In candid moment, Bernanke lets out the truth

I love it when a reporter catches a high-profile official letting down his guard:

SEWARD, NE—Claiming he wasn’t afraid to let everyone in attendance know about “the real mess we’re in,” Federal Reserve chairman Ben Bernanke reportedly got drunk Tuesday and told everyone at Elwood’s Corner Tavern about how absolutely fucked the U.S. economy actually is.

Bernanke, who sources confirmed was “totally sloshed,” arrived at the drinking establishment at approximately 5:30 p.m., ensconced himself upon a bar stool, and consumed several bottles of Miller High Life and a half-dozen shots of whiskey while loudly proclaiming to any patron who would listen that the economic outlook was “pretty goddamned awful if you want the God’s honest truth.”

“Look, they don’t want anyone except for the Washington, D.C. bigwigs to know how bad shit really is,” said Bernanke, slurring his words as he spoke. “Mounting debt exacerbated—and not relieved—by unchecked consumption, spiraling interest rates, and the grim realities of an inevitable worldwide energy crisis are projected to leave our entire economy in the shitter for, like, a generation, man, I’m telling you.”

“And hell, as long as we’re being honest, I might as well tell you that a truer estimate of the U.S. unemployment rate is actually up around 16 percent, with a 0.7 percent annual rate of economic growth if we’re lucky—if we’re lucky,” continued Bernanke, nearly knocking a full beer over while gesturing with his hands…

…Numerous bar patrons slowly nodded in agreement as Bernanke went on to suggest the United States could pass three or four more stimulus packages and “it wouldn’t even matter.”

“You think that’s going to create long-term economic growth, let alone promote job creation?” Bernanke said. “We’re way beyond that, my friend. There are no jobs, okay? There’s nothing. I think that calls for another drink, don’t you?”

While using beer bottles and pretzel sticks in an attempt to explain to the bartender the importance of infusing $650 billion into the bond market, the inebriated Fed chairman nearly fell off his stool and had to be held up by the patron sitting next to him.

Another bargoer confirmed Bernanke stood about 2 inches from her face and sprayed her with saliva, claiming inflation was going to “totally screw” consumer confidence and then asking if he could bum a smoke.

“Sure, we could hold down long-term interest rates and pursue a program of quantitative easing, but c’mon, we all know that’s not going to make the slightest bit of difference when it comes to output, demand, or employment,” Bernanke said before being told to “try to keep [his] voice down” by the bartender. “And trust me, with the value of the U.S. dollar in the toilet, import costs going through the roof, and numerous world governments unprepared for their own substantial debt burdens, shit’s not looking too good for us abroad, either.”

“God, I’m so wasted,” added Bernanke, resting his head on the bar.

Customers at the bar told reporters the “shitfaced” and disruptive Bernanke refused to pay for his drinks with U.S. currency, claiming it was “worthless.” Witnesses also confirmed that near the end of the evening, Bernanke put money into the jukebox and selected Dire Straits’ “Money For Nothing” to play five times in a row.

Read the whole thing here.

And who knew Bernanke and I had similar tastes in music?

Taleb video: credit crunch not black swan, moral hazard now worse

From Bloomberg:

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Some great comments on the OMB (“lying on their forecasts”), Geithner (“who has a mortage on a house not far from mine… who didn’t understand risk and real estate prices”), Summers (“uses wrong mathematics in his papers” and has “systemic arrogance”), and Bernanke (“the one who crashed the plane”).

He has praise for David Cameron, whom he thinks understands how to solve the crisis.

Plenty of fodder for inflationists and bond bears here: Hard assets like metals and agricultural land would be a good way to protect value. Forget the stock market and most real estate.

Does anybody, such as professors, now understand the issues he raises? No. Don’t go to business school, but if you go, don’t take any business class that has equations in it: “it’s all bogus.”

Jim Rogers discusses his euro long and stock shorts

I happen to have similar positions at the moment, though unlike Rogers, I’m a bear on commodities and China, which he seems to be perpetually long.  Here’s today’s Bloomberg interview.

Take-aways:

- Long euro as a contrary position. Too many shorts out there.

- All these countries (Spain, Portugal, UK, US) are spending money they don’t have and it will continue.

- ECB buying government and private debt is wrong.

- EU is ignoring its own rules about bailouts from Maastricht Treaty.

- Governments are still trying to solve a problem of too much debt with more debt.

- Fundamentals are bad for all paper currencies. Good for gold.

- Is “contagion” limited now? Well, for those who get the money…

Here’s a longer interview from a few days ago on the same topics as well as stocks:

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- Rogers has a few stock shorts: emerging market index, NASDAQ stocks, and a large international financial institution.

- Rogers owns both silver and gold, but is not buying any more. He’s not buying anything here, “just watching.”

- Optimistic about Chinese currency. Expected it to rise more and faster, but still bullish.

- Thinking of adding shorts in next week or two if markets rally (my note: they have now).

- “Debts are so staggering, we’re all going to get hit with the problem,” no longer just our children and grandchildren.

Long Euro

I’m not a believer in manipulation, so I’m not counting on the central banks of the world to drive down the dollar. It’s as simple as 2% bulls: as of late last week there were 50 euro bulls for every bear. I always like to be the lone nut.

EUR.USD is looking very oversold at the moment by RSI, also. I’m still a long-term euro bear and would not be surprised by parity or $0.85, which actually looks all the more likely now that euroland is going to print away to relieve its banks of their bad bets on GIPSI bonds.

I thought the bailout was supposed to save the Euro.

In government and mainstream media logic, the bailouts are supposed to be good for the euro. With EUR/USD pushing 1.27, it appears that somebody forgot to tell the market that implied guarantees for GIPSI nations to the tune of 100s of billions of new euros should strengthen the value of those in circulation.

Here’s a 10-year view of the spot market, revealing just how much downside there is in this cross. On the other hand, the euro is getting oversold on a short-term basis, with RSI approaching the conditions preceding the short but violent rally in late ’08. It could trend a little while longer, but don’t get caught short without your stops.

TD Ameritrade

Video on Greece w/ Hugh Hendry: Never compromise when it comes to moral hazard.

On Russia Today via Zerohedge:

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Hendry:

-  ”This is a bailout of the banking community… especially in France but of course also in Germany.”

-  Questionable whether the French banking system could take the hit, estimated at 35 billion euros.  This would raise questions about their Spanish, Portuguese and Italian bonds. This is not the end, but the “end of the beginning.”

RT:

-  How does this help the Greek people? They will be “paupers in Europe.”

Hendry:

-  There is a remedy. The remedy is that Greece could leave the Euro. If it were to bring back the drachma, the currency would be very, very cheap. This would bolster tourism and exports. London is full of foreign shoppers now that the pound is down 25%.

-  Soveriegn bankruptcy is the normal and healthy procedure. Bankers take the hit they deserve.

-  Great political flaw in the euro, trying to join cultures that don’t want to join. Angela Merkel is not being generous. Spending taxpayers’ money is not generousity. She’s trying to salvage a bankrupt philosophy.

RT:

- Moral hazard issue is not being talked about. This gives a green light to Spain, Portugal, etc to spend away.

Hendry:

- The truth is unpalatable. Giving an over-indebted country more debt is not the solution. We need to restructure the debt and punish the irresponsible banks and investors.

- We should never compromise with bailouts, and certainly not on Greece, which is just 2% of the European economy.

Silly Greeks

Those government workers don’t seem to get it: they’re on the same side as their politicians and the foreign bankers. They should all support the bailout and austerity measures, since this is the only way to keep the racket going a little longer. It’s the taxpayers who should be storming parliament and demanding default (just like in the US, UK, Japan, etc)!

Also, it makes perfect sense for the euro to tank on this news — Europe just tipped its hand that it’s likely to print 100s of billions of euros to bail out all these GIPSI nations.

Greece defaulting would be good for the euro, deflationary — 200B in euro balances would go POOF! Even if all the GIPSIs dropped out of the euro, which they would NOT have to do even if they defaulted, the euro could strengthen. In the end, if everyone but Germany defaulted and dropped out of the eurozone, it would be a hard currency and they could just call it the Deutsche Mark again.

Bill Laggner interview: Greece, GS, derivatives, etc.

Eric King always does a good interview, and Bill Laggner is a hedge fund manager (Bearing Fund, LP) who has been on top of the credit bubble and bust. He comes at things from an Austrian perspective.

Listen here.

Some take-aways:

- People of wealth around the world have lost faith in their respective governments.

- There is a limit to government borrowing, but establishment economists and politicians are very complacent right up to the end.

- Goldman’s swap transactions on Greek debt.

- Good luck getting Greece to go from 14% deficit to 3%.  Mathematically impossible — Greece must default like Argentina did in 2001. They’ll probably leave Eurozone, and this may be best for each of them.

- Portugal, Ireland and Spain face the same issue. Spreads blowing out. Puts heavy pressure on European banks.

- Politicians and talking heads are saying sovereign debt issue is contained, just like they said sub-prime was contained.

- European banks are at least as levered as US banks were two years ago.

- We’re at a juncture where we can print and delay or default and get it over with.

- Some countries may realize they are better off defaulting than taking IMF money and being slaves.

- GS people have been hired by Greek government to advise on bailout.

- Monetary elites like GS face a risk of the structured finance business, their bread and butter, disappearing.

- GS and others don’t produce capital. They speculate and then siphon money from taxpayers when they lose.

- Goldman’s proprietary trading book is highly lucrative, much more so than most other investment banks’. They make money over 90% of the time – how is that possible if it’s all honest?

- Goldman was a credit facility for New Century, one of the worst loan originators in sub-prime. We’ll find out more about their roll in helping build a market for junk mortgages. Possible exposure of fraudulent practices.

- Goldman sold a lot of this mortgage paper on leverage — they provided loans to funds to let them go levered long CDOs.

- Civil litigation will open up Pandora’s Box. Where there illegal activities within Goldman? Possible reputational risk. If they survive, they’ll be a shell of their former self.

- US has the same problems as Europe. US cities and states are just as bankrupt as Greece.

- Local politicians are corrupt and clueless and bankers took advantage of them, as in Jefferson County Alabama.

- Criminal proceedings in Italy against Deutsche Bank should provide insight into possible bribery and fraud related to derivative transactions.

- Expect litigation related to US city and state derivative transactions, as in Jefferson County Alabama.

- Expect increased outrage towards bankers.

- No transparency in US financial system.

- As states and cities go bankrupt, expect them to default on derivative transactions and enter litigation.

- (My own note: what about government employee unions? If you’re looking for an explanation for municipal and state bankruptcies, look there first.)

- US financial reform bill doesn’t solve anything. Still have the moral hazard of too-big-to-fail.

- Geithner is walking moral hazard.

- Amazing rally in risk assets over the last 14 months. Complete about-face in sentiment. New low in bearishness.

- Bill and partner Kevin Duffy are two of the few remaining bears left on the planet.

- VIX is ticking back up, Fed has ended a key lending program, sentiment is too extreme, leading economic indicators are rolling over. Stimulus will wear off like any drug, and there has been nothing done to sustain economy.

- If central banks hit the accelerators on their printing presses to bail out bankrupt governments we could enter a hyperinflationary mode. If we go the route of default, that could be avoided (deflation).

Prechter in the morning (King World News interview)

Eric King is one of the best financial interviewers out there, so he gets the best guests of anyone I know.

Listen to the MP3 here, recorded last Saturday, March 20.

Take-aways:

The last of the bears are capitulating, just as the last of the bulls turned bearish last winter. Everybody loves stocks after a 73% rally, and there is huge psychological pressure to be bullish.

The market only gives away free money for so long (unbroken strings of up days often come near the end, as in Spring 1930).

The last two times that the market made a double top (July/Oct 2007 and the 2000 top), the Nasdaq surged at the very peak, leaving the Dow and SPX behind. SPX has just barely made a new high, but it feels like it’s much higher than in January.

GDP expansion is very weak compared to the stock rally, bank lending and jobs are still trending negative.

This is not a recession that has ended. This is a depression that has had a big countertrend rally.

States are all bankrupt, because they always spend too much. Governments always go bankrupt in the end. (Interesting factoid: Nebraska’s constitution outlaws borrowing by the state, so they are in the best shape).

All of the dollar-denominated IOUs are going to be worthless in the end. The government’s backstop has delayed this, but the debt will still go bad. The central banks will not take on all the bad debt, so the governments are trying, but they will ultimately default themselves.

Hyperinflation is not an option with all this debt. Default (deflation) is inevitable. Government defaults are deflationary.

Cycles are part of the human social experience. Muni defaults haven’t happened since the 1930s, but that is only because that was the last time we were at this point of the debt cycle. Munis will end up as wallpaper — no way the states can pay them off.

Conquer the Crash was released in 2002, but the stock market rose for 5 more years and the credit bubble got even crazier before finally topping in 2007, but the extra debt is just making things worse now that we’re at the point of no return.

We have a return of confidence. AAII (American Association of Individual Investors) survey shows about 25% bears, same as October 2007 and May 2008 tops. This is not a good buying opportunity.

Every investing group (individuals, pensions, mutual funds, etc) has been overinvested for 12 years. Mutual funds are only holding 3.5% cash. They have never given up on stocks, even in March 2009, which was nothing like in the 1970s and early 1980s.

Very few people think we can end up like Japan, and keep breaking to new lows for 20 years. Everybody always has a “story,” a narrative as to why the market is going to keep going down (at bottoms) and up (at tops).  (Story today, IMO: PPT manipulation and money printing will drive stocks up forever). The story is often exactly wrong at the top and bottom.

Interest rates do not drive stocks. Lower rates are not bullish (just look at the 1930s or 2007-2008). Rates went up from 2003 – 2007 as the market rallied. People’s logic is always incorrect at the turns. Nor do earnings drive prices: stocks fell 75-80% in real terms from 1966-1982 as earnings rose.

Oil and stocks have a correlation that comes and goes – sometimes none, sometimes very positive, sometimes very negative. No predictive power.

Markets have a natural ebb and flow that arises from herding processes in a social setting. Reasoning about causation is a waste of time.

Economists jabber on about all kinds of causation, but they never offer statistics that pass muster.

Bond funds are going to slaughter the masses. The public always buys the wrong thing at the wrong time, and a wave of defaults is coming.

The dollar is likely starting a major rally (up 9% since fall, 11% vs euro). Prechter was early on that call but it still was a good one. Might be the start of a renewed wave of deflationary pressures.

The message in the new edition of Conquer the Crash remains, “get safe.” Find a safe bank, hold T-bills or treasury-only mutual funds, cash notes, and some gold and silver. No downside to safety.