Outrageous!

Hank Paulson has recently been making sense. That confused me. Thanks, Hank, for returning to form and ending my head-scratching.

Hank has now bailed out Fannie Mae and Freddie Mac. The bailout plan includes opening the Fed's discount window to the two mortgage insurers (more on that later). In addition, Hank will ask Congress to approve increasing the Treasury's lines of credit to them, and buying Freddie and Fannie stock.

Wait - didn't Hank say over the weekend that a rescue plan shouldn't benefit Fannie and Freddie's shareholders? How does providing bid support for the stock not benefit them? The shareholders should be at risk, Hank. That's the nature of an equity investment. Taxpayers shouldn't be shareholders unless they want to be - I have no desire to be a shotgun bride to those two outfits. Hank is a pinko.

As for Bernanke opening the discount window, just how deep is the window, anyway? We's better find out soon, because the banks are going to start hitting it hard, now that IndyMac's gone down (more on that later, too). And he's already opened the window to investment banks. And he said not too long ago that they might keep it open to investment banks next year, even though the original plan was just to give them access this year.

Detour: Of course, that was predicated on the foolish belief that the credit crisis would be over by then. Let me stand on my desk and shout:

THE CREDIT CRISIS WILL NOT END BEFORE THE END OF 2009.

Perhaps not even then, because every move the Fed and the Treasury make just makes it worse. They respond to panic with things that will just extend and exacerbate the problems people are panicking over. And they reward the wrong behavior. So the crisis may not end until it reaches catastrophic proportions.

Back on course: So now, we're opening the discount window to Freddie and Fannie. Who's next? MBIA, FGIC and Ambac? S&P? Moody's? How long before the window runs dry, and we have to start printing money, sending inflation even higher? How long before the dollar becomes the new peso? (To quote Marty Feldman, "Oops - too late!") How long before we have to seek capital infusions from foreign nations, like Wall Street has? (Repeat the Feldman quote.)

Now, on IndyMac. Why was Bear too big to fail, and IndyMac's not? Ostensibly because if Bear fell, Lehman would follow, then Merrill, then ... Ben (who's a pansy, by the way) and Hank didn't want to start a domino effect.

And the IndyMac failure won't trigger the same in the banking sector? Do you know how many headlines I've read today alluding to that very outcome, or predicting the next name to go belly-up? Me neither; I've lost count. But WaMu's down 35% today, National City's down 15%, Zions Bank (my personal bet for the next shoe to drop) is off 23%, SunTrust is down 9%, and Wachovia fell 15%.

Jim Rogers - who's right a lot more than he's wrong - called the Fannie/Freddie bailout "an unmitigated disaster," and he accused Ben and Hank of bailing out their Wall Street cronies. He may be right.

************

Two more outrageous items. First, I read this morning that Citi has about $1.1 trillion off-balance sheet - about half its total balance sheet size. The money is in various shadowy financing vehicles, some 7,000 different ones. As it takes more and more of them back onto its books, its losses are mounting.

Now, the Financial Accounting Standards Board (FASB) wants the big financials to value off-balance sheet assets and liabilities every quarter.

Citi's deputy controller sent FASB a letter objecting to that requirement, saying "We would not be able to perform this analysis given the resources we currently have."

There are two things wrong with this picture. First, when an authority requires you to do something, not being able to do it is not a tenable defense, last time I checked. (But in case it now is, hey, IRS, I can't figure out how much tax I owe you.)

Second, and far more ominous, is the notion that the largest financial institution in the world can't value what it owns - more than a trillion dollars worth (well, we think) of what it owns. The translation of the quote above is, "We have no earthly clue what this crap is worth."

The last bit of outrageousness today is a quote from a mortgage broker commenting on the impact of the Freddie/Fannie fallout on mortgage lending. "Some lenders are really pulling in their horns," he says. "They're demanding really clean loan applications with every i dotted and every t crossed."

I'm going to shout again: IF THEY'D DEMANDED REALLY CLEAN LOAN APPLICATIONS WITH EVERY I DOTTED AND EVERY T CROSSED IN THE FIRST PLACE, AS THEY SHOULD HAVE, WE WOULDN'T BE IN THIS FREAKING MESS TODAY!!

There, I feel better.

Another Bipolar Rally and Other Stuff

Stock traders didn't let us down yesterday. Oil fell more than $5/barrel, to a little more than $136.

Wait - isn't that still really expensive? When oil was rising through that level, just a couple of weeks ago, the Dow was shedding more than 250 points over about a four-day period. Yesterday, we get a 150-point rally for hitting that level.

Oh, and why did oil fall? Reduced concerns that Iran might threaten Israel.

So what's Iran up to today? Oh, just testing a little long-range missile - one that can easily reach Tel Aviv or Jerusalem. So oil's up, and stocks are down.

************

Here's more nonsense from a Bloomberg story: "Treasuries fell as stocks rose and concern eased that mortgage-related losses at banks and financial companies will widen."

Oh, really? If those concerns have abated, then why are mortgage spreads widening back out to the 22-year highs they reached in March before the Bear Stearns bailout? The widest spreads since we've had a secondary mortgage market ought to tell us something, as should a doubling of the credit default swap spreads on Fannie Mae and Freddie Mac.

The financials have written down about $400 billion thus far, right? Every estimate out there is that credit market losses will ultimately hit anywhere from $1.3 trillion to $1.6 trillion. So we're only about a quarter to a third of the way through this mess. Trust me, the losses will widen (especially with rates now rising).

A bond trader interviewed for the article said, "Financials have hit bottom or are close to it. The Fed has a grip on the financial downside."

Riiiiight.

************

We now turn our attention from nonsense to good sense, and from a most unlikely source: Hank Paulson. The architect of the monumentally silly "HOPE NOW" plan said, "Many of today's unusually high number of foreclosures are not preventable. There is little public policymakers can, or should, do to compensate for untenable financial decisions." (Emphasis added.)

Wow.

Don't get me wrong, I don't disagree. In fact, this is probably one of the first times I've found myself in complete agreement with Hank. It's just something of a shock coming from him.

Barack Obama: A Man of His Word

I truly believe that - honest. Throughout this campaign, Obama has promised "Change you can believe in." And I think he'll deliver on that promise. In fact, he already is.

He's changing positions on everything from the economy to (gasp!) Iraq, the topic on which supposedly he and he alone was steadfast from the get-go.

And he's doing so only in part, methinks, for the reason all politicians do when they switch from primary to general election mode; that being the tendency to run toward the middle come general race time.

I believe the other reason - the more ominous reason - for the waffling is that the relatively inexperienced Obama is feeling his way on these topics, testing the economic winds, realizing that many of his initial pie-in-the-sky idealistic visions are simply unworkable in practice.

And I believe - I believe that is the real Barack Obama. I believe sitting at the big desk in the Oval Office would expose his inexperience painfully, and we'd get more switching of gears. And I don't think we want that soft underbelly exposed to potential nuclear rivals like Korea and Iran, nor to economic rivals like Russia and China.

************

Lest I be accused of partisanship, McCain is playing his own tricks. Demonstrating his firm establishment as a Washington insider, part of The System, The Machine, he's promised to balance the budget by ... 2013.

Brilliant. One of the oldest campaign gambits in the book. "I promise that if you elect me - then re-elect me - one year into my second term I'll deliver the goods." But there's the rub - you gotta promise two terms, or it won't get done.

Besides it being an old political gambit, in this instance it's just plain impossible. No way is the US budget balanced by 2013, I don't care who's President. I liked McCain better when he was saying the cure for the housing crisis was time.

************

One more politician in my sights today: Bill Clinton, who stooped to what is, even for him, a new low. He was talking about Nelson Mandela's captivity, and managed to segue that into a general observation about POWs: that at some point, their experience will come back to haunt them, and they'll snap.

Poppycock. We've all seen Bill Clinton snap, plenty of times, and he wouldn't have lasted a day as a POW. He'd have given up every secret he knew, from military intel to the phone numbers of every intern in the Beltway.

Another Brainless Rally (and Other Stuff)

Stock traders are a funny lot. Tuesday we learn that GM's sales are down 18%, but GM leads the market from a triple-digit loss to close modestly higher. Wednesday, sanity returned, as a Merrill Lynch analyst downgrades GM's stock, reporting the company needs to raise about $15 billion to avoid bankruptcy. GM falls, as does the rest of the market, with the Dow retreating more than 165 points into official bear-market territory, closing more than 20% below October's high.

So this morning, following a report that payroll losses for June exceeded the forecast, and with May's job losses revised higher, plus unemployment insurance claims spiked to near a cyclical high and the service sector contracted, what happens?

GM leads stocks about 70 points higher. Go figure. The only explanation is that most of the traders were gone early for the holiday, as evidenced by the light volume. Apparently only the dumb ones stuck around.

************

Moody's is going to examine its computer models to make sure they accurately assess risk, after discovering a glitch in one of them that resulting in rating about $1 billion in complex structured debt AAA, when it should have been rating lower.

Let me repeat that first part: Moody's, one of the big three ratings agencies, is going to examine its computer models to make sure they accurately assess risk.

Are you kidding me?? Shouldn't this have been done before the models were used to assess risk and assign ratings? Can we believe anything the ratings agencies say anymore?

************

Memo to Hank Paulson (to steal a film title from The Talking Heads): stop making sense. Seriously, you're scaring me. You've never made sense before. Are you well?

Hank recently expressed the opinion that the government should not be in the business of bailing out big financial firms. Some notable quotes: "We need to create a resolution process that ensures the financial system can withstand the failure of a large complex financial firm ... Two concerns underpin expectations of regulatory intervention to prevent a failure. They are that an institution may be too interconnected to fail or too big to fail. We must take steps to reduce the perception that this is so - and that requires that we reduce the likelihood that it is so."

I wholeheartedly agree, as a free-market guy. It's just a shame Hank didn't hold these views when he and his pal Helicopter Ben put taxpayers' money on the line to bail out Bear Stearns.

Hank now says he thinks presidential approval should be required for such action. I know that he, Ben, New York Fed Bank President Tim Geithner, and Jamie Dimon, CEO of JP Morgan Chase (which received a windfall when it got Bear for a song and at the same time got to off-load $30 billion of Bear's most toxic waste to a shell company created by the Fed and funded by taxpayers), were all in on the talks to rescue Bear. I don't recall hearing anything about the President being consulted.

************

Another sign of the times: arson is up this year. Why? Home foreclosures. There were four suspicious fires that destroyed foreclosed homes in New Bedford, Massachusetts in April alone. Fire chiefs in hard-hit states like California, Nevada, Massachusetts and Ohio are seeing more foreclosed houses burn, as the defaulted owners seek to collect insurance money or thrill seekers set empty houses ablaze.

Wow.

On that note, have a safe Fourth of July, and remember why you're celebrating. Freedom isn't free.

Here's Your Sign

Stocks continue to ignore what the rest of the world is telling them. Yesterday’s auto sales report should have sent the Dow, which at one point during the day was trading off nearly 150 points, reeling further. Instead, GM of all companies led a rally to close up almost 35 points. The rationale? GM's 18% year-over-year sales drop could have been worse.

This morning, stocks are again trading higher in spite of the ADP report, with the financials leading the way on “speculation that banks have raised enough capital to weather credit-market losses,” according to Bloomberg. Given that there’s been no concrete information reported to substantiate that speculation, the rally is obviously of the “we want a rally, so let’s create a reason for one” sort. The only news from the financials is that Merrill Lynch’s quarterly loss estimate from subprime-related write-downs was revised higher.

The market seems loathe to break into the technical definition of a bear market, which happens about 60 points below where the Dow’s currently trading. It’s off 19.5% from October’s highs already; really, how significant is that half-point difference? We’re in a bear market, folks. And it's going to get worse. One money manager noted this morning, "The market will be dictated by the financials." In that case, brace yourselves.

************

Another reason things will get bumpier is that the trickle-down from subprime defaults is now spreading into other debt sectors, including home equity lines of credit (HELOCs) and credit cards. Delinquent payments on the latter have reached the highest point in 2006, according to the American Bankers' Association, and HELOC delinquencies increased at their fastest pace since 1987. Given the heavy use of HELOCs in the most recent cycle as compared to the '80s, that's an ominous signal.

************

The reason for the title of today's post - borrowed from comedian Bill Engvall - is three economic signs of the times I've recently run across, one of which I read about and two of which I observed.

Let me state emphatically that the one I read about is that brothels in Nevada, which allows legalized prostitution in certain counties, are offering gas cards to their customers. Apparently truckers comprise the bulk of their business, and with soaring fuel costs they're not leaving the highway to stop at the brothels. A few of the "ranches" also offered a two-for-one promotion for customers who brought in their tax rebate checks. Stimulus, indeed.

The second sign came from a clothing catalog I receive regularly, from a company called The Territory Ahead. I like their stuff, but it's a bit pricey for my tastes. I've never seen them offer deep discounts - the occasional "10% off a purchase of $100 or more" at Christmas, but that's about it. Their latest catalog offers a number of sizeable discounts, however, and not just on the stuff that you knew would wind up in the bargain bin due to its ugliness, or on out-of-season stuff. One particularly attractive short-sleeved shirt, originally priced at $45, is going for $19.99. Gotta compete with the Wal-Marts of the world, which are the only retailers doing well these days.

The final sign came from a visit to Chipotle. Higher food costs have not resulted in price increases at the popular fast-food chain, I'm happy to report. However, they have resulted in smaller portions. I noticed when they made my Burrito Bol they put in about two-thirds the rice they used to start with, and a scant few onions and peppers (for the fajita version). The chicken was skimped on as well. So inflation is with us, in the form of not only higher prices but reduced servings. Looking at my waistline, that may not be a bad thing - a little deflation there is in order.

Long Time, No Blog

My apologies for the long hiatus. I spent the first week of June in New Orleans on a mission trip to provide hurricane relief, and the next two weeks rehearsing with the praise band I play in for a concert at the state prison in Lansing, Kansas - both of which were amazing experiences, but more on that later.

For now, here's an interesting news item - with an important lesson - from the United Arab Emirates, home of Dubai, which has become a global playground for the rich and famous, with its mind-boggling real estate developments and resorts.

Consumer spending in the UAE - the Arab world's second-largest economy - grew 17.7% last year, more than doubling the pace of half a decade earlier. Per capita spending has grown to eight times the average for the rest of the Middle East in the nation that imports about 85% of consumer goods, and spending as a percent of earnings is approximately 60%.

The UAE's Department of Planning and Economy is concerned that the rampant "consumer spending at the expense of savings and investments has, and will continue to have, adverse effects on the local economy. This alarming consumption rate could, in the future, constitute a big hurdle in the face of any plans to transform the country" to self-sufficiency. "The combination of easy loans in addition to advertising and media propaganda have all combined to plunge consumers into a quagmire of spending. Some of the woes that have beset the UAE's economy have to do with this pervasive culture of consumer spending."

Sound familiar? The US has fully embraced this culture, eschewing savings in favor of consumerism. Our own government has turned a blind eye to the resulting economic problems, proclaiming consumption as the engine for growth in a once self-sufficient economy increasingly dependent on exports. Consumption comprises 70% of US GDP, vs. less than half that for the world's fastest-growing economies, those of India and China, both of which boast double-digit savings rates, while that of the US hovers near zero.

China gets it. So does India. Even the UAE acknowledges that "consumer spending at the expense of savings and investments has, and will continue to have, adverse effects on the local economy." When will US economists and government officials recognize that savings, not spending, is the true engine of sustainable economic growth?

Hillary, the Obamas, and "The Working Man"

Well, Hillary's gone and done it. She's gone off the deep end. And I knew she would.

Like Bill, she's too full of herself to concede, even when she's clearly defeated. So she's taking the fight all the way to the convention, and trying desperately to get the Michigan and Florida delegates seated. Michigan - where Obama wasn't even on the ballot - offered her a compromise: 69 delegates for her, 59 for Obama (she beat "uncommitted" by a margin of 65% to 35%).

But Hillary wants them all. Why? Because she needs them all, if she's to claim the nomination.

In Florida, she's trying a populist approach, whipping voters into a frenzy. "You didn't break a single rule," she tells them. No, but the party did, and she didn't protest back then. "The outcome of our elections should be determined by the will of the people," she tells them, "and we believe the popular vote is the truest expression of your will."

Oh, really? Funny, I can't find a single speech she gave before the primaries and caucuses got underway where she argues that the delegate system should be discarded in favor of the popular vote. Why? Because she didn't feel that way until it suited her (lost) cause.

Yet she wants delegates seated. Hypocrisy? You bet.

This will only continue to divide Democrats, and it can't be good for the party. But I don't think that's what she wants. I think she knows she's lost, but she wants to wound Obama to the point that McCain beats him, so she can run again in four years. She doesn't want a solid Obama to win, then perhaps win a second term, then endorse his veep (which certainly won't be her), forcing her to wait anywhere from four to 12 or 16 years for another shot.

********

Speaking of hypocrisy, when asked why, on an income of $240,000 a year, Barack and Michelle Obama didn't give more money to charity (they contributed less than 1% of their income), they complain about the high cost of raising kids, and having to pay back expensive student loans. (Gee, I make less than that, and I have a kid and some debt, but I manage to give a heck of a lot more than 1% of my income to charity.)

But now that they're millionaires (and giving more to charity, but still not a significant percentage, and they've only been doing since Barack declared his candidacy), Barack apparently feels differently about the bracket that he formerly struggled to live in.

Justifying his planned tax hikes, he said, "Once people are making over $200,000 to $250,000 they can afford to pay a little more in payroll tax." But wait - they can't afford to give to charity, not if they have kids or loans. So how can they afford to pay more in taxes?

This is what's wrong with big-government types. The world is better off if we direct our money to charity, under our own guidance, than if we trust politicians with it. Case in point: Obama himself, who has already - in his notably short tenure in Washington - proven himself adept at serving up pork. He requested $330 million in pork for his home state in a single year.

One example was the $1 million he requested for the University of Chicago Medical Center. A worthwhile cause, perhaps. Though maybe the fact that one Michelle Obama is a vice president of the hospital has something to do with the request. Or the fact that her pay for that role nearly tripled shortly after her husband got elected as Senator.

But it's probably just a coincidence. She probably just went plaintively to her boss, hat in hand, and explained how difficult it was for her and Barack to pay for their kids' dance lessons and sports supplements (which she recently complained cost about $10,000 a year - good Lord, what kind of supplements are they giving those kids?), and repay those darned expensive student loans, so could she please have a raise? And voila, her boss tripled her salary. Yeah, I'm sure that's how it went.

********

More on the Obamas: Barack - who's been seen by some as lacking the backbone to be Commander-in-Chief - showed his moxie in a recent interview, when he said that making Michelle a campaign issue was "unacceptable." Well, sorry, sport, but you're not dictator - er, President - yet, so you don't get to make that call.

Hey, he trumps her out on the campaign trail, uses her to appeal to the female vote, with which his opponent has an edge, encourages her to campaign on his behalf. So anything she says - especially things like "I've never been proud of my country," or "America is a mean country" - is fair game. Just ask Hillary, whose spouse's acute case of foot-in-mouth has cost her numerous times. Or ask John Kerry.

And another curious thing: Michelle's Princeton thesis, which addressed the topic of race, has been shelved by the University until November 5. Hmmm. Wonder who Princeton supports for President?

********

Finally, a thought from my good friend Rick Maner. The Democratic candidates often appeal to the blue-collar crowd by talking about how they're going to tax the "rich" to take care of "the working man." Well, Rick takes umbrage to that reference, as do I.

While certainly not "rich," we fall into the tax bracket to which both Clinton and Obama plan to put the screws (and I daresay we give more to charity than either of them). So their implication is that we're not "working men." Just because we don't carry a union card, or come home with grease on our pants and dirt under our fingernails.

Don't get me wrong, there's nothing wrong with those that do. I admire the work they do. But I work equally hard. Granted, what I do uses my brain more than my hands. But the average mechanic or plumber could no more do what I do, than I could do what they do. Someone apparently values what those of us in the higher tax brackets do - those of us that earn our living working for someone else, not trust fund babies or the like - or they wouldn't pay us what they do.

So, Hillary and Barack, when you say you're going to take care of "the working man," I'm curious: what are you going to do for me? At least I don't take two years away from my desk, while still drawing a salary, to run for President.