Irrational Exuberance

As Greenspan coined, 'irrational exuberance' this is certainly happening in the banking and insurance industries this week led by AIG, FNM, FRE, and C. All of these companies are owned to some degree by the taxpayer i.e. AIG 80% (note: A draft of the Treasury document that was left out in the final version called AIG "highly speculative"). The word is that hedge funds have jumped in which tells me that this tower is being built on sand and it will only take a sprinkle to sink it. I see companies like ABK, B of A, ETFC and so on are being pulled up by the momentum.

My fire continues to burn brightly around the Federal Reserve and its continued effort to keep the information as to what banks received what emergency loans a secret. They are now preparing an appeal.

Federal Reserve Transparency, Bernanke re-nominated, CIA Probe

I am all fired up this morning after reading the president has re-nominated Bernanke as federal reserve chairman. If the senate confirms him, then status quo is the name of the game in Washington. Our use of easy credit policies is what led to the Great Depression with unemployment of 20%. And if the same measurements are used today that were used then, unemployment is closer to 16%.

Some good news is that a federal judge said today that the federal reserve has to identify to the public the name of the banks who received the $2.2 trillion in loans. Bernanke did 'say' that transparency is important, yet he is the one who is trying to keep the list secret. Another interesting fact is that during the Depression the total stimulus as a percentage of GDP was 8.3%. In all the other 17 recessions since creation of the federal reserve, it did not go above 7.2%. Today it is at 29.9%. The masses need to take charge and speak up. Faith and trust in the government can only goes so far as the numbers, growing exponentially, speak for themselves. Again, once the foreign countries lose this faith, we will all be shocked awake. We have the opportunity to take the lead instead of being crucified after the fact.

The White House Budget Office said that by 2019 the public debt will double to reach 75% of the size of the entire national economy. Given this estimate, a reasonable person can see that we are on a path of massive sudden contraction because of immense debt expansion.

One final comment, I agree with the special prosecutor being assigned for the CIA probe to investigate interrogation abuses. Some months back, I commented on this, saying no president should be above the law. I am glad to see the law still prevails. Whatever the outcome, that is what is important. Without the strength of the justice system, we are at the mercy of whoever is in power. And we have seen historical examples of the outcome when that happens.

Bernanke's words, China, Note of Self-Understanding

Bernanke's words last Friday did wonders to provide buoyancy to the markets. I still think we are in a bear market rally and when the hot air deflates, it will be sudden. Enjoy the ride as long as the helium lasts. Then I hope you are out when it is used up. The statistics I have been pointing out in my previous blogs are facts versus just words. And to repeat myself, he should be replaced.

As you know I have been following tidbits on China. Today, I saw a quote from Henry Kissinger, the man who helped establish ties with China under President Nixon. He said, "I think the center of gravity of the economic world is beginning to shift towards Asia." That is confirmation of what I see as the trend too. We'll need a big couch for all of us to sit together :) i.e. U.S. squeezing in with China. He also mentioned the new alternative or companion currency to the dollar that China brought up a while ago. He see the dollar built around the Chinese currency once it is convertible in approximately 5-15 years.

What is interesting and I found surprising is the leader on producing manufactured goods sold worldwide. It is the U.S. at 20% with farm equipment, airplanes, military weapons, chemicals, shipbuilding and so on. Notice these are big ticket items versus what China sells. They produce 12% and Japan follows with 11%. This information doesn't seem to be mentioned in the mainstream news, and as a result people think we have sent everything out of the country except pizza and beer. :) I am half serious on that statement.

As you can see I am feeling lighthearted writing this article. I discovered something about myself last week. I decide that treating myself as I would have others treat me makes life kinder. Notice the twist on the biblical quote, "Do unto others as you would do unto yourself." That doesn't work well if the self is being mistreated. Any comments or thoughts on this?

Corporate Defaults, Individual Investor

For the 2nd quarter of 2009, corporate defaults were $254B compared to $102B for all of 2008. This is predicted to continue through mid 2010. And the mortgage delinquencies/foreclosures are now at 13%. With figures like these and knowing they will continue to grow, I see no logic in the stock market doing as well as it is. It is interesting to note that institutions compromise 76% of all trading. In 1950 it was only 6%. The influence of the individual investor has diminished markedly.

Progress Report

The 'cash for clunkers' program is encouraging consumers to increase their debt, so I'm not surprised that retails sales are lackluster at best. The economy is still contracting, regardless of the U.S. government's efforts to artificially kick it in the rear.

Foreclosures in July are 32% higher than July 2008; close to 7% higher than June 2009. The medium price of homes dropped close to 16% in the second quarter. In my opinion, this is the measurement stick to watch. When this area turns the corner, then there will be the opportunity to move forward.

Another statistic to watch is consumer and commercial bankruptcy filings. For the former, there was increase of 34% over the first quarter of 2009, with California being the leader in filings. As I have mentioned before, the commercial sector has yet to unfold as to the depth of their financial struggle.

World and U.S. Debt Load, California Debt North Korea

My concern level has elevated after looking at some debt statistics here and worldwide. Notice the U.S. stock market keeps looking for more good news daily. This reflects no long-term up trend, given this view. Here are some numbers that we all need to be aware of:

* The U.S. government has $11.2T in debt which is 79% of GDP at $14.1T. Money is being printed to pay the interest on it. California doesn't have that option.

* California has sold close to $14B in bonds this year to cover the debt (this is only the for the first half), compared to around $8B for all of 2008. This state's credit rating is the same as Russia's.

* The emerging markets are paying less for insurance against debt default than we are overall. For example, Turkey paid less for this coverage than New York City for two weeks.

* The U.S. Federal government alone has a debt load close to the sum of 95% of the world's population. That is excluding the $47T in total public and private debt.

I think we are riding a debt wave of such magnitude that it is invisible to this country and the world at this time. It is beyond human comprehension. Yet we are all here to enjoy the ride depending on our attitude when we realize by looking at the rest of the world that we are over our collective heads. The statistics given here are an indicator of how far along we are moving.

Also, North Korea has indicated that it wants better relations with U.S., this coming on the heels of Bill Clinton's visit. I suggest that the way he used words was effective and either he should continue what has been started or someone needs to be coached by him. He knows the importance of psychology.

Profanity, Underwater, Commercial Bankruptcies, North Korea

There has been lots of talk about Treasury Secretary Geithner's profanity being intentional in front of Bernanke, SEC Chairman, Chapiro and FDIC Chairman Bair, to try and build power to force the independent regulators to go along with the administration's reform of financial regulations. I see this as a red flag and it is very important for regulators to stand on their own feet, hang onto their independence, and not bow to pressure. There has to be a check and balance. Also, to get from underneath this kind of forcefulness, all of the banks who took government loans need to repay them as timely as possible.

Commercial bankruptcy filings jumped 42% in July 2009 from a year ago. This is an area that hasn't fully been felt yet like the residential side. Foreclosures in this sector will increase and create a chain effect on companies who are in this industry and those who depend on it for their business.

Another troubling statistic is that 48% of homeowners are expected to be underwater in 2011. It's currently 26%. That is a tremendous increase and no one knows what the ramifications are going to be. Again, practice prudence with your way of life.

North Korea needs attention and knows how to get it; the most recent example by having Bill Clinton take pictures with the leader and bringing the journalists back. We need to be creative in using this behavior to align with our goal, removing the threat of nuclear weapons. I think we are still using the traditional ways that are obsolete now.