Eleventeen Ways to Play Pretend

Calvin: Here’s another math problem I can’t figure out. What’s 9 + 4?
Hobbes: Ooh, that’s a tricky one. You have to use calculus and imaginary numbers for this.
Calvin: IMAGINARY NUMBERS?!
Hobbes: You know. Eleventeen, thirty-twelve, and all those. It’s a little confusing at first.

I’m not a fan of the current economic situation. I’m also not a fan of the decisions made by elected officials. And I’m most certainly not a fan of the way either of these two are portrayed in the media. After the umpteenth time seeing the recent Scotiabank commercial (you know, where the certainly unbiased financial-planner-like-looking-person tells a lady that her husband is right, and now may be a good time to invest), I had to speak out. And by speak out, I of course mean I had to write this diatribe that will be read by about 5 people and most certainly NOT the wife and husband in that commercial.

Now I am definitely NOT a financial-planner-like-looking-person, and I’ve also been mostly out of stocks for the last couple of months and have missed some nice gains in the market. But I am also NOT someone who is very much dependent on having people invest their money with me so that I may make a commission, increase my revenue and not have to cut my dividend payout which would have some people screaming bloody murder. But I AM the type of person that likes to look at a number of different sources of information, and what I see puzzles me.

To those who say the economic fundamentals are improving, I innocently ask, (like my five year old might if she senses something awry), “Is there an issue, papa?”.

Just seems to me there is a lot of pretendin’ afoot in the world. So off the top of my head, and with a nod to the great comic writer Bill Watterson, here is a list of Eleventeen Ways to Play Pretend (in the global economy)

1 Pretend an inflated P/E doesn’t matter

During the 1920-1990 period, the trailing 12 month ‘real earnings’ P/E (Price to Earnings Ratio) for the S&P 500 was usually somewhere between 10 and 20. As a general statement, the lower the P/E, the more ‘reasonably priced’ stocks are perceived to be. During the height of the tech boom (remember, right before many stocks blew up?), the P/E edged up over 30. That was kinda high and signaled a wee bit of irrationality.

As of October 31, 2009, the P/E for the S&P 500 was up over 130. No, I didn’t accidentally add a 1 to the beginning of that number. If 30 is considered irrational, what the hell does 130 signify?

The media is fond of representing the P/E in ‘operating earnings’, because it makes the number smaller. That means take out one-time events and other items. Funny though, how one-time events tend to occur every quarter. Oh, and back in the dot com boom I thought they called operating earnings “Pro Forma”, but that term was dropped due to bad stigma. Change the name, but don’t change the spin. I find that completely retarded mentally challenged.

2 Pretend to have a strong US dollar policy

US Treasury Secretary Tim Geithner, Fed Chairman Ben Bernanke and President Obama all TALK about having a policy to support a strong US dollar. But funny how ALL of their actions support a weak dollar, and indeed these actions have led to a huge decline in the US dollar. Look at a chart of the DXY for the past 6 months. (DXY measures the performance of the US Dollar vs. a basket of other currencies). The 6 month chart looks like a great course for the upcoming Vancouver Olympic mogul competition. Lots of bumps, but straight downhill.

And thanks to the actions of the 3 stooges, the US dollar has become the currency of choice for a burgeoning carry trade. Borrow US dollars at almost 0% interest, and invest in pretty much anything else (like hey, the stock market) for a guaranteed, easy profit. For extra credit, check out a chart displaying both the performance of the S&P 500 and the US Dollar over the last 6 months. It is quite stunning. Dollar goes down, stocks go up. Dollar goes up, stocks go down. With amazing precision. This all works, until it doesn’t.

Back in the day, carry traders used the Japanese Yen. Just don’t look at a chart of the Nikkei index from Dec 1989 to Sep 1990, when that carry trade ‘unwound’. That chart makes the Vancouver Olympic Giant Slalom competitors envious. And if you look at that chart from Dec 1989 to present day, it is even more depressing. If anyone out there thinks that Geithner, Bernanke, Obama or Santa Claus can make sure that doesn’t happen in the US, can I ask you to show me anything they’ve done in the last 2 years that worked out the way they expected?

3 Pretend the economy has turned and growth is back

The US recession is now over, thanks to a +3.5% GDP number in the 3rd quarter. Funny how it takes two quarters of negative GDP to ‘officially’ get them into recession, but only one positive quarter to get them out. Many folks don’t even know what GDP is, and most likely don’t really know how it is calculated. I sure don’t. But one giant line item that DOES make it into the calculation is government spending. And boy, did the US government spend a lot in Q3. Yet for all the trillions of guarantees and spending of money they don’t have, (which will have to be repaid in the future, plus interest, by all the good taxpayers), they were only able to eek out an estimated 3.5% number.

Sure, it beat the estimates, which were 3.2%, but watch out for one of their favorite tricks when they publish the Q4 numbers. There will likely be a revision to the Q3 number, and I’d guess it will be revised downward. In fact, Goldman Sachs (more on them later), has recently stated the number will likely be closer to only +3.0%. Gee, that’s below the ‘estimate’ of 3.2%. But as long as when it was first announced they beat the estimate by using an ‘estimated’ GDP number, the media is happy and all the government economists can pat themselves on the back for a job well done.

4 Pretend economic growth in other nations is even stronger

You think +3.5% GDP growth is impressive? That’s nothing. China routinely hits +8.0% and +9.0%. These guys are really growing. One has to wonder, though. If the US revises their numbers and has questionable calculation procedures, what might the REAL numbers be coming out of a command economy like China? One might point out that based on huge declines of oil imports, the industrial activity that is claimed to be happening is quite simply, not.

But I’m not one to point out things like that. In this instance I like to see pictures and video of manufacturing/industrial output at work. So check out these two links, which clearly show that China is definitely putting the P in Gross Domestic Product.

Gives new meaning to a real estate collapse. Build a building, add to GDP. Too bad it fell down with that high quality Chinese production.

Oh yeah? Well I’ll see your one measly little building, and raise you a city! Wanna REALLY pump up that GDP number? Build a whole city, ORDOS. If you build it, they will come. Wonder how many corn fields they plowed over in the hopes Shoeless Qiáo and his buddies show up.

If you make product to boost GDP and nobody is around to see the product, did you really boost GDP?

5 Pretend people will take over spending to keep GDP positive

The US consumer is 70% of the economy, or so it has become lore after all these years. All the politicians and most economists in the world have gone “all-in” with their bet that if they can throw enough money around that it will tide them over until the consumer shows up with an open wallet again. In a ‘normal’ recession, this can likely work. But as this is a credit based recession, and not an inventory based recession, consumers can open their wallets all they want. Problem is, there’s no money in that wallet. And opening that credit card bill each month is getting more painful. Banks aren’t passing on those near 0% interest rates to the consumer. Why waste a perfectly good opportunity to screw the consumer in the name of higher profits? It is far more likely that the banks need all the money they can get, in order to paper over all the losses they’re hiding from all the bad decisions they’ve made in the last several years.

But back to the consumer and his spending ways. What exactly do the central planners, in each country’s government, think a consumer is going to spend? The published unemployment rate in the US hit 10.2% in October. No job, no money, no spending. And what did those central planners predict early on? They forecast unemployment somewhere around 8% by YEAR’S END. The US did ‘stress tests’ on their biggest 19 banks to see how they’d fare in certain conditions. The ‘most adverse’ condition in those tests had a 8%-ish unemployment rate by the end of this year and a 10% unemployment rate by the end of 2010. The US has gone OVER their ‘worst case’ scenario a full 14 months early. But no politician or news reporter seems to want to bring this up, nor do they want to do a real stress test with real numbers.

And as for the situation improving? Well, since November 1, 2009, the following layoffs have been announced: Sprint 2,500; Electronic Arts, 1,500; Nokia 5,700; Applied Materials 1,300; RBS 3,700 … I could go on. Yes, these are international in scope. But if things are really improving in the economy, why are companies STILL announcing mass layoffs?

6 Pretend retail sales are improving

October’s US retail sales were just announced, and they were up over September’s, though still lower than October of 2008. But did you know that these announcements are more like estimates and surveys? And the methodology they use to generate these numbers is questionable. For instance, if a store is counted one month, but not the next because it went out of business, that 2nd month’s data is just IGNORED? Mighty convenient. Instead of adding the 2nd month’s partial sales for that store (or even a big fat 0), the number is just not used in the calculation. Imagine calculating the average grade of a high school math class if you dropped all the F’s. That’ll prove kids are getting smarter.

Since a lot of the ‘government reports’ are indeed based on surveys, calculations, adjustments, etc, why not go right to the source? Sales tax. That number is pretty much cut and dry. There is no manipulation. You buy something, you pay tax. You don’t buy something, you don’t pay tax. Just Google for tax receipts (or some variation thereof). Pretty much EVERY STATE in the Union has receipts that are cratering. Combine that with income tax receipts, and most states are heading towards huge budget crises. And most states JUST passed precariously balanced budgets a couple of short months ago. Yet they’re already in trouble.

If retail sales are really improving, why is sales tax still declining?

7 Pretend state budgets are not just fantasy

You’ve likely heard of the hoops California had to jump through to ‘balance’ their budget. Releasing inmates, accounting gimmickry and who knows what else just to say they’re balanced. But did you know that New York is now also in deep trouble? How ‘bout Florida, Nevada and several others? The Pew Research Center (a non partisan think tank), recently issued a report that 10 states are on the brink of insolvency (California is the role model here). What are the main causes? Loss of state revenue, unemployment, foreclosure rates and poor money management practices. But don’t worry, I’m sure they’ll all turn it around real quick. After all, they prepared so well when ‘times were good’.

And how bad is California, even with their ‘balanced budget’ and all? On October 31, 2009 they announced that effective immediately, they will be withholding an extra 10% of what you pay in taxes from everybody’s paycheck. This is NOT a tax increase, you’ll get your money back (supposedly). No, you see, California is so DESPERATE for money NOW, they want you to give them a free loan until next April. When you file taxes in 6 months, they’ll pay you back. Yeah right, cause by then they’ll have found more money.

<sarcasm>Taking more money out of people’s paychecks as the ‘holiday season’ is starting to ramp up should really boost spending and holiday cheer. </sarcasm>

8 Pretend housing is improving

Real estate agents everywhere will tell you now is a good time to buy a house. Has anyone EVER had a real estate agent tell them that now is NOT a good time to buy a house, ever? The Federal Housing Administration (FHA) in the US, in partnership with government entity Ginnie Mae and well managed companies Fannie Mae and Freddie Mac are desperately trying to maintain house prices at inflated levels.

There are hundreds of thousands of mortgages that are delinquent, and banks are NOT foreclosing on properties because that would affect their capital levels. But the US government desperately wants people to keep buying houses, so prices stay artificially high. The FHA will allow you to buy a house with ONLY a 3.5% down payment, even if your financial situation (income, job, job security) is crappy. And the government will kick in $8,000 in most cases to help you out. And a LOT of people use the 8 Gs for their down payment. That’s just a delinquency waiting to happen. Barney Frank, chairman of the House Financial Services Committee, recently stated that this was a matter of “policy”. Yup, a high level member of the US House of Representatives states that putting people into homes they may not be able to afford, and which can lead to them defaulting on their loan is OK as long as it helps stem the slope of the housing decline. Brilliant, you jack ass.

Oh, and Fannie Mae just had a Q3 loss of 19.76 Billion and asked the government for 15 Billion in aid. Freddie Mac posted a Q3 loss of 5 Billion. I think Freddie should adopt the slogan “Hey, at least we’re not as bad as Fannie”.

And yet with all these losses, new mortgages are still being made AND encouraged.

And even though Fannie and Freddie are under government conservatorship, are hopelessly broke, poorly managed and in need of more bailout funds, their stocks continue to trade on the New York Stock Exchange. With high volumes. Imagine if they were delisted (like they should have been, long ago), how much commission money on these trades would be lost by Wall Street.

9 Pretend housing is improving in Canada

I’ve been railing against the US quite a bit, and lots of people say Canada is in much better shape. But, did you know that the Canadian Mortgage and Housing Corporation is playing with the same set of matches that the FHA/Fannie/Freddie used to set themselves on fire? Real estate in Canada is booming. What recession. There was a dip in prices, and now in many areas of the country, real estate prices are pretty much back to where they were before. How does that work?

It works with insanely low interest rates and extended amortization periods. ‘Experts’ will state that housing affordability is at an all time high. The amount you have to pay for your mortgage as a percentage of your income is low, therefore houses are affordable. Does ANYBODY care to think more than just 5 minutes ahead anymore? Interest rates are at all time lows. If you want to take 35 years to pay off the house (as opposed to a traditional 25 or 20), OF COURSE your payments are going to be low. TODAY. What happens a few years down the road when rates rise? You’ll still have a huge principal balance to pay and your payments will likely jump. And why would you think house prices ‘can only go up’? It didn’t work in the US. Their conditions are deteriorating, and since Canada depends on the US greatly, what happens to your big mortgage in 3-5 years when rates go up, our economy is still sputtering along, and hundreds of thousands of other people are in the same situation as you? Think house prices will only go up?

And why are mortgage rates so low? Well, partly because the CMHC is buying a lot of the mortgages that the banks are selling. Canadian banks have ‘great balance sheets’ in relation to their global counterparts (or so the media tells me). Sure, they’ll give you a mortgage, the CMHC buys it, and when things go tango uniform, the CANADIAN taxpayer will join the American taxpayer in hell. How big of an issue is this? In 2007 the CMHC had $138 billion in mortgages. By June 2009 CMHC had $290 billion in mortgages and the government has raised its limit again from $300 billion to $600 billion since CMHC is predicting they will have about $500 billion in mortgages by the end of 2010.

Yup, now is ALWAYS a good time to buy a house.

10 Pretend money in US banks is secure

The Federal Deposit Insurance Corporation (FDIC) protects the deposits (money) people place into banks in the US. (In Canada we have a similar institution, the CDIC – replace Federal with Canada). The problem in the US, though, is that their banks are in big trouble. The FDIC has had to close 123 banks this year already. IF (big if) the FDIC was doing its job properly, banks would be closed long before they cost taxpayers any money. But the FDIC is not doing its job. Chalk it up to political reasons, to being overwhelmed by the volume of problems, to incompetency, or heck, all 3.

Each bank closing is now forcing a loss on the FDIC. They’ve closed so many that their pool of money has run dry. There are still over 400 banks on the ‘problem list’. They are still closing multiple banks every Friday. Way back in 2007 they had to close 3 banks. At that time, the loss, as a percentage of assets, was 5.7%. Shouldn’t have happened, but OK, it did. This past Friday (Nov 13, 2009) they had to close 3 banks. The loss for all 3 was an average 38%, with one of those banks actually at 55%. That is huge. That means these banks were horribly in trouble and REALLY, REALLY broke. Almost all of the closures this year have had substantial losses. And it looks like the % loss is increasing as time wears on.

Oh, and these are ‘smaller banks’. These closures routinely cost the FDIC fund from 200million up to a billion or so dollars. Each. Now multiply that by 400 or so. And remember the FDIC has used up its kitty. Where is the money going to come from to make sure depositors get their money back? Well, the geniuses at the FDIC have asked all banks to prepay their premiums for 3 years. This will give the FDIC about 45 Billion. Compare that 45 billion to the number you came up with when you did 400 x (200million to 1 billion), above. Think that’ll cover it? Oh, and if these ‘smaller’ banks are in trouble, and cost the FDIC up to a billion in losses, what do you think a bank like Citibank, which is thousands of times larger than these smaller banks, and in no less financial trouble would cost to close down?

Rock * FDIC, US Taxpayer, Geithner, Obama * Hard Place

And another exercise for bonus points. If the banking system is so fragile and in need of capital, what effect will the draining of 45 Billion NOW to prepay premiums have on these banks?

11Teen Pretend the capital markets are not rigged

Waaaay back near the start of this post I mentioned Goldman Sachs. If you’re still reading, I salute you. I’ll try to keep this one short. Lots of people love to talk conspiracy and how Goldman Sachs is Government Sachs. How there is a revolving door between Goldman executive offices and high level government posts. Matt Taibbi has a great article about this, if you’re unaware of the conspiracies.

Anywho, Goldman does a lot of trading in every aspect imaginable. Stocks, bonds, commodities, AIG CDSs, etc. They report how much money they make (or lose) at a daily level. In Q3 of 2009, they lost money on just one day, and made money the other 64. In Q2 they lost money on only 2 trading days. If the ‘market’ is fair and equitable, and you have NO insider knowledge, what do you think the chances are that you can make money on 64/65 days? Sure, Goldman may be ‘smarter than average’, but what is the statistical probability that you can make the right guesses/moves with that high a success rate?

Oh, and for 36/64 days (that’s over half, in case your eyes are tired), Goldman made MORE than 100 Million dollars PER DAY! It’s gonna be a good bonus season for the ‘best of the best’ at Goldman with their record profits. And to think just last year these geniuses almost went bankrupt and had to rely on taxpayers to get them through.

The Screaming Viking