't mean necessarily that the bond market is bad...

From the U.S. point of view, we want a devaluation. A devaluation gets your pricing in line. When there is a deflationary environment, you want your currency to go down. When you have a lot of foreign debt denominated in your currency, you want to create relief by having your currency go down. All major currency devaluations have triggered stock-market rallies throughout the world; one of the best ways to trigger a stock-market rally is to devalue your currency...

Buying equities and taking on those risks in late 2009, or more likely 2010, will be a great move because equities will be much cheaper than now. It is going to be a buying opportunity of the century."

Recession? No, It's a D-process, and It Will Be Long - Ray Dalio - Barrons

SP Futures Hourly Chart at Market Close

Tomorrow appears to be showtime for Turbo Tim, Zimbabwe Ben, and Leisure Suit Larry. The Yes We Can Man probably will get a few more chances if he throws one or all of them to the wolves if the plan fails which it probably will. We'll have to wait to see it.

If it is the "guarantee program" then it is only as good as the price floors of the guarantees. Too high and the banks are welfare queens. And to say that the 'market will set the price' with an implicit price guarantee from Treasury underpinning it sounds like the Son of Fannie and Freddie, and not even a remotely fair price for the taxpayers.

The most serious flaw in the solution, of course, is that bank lending is really not the problem. Easy money for lending was the solution Greenspan used the last five times we reached a point like this, a little worse on each revisit. We have probably reached the limit of the law of diminishing returns of hitting that old easy money for the banks booty call again.

Why? Because the consumers themselves have hit the wall. Years of suppressing the median wage and understating inflation as a matter of government industrial policy have left the consumer flat out busted.

Saving the banks so they can lend more is like fixing the holes and repairing the engines on the Titanic so it can ram the iceberg again. Can we please consider changing course?

How to Resolve the Mortgage Crisis

Chris Whalen, The Institutional Risk Analyst, is making more sense on a rational way of resolving the subprime mortgage crisis than Tim Geithner, Ben Bernanke, and Larry Summers rolled together.

This is a bit of a read. We're looking for a video of his interviews on Bloomberg the past few days, and today in particular. But his common sense approach makes more sense than anything we have heard from the Washington Whiz Kids.

On top of his recommendation, Obama needs to target the stimulus more precisely and concentrate on driving employment and the median wage in the short term with both money and policy changes.

In fact, it is from the policy changes that the greatest gains would be achieved. Obama and crew need to stop putting out fires ad hoc in the manner of Bush and start working on a serious and well thought plan that the market can understand, whether they may like it or not.

Much of the stimulus package looks like payoffs to constituents and special interests, a perennial problem in the Federal government. The Democrats have to stop playing 'Let's Make a Deal' and strike a vision, share it, and then go for it. That is what FDR did in his first hundred days. His crew made errors in implementation, but the vision was coherent.

Obama needs to find his footing and start thinking out of the box. And it is not likely he will obtain that from Geithner or Summers, and does not have time to wait for the Volcker Committee to weigh in with a compromised solution.

Its a tough spot for any manager. Crisis management shows the weakness of his managerial experience. Bush was dying on the vine on his own watch. It tests a person like nothing else.

Its also an opportunity for growth, and Obama has about three months of goodwill capital to spend, and some bright people on deck. Time to stop making deals, and listening to the vested interests of everyone, and get to work striking a vision that his team can implement towards. A good start would be to strike the note of reform and level with the people, and do something about it other than symbolic gestures and fine rhetoric. Its time to tell the truth.

Can We Fix the Banks, Help Homeowners, and Rebuild the Mortgage Markets? Can Do.

"Here's the basic approach:

* The US Treasury would tender for all of the private label CDO/MBS extending between a range of dates, say 2004 forward to year-end 2007, representing trillions of dollars in assets held by investors and banks globally. The pricing on this paper will reflect current market prices, but say the average price was 50% of face value. Only issues that actually have an enforceable legal claim to collateral will be eligible. Derivative structures without collateral will not be eligible.

* Treasury then transfers all of the purchased toxic paper to the FDIC Deposit Insurance Fund, which acting as receiver under 12 USC restructures the trusts that are the legal issuers of the bonds and recovers legal ownership of the underlying collateral. The FDIC arguably has the power to call in all bonds and related investment contracts, and extinguish the claims of those parties which do not respond to the Treasury tender. The legal finality of an FDIC-managed receivership under 12 USC is what is required to end the toxic asset issue once and for all. The bankruptcy courts could be used in a similar fashion, but the unique legal authority of the FDIC suggests to us that this agency should run the process as part of its larger asset sale operations.

* This now "clean" whole loan collateral will then be re-sold to solvent banks in the localities where the property is located, using zip codes and other means to identify eligible buyers, priced at say 90 cents on the dollar, with a full recourse guarantee from the FDIC and financing from the Federal Reserve Bank in the relevant district. The banks will initially be guaranteed a minimum net interest margin and servicing income, and immediately begin to service the loan and manage the credit locally. Indeed, the participating bank must agree to retain and service the loan so long as government financing is used. The bank has the option to repay the financing from Treasury and take full, non-recourse possession of the loan.

We don't pretend that this simple outline is sufficient treatment of this proposal, but we have heard several permutations of this approach from veteran bankers in the loan origination channel all over the US. We see several advantages to this "community bank" approach to the crisis, which might be combined with modest additional capital infusions to solvent community and regional banks like WABC, if they even need it.

* First, it puts the trillions of dollars in now illiquid mortgage loan collateral trapped inside thousands of securitization deals back into strong local hands, who are responsible and incentivized to both manage and service the loan.

* Second, it re-liquefies the balance sheets of the US banking industry and it will vastly improve the prospects for home owners and housing markets around the country. If we are going to further lever the balance sheets of the Treasury and Fed, let's do it for a real reason and with a clear purpose.

* Third, the approach outlined above provides the Obama Administration and the US Treasury with maximum bang for the buck in terms of both addressing the solvency problems facing the banks and also helping the economy and the housing industry.

One downside: This new market paradigm suggests that loan servicing as a standalone business may be at risk. Once community banks begin to accumulate significant local servicing portfolios, they may rediscover the benefits of keeping the credits that they originate. Sorry Wilbur!

And what about valuation? Well, as our friend Kyle Bass of Hayman Capital likes to remind us, all of these assets are valued and traded every day. It's just a matter of organizing the purchase process in a transparent and competent fashion. Starting with our friends at shops like Hayman, Black Rock and RW Pressprich, we know people who know how to trade illiquid assets."