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Today – SPMs are down 14.60 in Sunday night trading because Obama’s chief economic adviser, Larry Summers, asserted while appearing on Fox News Sunday, that the economic freefall is over but, “I expect the economy will continue to decline… [with] sharp declines in employment for quite some time this year.” (Reuters)

• “The anticipation over the white paper appears to be much ado about nothing,” said Josh
Rosner…“The most significant numbers provided by the Fed in the paper appear to be the page
numbers.”…
• “A lot of triple talk,” said Jim Glickenhaus… “I think they’re going to say while things are bad, the end is not at hand. Maybe.”
• “The question I have, by using fourth-quarter numbers, is this skewed positively?” said Lawrence Kaplan, an attorney with Paul Hastings, who served as a senior attorney in the chief counsel’s office at the Office of Thrift Supervision. “Because January and February were pretty lousy, and as a result that’s when it hit the fan.” (Bloomberg)

As most people guessed, the ‘stress test’ is an innocuous exercise based on rosy economic projections. Besides, why is a ‘stress test’ needed when there are already three agencies (Fed, FDIC, OCC) that apply metrics to measure banks’ solvency and financial condition?

gdp-stress

A major problem with the ‘stress test’ is it depends on modeling and it’s the precise practice responsible for much of this economic and financial mess. It’s extraordinary that so many people believe that the Fed and Treasury, after missing the financial disaster, housing debacle, recession and derivative implosion, can now extrapolate economic conditions and resultant financial affects from its models. How did all that rocket-science modeling for subprime defaults and securitization workout? Yet many people already forget or ignore this reality.

Here’s another reality that most investors are missing – banks must raise more capital. So who’s the patsy in recent days that has been driving financial stocks higher? The FT: Fed will seek bank capital increase. Some of the country’s biggest banks will be asked to raise more capital by US authorities following the completion of bank stress tests, senior Federal Reserve officials said on Friday. (Financial Times)
Banks May Need $1 Trillion After U.S. Tests, KBW Says (Bloomberg)

What few analysts realize is that economic ‘muddling’, the best case scenario for the next two years, gives no relief to an economy burdened with record debt. If you lose a high paying job and you are struggling to pay your debts, you will not suddenly be able to pay your debt with a job a Wal-Mart.

What analysts should do is quantify the US private and public sector debt load and then extrapolate the needed income and GDP to service the debt. And then they should calculate how much debt will implode with little or no income and GDP growth.

The ‘real budget deficit’, “Treasury Gross Public Debt”, is now $1.85 Trillion (Barron’s p. M70).

The most disturbing aspect of the current scheme to manipulate markets, economic data and industrial data into something benign enough to increase consumer confidence and reinflate assets is that it is the precise scheme that Easy Al and others perpetrated over many years. And it created the current mess.

Solons again are trying to inflate assets to a level that is a huge disconnect with economic reality in
the misguided belief that they can paper over structural US economic problems and fostering
‘confidence through asset bubbles’ that will translate into economic activity. We are back to square one in ‘the new economy’ gambit.

And because we are back to square one in ‘the new economy’ of inflating assets to paper over problems, the markets are diving back into inflation mode. Commodities are soaring; bonds are struggling even with Fed support and the dollar is finally buckling.

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Bill King is a Wall Street veteran with 35 years of institutional equity, proprietary and derivatives trading experience, giving him a unique perspective on current market conditions and forecast. As author of The King Report, Bill’s candid observations and forecast on the economic, financial, and political forces that are impacting the markets is read by major institutions and hedge funds. However, this report is not the usual garden variety tripe that is issued by the financial media and Wall Street. Bill, in plain language, refutes conventional rant about Wall Street activity and articulates the real factors and impetuses that drive market activity. The inside world of Wall Street is far different than what is disseminated to the masses. Wall Street insiders seldom adorn their own portfolios or trading accounts with ‘recommended list’ issues.

Category: Bailouts, BP Cafe, Financial Press, Markets, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

10 Responses to “The King Report”

  1. ” It’s extraordinary that so many people believe that the Fed and Treasury, after missing the financial disaster, housing debacle, recession and derivative implosion, can now extrapolate economic conditions and resultant financial affects from its models.”-above

    “The most disturbing aspect of the current scheme to manipulate markets, economic data and industrial data into something benign enough to increase consumer confidence and reinflate assets is that it is the precise scheme that Easy Al and others perpetrated over many years. And it created the current mess.”

    ~~”And because we are back to square one in ‘the new economy’ of inflating assets to paper over problems, the markets are diving back into inflation mode. Commodities are soaring; bonds are struggling even with Fed support and the dollar is finally buckling.”

    good going Mr. King. Not only do you hit the high points in a succinct fashion, one is able to draw out further detail upon re-reading..really well-written.

  2. rktbrkr says:

    The stress test was a confidence building exercise right? And there were probably a parallel series of tests run for purely academic purposes , of course, that showed how bad would be in the real world when TG has no more debt to convert to bank equity and he has to go back to Congress and explain how very complicated and difficult it will be for them to understand the next round of TARP.

  3. Onlooker from Troy says:

    Good stuff and spot on. We need a dose of reality in this country, not just more easy money (i.e. mind numbing drugs).

  4. Onlooker from Troy says:

    Another good rant by Dr. Hussman (link below). He’s as frustrated and angry as anybody about how this is being mismanaged and exploited by Geithner/Bernanke and the banking oligarchy, respectively.

    http://www.hussmanfunds.com/wmc/wmc090427.htm

  5. usphoenix says:

    Agree totally. Stated superbly. Kudos.

  6. rktbrkr says:

    I just caught a little of Chris Whalen on CNBC (my bad) saying the bank guarantees are going to become an issue. YOU BETTER BELIEVE IT! CITI reported “only” a $3B loss on their 300B of guarantees in the 4Q but that really only covered 1 month. That projects out to 10-12B a year if things don’t get worse – and they have. There are 700B of these guarantees and I doubt they are reserved “we’ll never need them”

  7. zot23 says:

    I can’t say this enough: no good investor would be willing to go long in this climate. We have extremely muddled visibility into the health of our lending/insurance institutions, and what honest glimpses we do get are skewed heavily to the problems being worse than advertised. Without credit, how can we have a real expansion?

    I’m sitting on cash, gold, and a bit of land since Feb of last year. Every rally I’ve sold off what little stock I had, now I have now. Not a single regret yet. This is madness.

  8. zot23 says:

    Typo: Now I have none…

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