What's Dead? (Short Answer:
All Of It)
Mar 9, 2009
Just so you have a short list
of what's at stake if Washington DC doesn't change policy here
and now (which means before the collapse in equities comes, which
couldstart as soon as today, if the indicators I watch have any
validity at all. For what its worth, those indicators are painting
a picture of the Apocalypse that I simply can't believe, and
they're showing it as an imminent event - like perhaps today
- All pension funds, private
and public, are done. If you are receiving one, you won't be.
If you think you will in the future, you won't be. PBGC will
fail as well. Pension funds will be forced to start eating their
"seed corn" within the next 12 months and once that
begins there is no way to recover.
- All annuities will be defaulted
to the state insurance protection (if any) on them. The state
insurance funds will be bankrupted and unable to be replenished.
Essentially, all annuities are toast. Expect zero, be ecstatic
if you do better. All insurance companies with material exposure
to these obligations will go bankrupt, without exception. Some
of these firms are dangerously close to this happening right
here and now; the rest will die within the next 6-12 months.
If you have other insured interests with these firms, be prepared
to pay a LOT more with a new company that can't earn anything
off investments, and if you have a claim in process at the time
it happens, it won't get paid. The probability of you getting
"boned" on any transaction with an insurance company
is extremely high - I rate this risk in excess of 90%.
- The FDIC will be unable to
cover bank failure obligations. They will attempt to do more
of what they're doing now (raising insurance rates and doing
special assessments) but will fail; the current path has no chance
of success. Congress will backstop them (because they must lest
shotguns come out) with disastrous results. In short, FDIC backstops
will take precedence even over Social Security and Medicare.
- Government debt costs will
ramp. This warning has already been issued and is being ignored
by President Obama. When (not if) it happens debt-based
Federal Funding will disappear. This leads to...
- Tax receipts are cratering
and will continue to. I expect total tax receipts to fall to
under $1 trillion within the next 12 months. Combined with the
impossibility of continued debt issue (rollover will only remain
possible at the short duration Treasury has committed to over
the last ten years if they cease new issue) a 66% cut in the
Federal Budget will become necessary. This will require a complete
repudiation of Social Security, Medicare and Medicaid, a 50%
cut in the military budget and a 50% across-the-board cut in
all other federal programs. That will likely get close.
- Tax-deferred accounts will
be seized to fund rollovers of Treasury debt at essentially zero
coupon (interest). If you have a 401k, or what's left of it,
or an IRA, consider it locked up in Treasuries; it's not yours
any more. Count on this happening - it is essentially a certainty.
- Any firm with debt outstanding
is currently presumed dead as the street presumption is that
they have lied in some way. Expect at least 20% of the S&P
500 to fail within 12 months as a consequence of the complete
and total lockup of all credit markets which The Fed will be
unable to unlock or backstop. This will in turn lead to...
- The unemployed will have 5-10
million in direct layoffs added within the next 12 months. Collateral
damage (suppliers, customers, etc) will add at least another
5-10 million workers to that, perhaps double that many. U-3 (official
unemployment rate) will go beyond 15%, U-6 (broad form) will
- Civil unrest will break out
before the end of the year. The Military and Guard will be called
up to try to stop it. They won't be able to. Big cities are at
risk of becoming a free-fire death zone. If you live in one,
figure out how you can get out and live somewhere else if you
detect signs that yours is starting to go "feral" -
witness New Orleans after Katrina for how fast, and how bad,
it can get.
The good news is that this
process will clear The Bezzle out of the system.
The bad news is that you won't
have a job, pension, annuity, Social Security, Medicare, Medicaid
and, quite possibly, your life.
It really is that bleak folks,
and it all goes back to Washington DC being unwilling to lock
up the crooks, putting the market in the role it has always played
- that of truth-finder, no matter how destructive that process
Only immediate action from
Washington DC, taking the market's place, can stop this, and
as I get ready to hit "send" I see the market rolling
over again, now down more than 3% and flashing "crash imminent"
warnings. You may be reading this too late for it to matter.
Mar 5, 2009
Karl Denninger's Market
Karl Denninger's Home on The
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