This is not good.
But the worst news is not in the stock market. It is in fact in some of the other indicators in the market which were indicating potential capital flight, along with still-extreme levels of stress.
I must caution everyone - if you are not prepared for six months to two years of unemployment, you need to be. If you are dependent on credit to survive (that is, if you couldn't make it without your credit cards) you need to fix that now.
Like today now.
Several times I have said "raise cash, get out of debt, be prepared."
I must reiterate this advice and emphasize it, as we may see a bond market dislocation and concurrent stock market crash at any time, without warning. It could be as early as today, in fact.
No, what happened the last three days isn't a crash, although it has now hit my full "bear market" target - 1070 - and in fact exceeded it.
Unfortunately what happened the last three days forces me to reset that target to the 2003 lows, and perhaps as low as four hundred on the S&P 500, 4000 on the DOW.
Needless to say if that happens it will be on the back of an economic catastrophe of a scale similar to the 1930s.
Bernanke's latest load of crap with an "SIV" for commercial paper is just another example of "more of the same" stupidity.
Bernanke and Paulson need to be indicted and jailed for criminal negligence (at best) and put in the stocks where the people can serve up some rotten tomatoes.
This evening we were "treated" to both political candidates shooting their mouths off on matters economic, but saying nothing of substance. Neither candidate was willing to admit the truth - that this "bailout" hadn't worked, that in fact the market had crashed by 15% since it was voted on, and that there is a zero chance of it having any positive impact on one American household.
But no, not even the "moderator" was willing to ask those tough questions, nor was anyone present.
These "debates" are a sham, a fraud and a gigantic waste of time.
Never mind that McCain embarrassed himself by claiming to be a "maverick" and "against pork", when he had just gotten done voting for over $150 billion of it in the Bailout Bill - pork that was not present in the original house version.
Was that claim of being "against pork" good for a "no" vote? Nope. He voted yes, as did Obama.
To those who dismissed the six petitions (you can go over to http://supportedthebailout.org and see the old ones) over the last year, how do you feel about it now?
To those who said that "subprime was contained", how contained is it now?
To those who said that deterioration in consumer credit wasn't going to be a big deal, would you like to revisit that belief?
To those who said that "the nation would not have a recession", do you have any regrets, apologies, or perhaps an outright retraction?
To those who told people to buy buy buy all the way down, how do you feel now that they've lost 30% of their money?
To those politicians from both parties who voted for the ESSA on the claim that it would "stabilize markets", can you show me where it has been, in fact, stabilized? If this is "stable" I'm somewhat curious as to your definition of "unstable".
There is chatter circulating, apparently, that "global equity markets will be closed after the emergency G7 meeting this weekend." That ought to induce confidence - just ask the Russians or Indonesians, both of whom have tried this and it has resulted in an instantaneous crash when they reopened (the Indonesian market was just closed AGAIN this evening, after literally imploding - down by more than 10% - within an hour of starting to trade.)
This is no longer a US problem, but the United States continues to refuse to lead. We continue to "trust" the idiot savants Bernanke and Paulson, both of whom have sung the same song since this crisis began more than a year ago, have been wrong 100% of the time, and yet have found an ear in Congress repeatedly willing to listen to and follow their insanity.
By allowing this action and indeed following the advice of these two each and every one of the 535 members of that body has taken unto themselves the responsibility for the calamity that now faces American investors and the public, as our economic system literally "folds back" and consumes itself. Americans will not be able to retire and have no economic security, and now are losing their jobs in increasing numbers. This will continue.
For more than a year I have tried to get the attention of Congress with petitions, phone calls and faxes. I have been ignored, as have others who have been consistently right in our expectations and beliefs, including "Mish" Shedlock, Nouriel Roubini, Charles Hugh Smith and others. Over 200 degreed economists urged that the "Bailout Bill" not be passed as submitted, including two Nobel Lauretes; all were ignored.
The people of this nation have sat on their hands and watched American Idol, now turning into the NFL, while lapping up the slop from Paulson, Bernanke and Bush about how the "economy is fundamentally strong", instead of showing up in Washington DC to protest or flooding the fax and phone lines demanding that Congress act to reign in the fraudsters.
Let me know how "fundamentally strong" the economy is when you're walking the unemployment line and waiting for your turn at the soup kitchen for something to eat.
Entitlements? Forget 'em. They're gone. Social Security? Medicare? Done. Not today, but in the not-distant future. China, having gotten its money from the $700 billion "bailout", will ditch our Treasuries and refuse to buy more, as they will no more need to sterilize export dollars as our economy collapses. We in turn will be left to twist.
We deserve it, because we could have (but didn't) stand up to their demands that we cover a private dispute instead of handing over $700 billion we don't have. When (not if) the foreign flow of funds inward disappears due to the lack of need for these nations to recycle dollars, we will suddenly find that we have a nearly $800 billion a year hole in our federal budget - a hole that can only be filled by chopping Social Security, Medicare and the Military. Congratulations Congress (and America in general); you didn't really think you'd get away with that, did you?
George W. Bush will go down in history as the President who held the office while we drove our nation's financial system off the cliff, laughing all the while about flipping houses. And despite his protests to the contrary, the history books will record that it was his administration that removed the 12:1 leverage limits, sued New York to prevent them from clamping down on predatory lending, and willfully stuck its head in the sand while Bear Stearns prepared to blow up, never mind ignoring the problem after Bear detonated in February.
Henry Paulson will go down in history as the Treasury Secretary who sold out our nation to the Chinese and London Bankers, then fled the country with $500 million he "earned" creating and selling the very credit instruments that later blew up and sunk the nation.
The members of the House Financial Services Committee, the Senate Banking Committee and the Joint Economic Committee will each have special places reserved in the history books for refusing to deal with Ben Bernanke's raw power grab after Bear Stearns, an act that will ultimately be judged to be the single most important element of the crisis, as it forever put the market in a mood to expect "rule changes" at any time, precipitously damaging trust and liquidity.
The "no short" rule will ultimately be cited as the reason that the market crashed, being that there were no shorts to cover and thus hundreds of stocks, on that fateful day, went "no bid" and had their prices collapse to zero - all at once.
Oil will collapse in price to $20/bbl. Unfortunately nobody will have any money to buy gasoline, or a car, so it won't matter. As in The Depression millions of automobiles will be scrapped after being abandoned by their owners for lack of insurance and registration fee money. Cheap scooters will become the dominant form of transportation for those with jobs, as they will be all most people can afford.
As credit collapses distribution of food and other essentials will break down. Unable to access credit, trucking companies will be unable to get goods to market. The current distribution system for food requires travel of over 500 miles from production to consumption; this is untenable in a market where stable credit is unavailable. Food distribution will be severely impacted and in some areas may break down below critical levels.
Unemployment will reach 25% within two years. Median income will fall by 30% nationally. Foreclosures will reach 20 million homes. The government will step in with HOLC-style remediation but it won't matter - the unemployed won't be able to pay irrespective of the price.
House prices will fall to well under $100,000 nationally on a median basis but with lending all but non-existent you'll need 50% down. A few people will make out like bandits near the bottom, being able to buy up homes for $10,000 each in blocks of 10 at a time - for cash. 60% of America will be renters; nearly half of all homeowners will ultimately lose their homes to foreclosure.
Civil unrest will break out in major cities when incomes fall but the cost of food and essential services fail to come down materially, leaving millions of Americans hungry, broke and homeless. Unlike in the 1930s America will not quietly stand in soup lines - instead they will riot, loot and burn. The National Guard will be called up but will find it impossible to exert meaningful control without shutting down all commerce in the affected areas. The decision will be made to cordon off the cities and deny entry to anyone who does not live in that specific neighborhood, essentially shutting down commercial activity. GDP will fall by 30%.
The S&P 500 will fall to 150 and flatline, a 90% loss. CNBC and Bloomberg will cease broadcasting. Volume will fall to 10% of former levels.
Can it be stopped?
Yes, but not for much longer.
The markets are perilously close to a tipping point where they will collapse, after which all of the above will come to pass, and Congressional action (or inaction) will be irrelevant.
Congress will then have to face the people, as will President Bush and his Cabinet, and may God have mercy on our Republican form of government, because history shows that when government mismanages things to this degree and refuses to respond to the will of the people, a "messiah" generally appears with a "solution" - but there will be "compromises."
Like your freedom.
To fix the problem trust must be restored. To restore trust you must stop the lying, expose the liars, prosecute and jail them all, and stop changing the rules in the middle of the game.
This must happen now. Today. Immediately. Not tomorrow, not next week, not after a series of hearings.
Market participants must be able to know that when they engage in a transaction it will be transparent, handled fairly, and their rights will be protected.
Our politicians must stop demanding the impossible - that home prices "levitate." House prices cannot be maintained at more than 3x incomes - it simply can't be done. We must encourage home prices to contract to sustainable, affordable levels quickly and efficiently.
Mortgages must return to 30 year fixed notes, 20% down, no more than 36% DTI. No government-linked paper in any GSE may issue outside these guidelines. We must reliquify the mortgage market, and this is the only way to do it - by writing only sustainable mortgages.
Strong consumer protection laws must be written that bar negative balance auto and home loans. The practice of "rolling over" an old car loan into a new one, producing an instant 20% or more deficiency against the vehicles value, must end.
Usury laws must be re-imposed, limiting credit card and other consumer loan interest to no more than a reasonable spread over funding costs. Yes, this will limit credit to less-worthy borrowers. So be it. Unbridled credit got us here, and we must prevent it from happening again.
The excess, unsustainable debt in the system must be defaulted. Whether held by corporations or individuals, it must be purged from the system. Those firms and individuals that are bankrupt must be so declared and their assets liquidated, so they can start over and the market can clear.
People will say that what I ask is unreasonable, unable to be achieved, or "needs study."
You're free to study all you want, but if these actions are not taken immediately, right now, today, the above forecast will come to fruition.
You are seeing the global credit markets unravel in front of your eyes, and it is happening precisely because the fraud, avarice and outright theft has gone unpunished and left in place to siphon off wealth from the average American for more than 20 years, and our President, in that environment, went on national television and threatened the world with a global Depression unless his Treasury Secretary got a $700 billion blank check.
The markets, correctly perceiving there was a problem, did exactly what they did when this same gambit was run during the Fannie and Freddie debacle - they called the bluff.
The check is now on the table and we have but two choices - either pay it or suffer the consequences.
The above is from Karl Denninger. I would add one thing to the prescription... REMONETIZE REAL MONEY! This will begin a cascade of good things for everyone (except Paulson and Bernanke).
Oh, and mark to frickin' market the US Treasury's gold like the ECB does, instead of the ridiculous Marked-to-1973 price of $42.22 per ounce you are now using. Sheesh. Are you frickin' kidding me?