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Come To Jesus Part Deux

Karl Denninger
Market Ticker
Apr 6, 2010

Be warned: Language contained in this Ticker may not be suitable for polite company. Tell the kids to go watch cartoons or better yet, toss a football out in the yard.

If you haven't read the original, penned in 2007, it's here.

Here's my 2010 update.

Many of you think that the rally off the lows last March is some indication of a "new bull market" or that "they saved us." Still more look around and see people spending tax refunds and think "oh wow, look at all the pretty iDouches being sold today."

Let me post - once again - my chart from this morning's Ticker.

(Click on image to enlarge)

That red line is the REAL GDP in the economy going back to the early 1990s. It is final private demand on a y/o/y basis. You will note that it is in fact down more than 20% from the peak (these are compound annual change rates.)

The reason we have not seen an all-on collapse - yet - is that the government has stepped in and has borrowed and spent a literal $3 trillion over the last two years for the purpose of hiding the insolvency of virtually every bank and a good number of citizens in this nation, along with virtually every pension plan, annuity and other "defined benefit" plan and institution. They also changed the rules of the game regarding asset valuations - that is, they cheated.

This gambit has produced a veneer of recovery.

There was no meaningful recovery from 2003-2007. GDP growth in the private sector never went over 2%. Never. The Federal Government literally borrowed and spent from $500-600 billion every single year from 2003 - 2008, when the banking system essentially collapsed. This "support" allowed the markets to croon on about 5% GDP growth rates (quite healthy) that were in fact false. This, in turn, led to the mis-allocation of credit that resulted in home prices spiking higher as credit was granted to people who had no ability to pay.

That debt, by and large, still exists. Only a tiny fraction of it has been defaulted or paid down, as I cover every single month in the Federal Reserve G.19 (and quarterly Z1) reports.

So now you have "economic recovery", you say? Like hell. You have an economy that is literally bleeding from the femoral artery as the nation's left leg has been severed above the knee by a bunch of homicidal maniacs on both Wall and K Streets. The patient is alive only because they are pumping in blood at a rate that exceeds that which is spraying all over the floor while you're calling the patient "healing"?


The stock market is the economy? Like hell. The fact of the matter is that there are people right now liquidating 401ks, IRAs and money funds. Where the hell is the money going? On balance there is a huge hole between reported inflows and outflows in asset classes. An educated guess says it's being spent.

Last time around (2003) the American Consumer had a reasonably decent balance sheet. What blew up in the 2000 crash was tech companies, and while those who were heavily into those firms' stock lost it all most ordinary Americans weren't hurt particularly badly by it. This was decidedly not true this time around; a huge percentage of Americans were snookered into becoming part of the America that "has it all", and got themselves so far into debt that even when their home mortgage is "restructured" with a government handout they still have 60% of their PRE TAX income going to debt service. That's not going to fly and what's worse, if you're underwater on your mortgage you can't just up and sell the house to move somewhere that has better job prospects. You're trapped like a rat in a fucking maze.

This is today's economy:

  • 42.8% of the unemployed - more than 6.7 million workers - have been unemployed 27 weeks or longer.

  • 425,000 of those workers joined the "27 weeks and over" club last month alone. The average duration of unemployment rose by 2.8 weeks last month alone; may I remind everyone that a month only has 4.5 weeks in it?

  • Hourly earnings fell last month. How does consumer spending recover if average hourly earnings are going down?

  • The government spent $333 billion more than it taxed in March. That's 28% of GDP - or nearly one in THREE dollars spent in the economy.

If you are investing in this market you are taking a terrible risk. There was much money to be made coming off the 2002 bottom, of course. I was in that market (re-entered in the middle of 2003) and did quite well. It was easy - buy an index and sit.

Back when this rally had just begun, I said that there was a decent chance it could retrace all the way to 1220. This wasn't some sort of wild "out my ass" guess, it was a simple 61.8% retracement of the dive in the S&P 500. A similar move would take the DOW to 11,170 - about where it is now.

The Nasdaq and Russell have already surpassed these benchmarks handily.

So is this the time to buy?

Do you buy something when it's cheap, or when it's expensive?

Is that impulse to buy analysis, is it fear, is it because you're being told you're "stupid" if you don't go all-in by friends and brokers who cold-call you - or is it GREED?

Do you believe the government can run a trillion dollar+ deficit for another nine years?

CBO says they're going to try to, and the CBO is usually low in its estimates on deficits. History says they're going to try to do exactly that - just as they did in the 2000s.

If you believe in the capacity of the government to run a trillion dollar a year or more deficit for the next decade, then you have an argument for the markets recovering to their highs. Just for reference, you still missed 2/3rds of the move, and "getting back to even" just puts you where you were in January of 2008 - when you should have been (and were if you were listening to those of us who got it right in 2007 and early 2008) OUT!

But assuming you weren't, that's what you're chasing now. If you held on the way down and now are clawing for the "get even" point, you're ascending into the rarified atmosphere of government-sanctioned fraud and corruption, praying that it can continue just so you can get back to where you were - not even to make a profit, but just to "get even."

What are the odds folks? Hairdressers getting $500,000 mortgages again? You think so? HELOC's out the Wazoo while all the existing dead ones are still around everyone's neck? Government borrowing a trillion a year from whoever will lend it, all while taxes are going up, health care legislation has been passed, all manner of other cock-and-bull economy-destroying crap is coming (Carbon taxes anyone?) and yet - it will all be ok?


Further, every one of those crooners on the Internet and on CNBS is trying to goad you into buying because they need someone to sell to. Their profits are paper promises that can't be turned into money unless you are a buyer. If those buyers do not materialize their paper profits will be nothing more than a wet dream that leaves them messy and unsatisfied when they wake up.

Their motivation is to get you to buy from them - at the top - so you lose again while they rob you once more.

You want an exact time when it will come apart?

I don't have it.

Neither does anyone else.

I didn't know precisely when it would blow up in the summer of 2007 and I don't this time either. But what I do know is that the math is never wrong and that despite all the bullshit and games eventually the cash flow always wins.

Unlike the 2008 collapse I don't think you're going to get any warning at all this time around. The reason is that the gearing that has been taken on and the bets being placed are several times as large as those of the last time.

The distortions in the economy today, net-on-net, are nearly triple what we saw in 2007.

If 2007 was a pipe bomb in relative terms, this is a jar of nitroglycerine and the guy carrying it both has a bum leg and is walking through a swarm of hornets.

How 'ya like those odds, sucker?

If you want to trade - bull or bear - then have at it. Plenty of money to be made there, if you're quick and nimble.

But if you're investing in this market today then your bet is that the government can borrow and spend a trillion or more beyond tax receipts in perpetuity, that cash flow will never catch up with the banksters, and that none of the nations currently in trouble (such as Greece) will actually default.

That's your wager in a nutshell, and IMHO those trying to get you to either be or stay involved here have motives that have absolutely nothing to do with your financial success.

Down the road don't say you weren't warned - because you just were.


Apr 4, 2010
Karl Denninger


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