The Bailout Bubble Inflates….The World Credit Bubble Deflates….The World Waits
October 6th, 2008 by Leonard
The Bailout Bubble Inflates….The World Credit Bubble Deflates…The World Waits.
Yes it’s not just the US. It’s everywhere. The European Union is almost not a “union” anymore. Ireland followed by Germany moved to protect their banks without great consultation and agreement with their economic partners.
Here is a pertinent question. How do you bail out a problem when the size of the problem is being covered up? The Troubled Asset Relief Program is called TARP. Here is a picture of a tarp.
Do you see how it covers things? Inside this TARP is the shadow banking system where all of the bad paper and unregulated highly leveraged financial instruments of the US and the world reside. You are not allowed to see what’s in the TARP. The reason for this is that the authorities believe that you and we are too stupid to understand what it is that we would be seeing and would probably freak out if we understood the magnitude of how much dead in the water debt and insolvency is sitting on the dusty shelves within the shadow banking system. Another reason is that systemic fraud needs cover.
The authorities want to continue using the same system of accounting that created the shadow banking system.
In November of 2007 The Fair Accounting Standards Board (FASB) made it clear that these phony financial instruments (my words), would have to be “marked to market”. There was political pressure to prevent that from happening but the FASB voted by a slim margin to pass the measure for at least financial instruments.
Absurdities
It seems almost absurd that any financial instrument would have to be voted on to be “marked to market” since that is the standard upon which all commerce is conducted. Marked to Market simply means, what would a CDO go for on Ebay? There would never be an answer to that if the shadow banking system marks value to myth and fantasy.
Very clever financial wizards also created a category called “Marked to Model” which is a value placed on a financial instrument based on a hypothetical computer model, that makes assumptions about where the economy would be at some point in the future, based on past performance with similar financial instruments that have been Marked to Market .
This of course is laughable. If you have ever seen a risk disclosure agreement that sits prominently in a mutual fund prospectus, or for any stock or commodity account that you have opened, then you would see a risk disclosure statement. There is always a risk disclosure, a paragraph that clearly says that “past performance is not indicative of the future results”. Using Marked to Model is like presenting a hypothetical track record with no risk disclosure or warnings to investors and worse, the models are premised on happy times forever and ever.
So there is Marked to Market, Marked to Model, and the silly putty category comprising the shadow banking system called Marked to Fantasy.
Of course I am being too simplistic. I need to be more respectful of the geniuses that actually developed these financial instruments. You see when Wall Street gets tired of the same old boring grind of buying and selling stocks, the geniuses step in and create financial instruments to ramp up the action.
And through the process of deregulation, financial instruments were created that were so leveraged and convoluted that no one except shadow banking specialists knew what to do with them. They don’t really have a market. They exist because Wall Street in its existential mind state of pretend land simply wanted them to exist, to ramp up the action.
Wall Street sold this junk pile of assets for great commissions, but used them as collateral to buy and sell more bad assets.
No one cared what they represented. These financial instruments were invented to create commissiondectomies but were sold and falsely legitimized as new financing models for raising capital.
In steps the Treasury Czar, Hank Paulson with a TARP.
This is not the first time that Hank Paulson has tried to pull the wool over everyone’s eyes. Remember his ridiculous attempt to save Citigroup with the Master Liquidity Enhancement Conduit? (MLEC) in Oct of 2007. Roughly speaking, this was a scam to create a market for Citigroup’s lousy asset portfolio by creating a holding company owned by Citigroup so that Citigroup could sell it’s assets to itself thereby creating a fictitious market value. There were several big banks that would act as a backstop. It bombed as an idea and banks began doing what they were supposed to do and write down the debt of their insolvent assets.
Now Paulson is back with another hyperventilating crises moment. The House Republicans did not pass the first bill he presented largely because they wanted to rid the bill of marked to market requirements. When that was modified they were happier with fantasy models of what the assets will be worth into the future. Here is another TARP.
So the Democrats got a little of what they wanted and the Republicans got a little of what they wanted and everyone could go back to campaigning in their respective districts to sell themselves.
Then the market tanked. No surprise since this 700 billion dollar bailout is only directed at unlocking the world wide credit markets. And since the FASB was politically pressured several weeks ago to not enforce FASB reg 140 which required banks and other companies to consolidate the assets held in their QSPEs (Qualified Special Purpose Entities) junk paper, we won’t be seeing how much bad paper is on the books of the shadow banking system until November 15, 2009, and that may only be a smidgen of what bad paper is really out there in the world of banking thieves.
Well maybe I am being harsh in calling bankers thieves…..not…..Because one thing that a thief knows, is that you cannot trust another thief, and so the banks are not lending to each other, or to anyone else for that matter. Did you know that Tarp are kind of fishy?
Okay, well the Dow Jones finally hit the minimum price objective of Head and Shoulders top that I drew as a probable projected pattern on November 19, 2007, almost 11 months ago. What a journey. Here is the original drawing.
And now here is what we are facing as possibilities.
After markets hit their minimum price objective there tends to be a bounce and a consolidation. And that is exactly what we got today Oct 6. Many times in real bear markets as we are experiencing, the consolidation takes the form of a continuation pattern. This means that unless the market has experienced a capitulation blow off, that the next pattern to form is most likely to drive the market further down, particularly since all of these government interventions since August of year 2007 have created neat little distribution patterns as air pockets. I still do not see a capitulation, and there are still too many bulls lurking in the corners.
As you can see on the weekly chart, a Complex Head and Shoulder topping pattern has developed that could project the Dow Jones down to about 7371. Simply measure the distance from the very top of the pattern down to Neckline 2 and project that distance down from Neckline 2 to a point called Minimum Price Objective at 7371 Complex H&S Top 2. The market closed today Oct 6 at 9955.
What could cause that to happen?
Well the list is quite long. There are corporate earnings coming up in mid October. There is a bad Xmas retail season being anticipated. There is a third wave of mortgage resets coming due in 2009 and commercial real estate is hitting the brakes. The list is actually longer but there is always a chance for a miracle if the horse is let out of the barn.
But it’s these damn TARPs.
Neckline 2 at DOW 10,287 now becomes overhead resistance. The declining 50 week moving average is still resistance further up.
In the meantime………Enjoy the ride, and trade carefully.
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