The war between Russia and South Osseta that continues to expand will likely turn out to be a significant financial story. There is a map of the region for your reference.

Please notice that South Osetta is within 100 miles of Turkey, a NATO ally and a dominant military power. Turkey's southern border is Iraq.

Here is a quote that summarizes the conflict:

Mr. Saakashivili, the Georgian president, said Russia’s oil riches and desire to assert economic leverage over Europe and the West had emboldened Kremlin country to attack. Georgia is a transit country for oil and natural gas exports from the former Soviet Union that threatens Russia’s near monopoly.

“They need control of energy routes,” Mr. Saakashvili said. “They need sea ports. They need transportation infrastructure. And primarily, they want to get rid of us. ”

Finance is not all about stock tips.

Just remember the next time someone tells you about the "BRIC" countries as if they are a homogeneous, ubiquitous "one", ask if Brazil is at war or if India has invaded Pakistan. Just because there has been economic growth in these countries does not mean that there is equal risk.

All the more reason for "Deep Due Diligence". This will be a regular segment on The Wall Street Shuffle. Charts and stock picks only get you so far. Little things like war are also part of the "risk premium" that we all remember from first year finance...the risk free rate (usually a short term treasury) + the rate of inflation (feel free to insert your own calculation here) + market risk premium (THIS is where you might factor in war, pestilence, politics, first strike capabilities, etc.).

This formula has never changed and it never will. And it works for every form of investment. It's just important to remember that "risk" is a much broader word than the financial community would have you believe.

More on this on Monday's show but...

Did you know the FED has about $1T in assets, mostly (90%) in treasuries, at least 8 months ago. They now have less than half that with the balance made up of a collage of CDO's, MBS's and other "difficult" to value collateral. The term "Level 3 Assets" really do not do justice to the nearly impossible to value transfer of bad paper for good (relatively) treasuries.

And, yes, when the FED runs out of treasuries they go right back to the Treasury and ask for more. How does the Treasury fund the FED? They borrow and issue the treasuries to the FED.

And when the Treasury borrows, the US debt increases and the US debt service increases and the US deficit increases and you either owe more or pay more taxes.

No matter how it goes, you pay.

This is really simple stuff when you follow the money.

Since When is "Bankruptcy" a Four Letter Word?

Memo to: Freddie, Fannie, GM, Ford, Chrysler, Ambac, Citi et al.

If it is right to save Fannie and Freddie and other financial institutions from Chapter 11, why isn't it right to save every other company? For that matter, why even bother with bankruptcy laws?

A little short on cash and and a little long on liabilities? Call the FED. Paid your lying, thieving management team big bonuses and stuck "investors" (lol...sorry, this word in this context always makes me laugh) with worthless debt? Call the FED. Too big to fail? Call the FED. Raped and pillaged your pension plan? Call the government.

This is the old saying about telling the same lie often enough it becomes the truth. Tell everyone you are too big to fail...seek the bail.

If we put aside the massive wave of hysteria, talk of financial pandemonium and world economic collapse and every other financial PR hack's message, you still have poorly managed companies that lost billions of dollars and have billions more to loose. Actually, they never really "made" the money in the first place; but that is another story. They lobbied relentlessly for this solution and they won.

Haven't companies entered and emerged from bankruptcy in the past? Sure, the equity is wiped out...AND IT SHOULD BE. If the company is too far gone, then the bond holders are wiped out and the company goes room temp and the last will is read, Chapter 7.

But there is no one to step in and save the equity holders. That is why equity returns a higher amount than debt does...specifically because equity is the first to go in a troubled company and the higher return is the higher reward for the additional risk.

By allowing Fannie and Freddie to continue status quo and for the FED to be allowed to actually buy into the equity is a crime, a felony of the highest magnitude. It is the the theft of tax payer dollars to support the FED (and, yes, this is exactly what it is, no matter what you may hear to the "contrary") to buy equity in bankrupt companies. Absolutely anyone else would have been indicted by now. Add to this the now explicit guarantee of the "full faith and credit" (what is left of it) of the US Government.

Did anybody ever hear of Delta Airlines? 2007? How about the $2.5B in post-bankruptcy financing provided by...wait...JP Morgan, Goldman, Merrill, Lehman, UBS and Barclays. What a cast of characters! Basically the same team borrowing hundreds of billions from the FED right now. THEY apparently heard of post-bankruptcy financing because they would not provide the financing without taking a first priority collateral in the debtor-in-possession facility.

So why exactly are we in such a rush to sweep under the rug bad management, let the equity stand (and, apparently now prosper) and stand behind the debt? Just why couldn't the FED or the US Government take a senior position or own the company? Why provide guarantees and equity?

We are re-writing all of the rules anyway. Why not just write a rule that says that Freddie, Fannie, Sallie, Merrill et al CAN operate with $0 equity AND the backing of the FED or the US Government? Why not replace the management with new management (it is done all of the time)? Why leave the exact same regulators in place and call them something different and give them "expanded" powers? They had all of the power they needed, They just heeded to exercise that power and not bend to the massive lobbying efforts.

When a bank fails, new management is installed by the FDIC over the weekend and the bank re-opens Monday under a new name, government guarantees in place and it is transparent to the depositors. Why can't an investment bank failure work like this?

Where are the consequences for bad performance? You and I face consequences every day for every act and choice we make.

How do you learn a lesson if you can't fail?

Why would you improve?

Why train a dog?

Why no just pass every student?

Why have jails?

Why have immigration laws?

Why wars?

Why have rules?

I guess this is just the ultimate result of a society with an unbridled sense of entitlement and with a complete loss of a moral compass.

This isn't good fiscal governance. This isn't world financial salvation. In our every day lives, this is just a thief and "selective"prosecution.

It makes no sense at all to justify these actions based upon saying "Well, we can't worry about why we got here, we just need to save it." It is precisely this logic that continues to nurture this bad behavior. Politicians, captains of financial industry, indulgent parents, lazy educators all may lay claim to this "cranial-anal inversion" of financial logic.

I just want to say the the next police officer that hands me a speeding ticket "Let's not worry about why we are here. I promise to do better." Let's say to the next murderer on death row Let's forgive and forget. Go home." Tell your children when you find them experimenting with drugs "Don't worry, just don't do it again." Pet your dog when he tears up the house.

Re-elect the same politicians that allow this theft.

Can something be worth less the zero?

I really liked the quote about Merrill Lynch yesterday:

Thain ``is trying to control the mess that he inherited,'' Scott Rothbort, president of Lakeview Asset Management LLC, said in a Bloomberg Television interview. ``I would not rule out at this point their having to write down even more, but you can't write things down beyond zero.''

I beg to differ. You can write ans asset down beyond zero. You buy a gas station, thinking that it is a profit and revenue generating company. Then you find a leaking storage tank. Your business shuts down, the property is now classified by the EPA as a hazardous site any you pay and pay to clean it up. Hence the less than zero valuation.

The same is true for some financial instruments. Let's say you purchased a credit swap derivative. If you bought it for $X, you must think its value is $X+something. You see it become worthless, you write it to zero. But what if the swap goes against you and you cannot hedge effectively due to the markets. You are now exposed to "less than zero" losses and may continue to mount as the underlying security exposes you to increasing losses.

This is a very real possibility so the notion of "you can't write something off below $0" is just no longer true.

We will be discussing exactly that in today's show regarding the great Merrill Lynch Fire Sale of $30B worth of assets at 1/5th their "value".

But did you know that Merrill is financing 75% of the sale? Did you know that a drop of 5% or more in the value exposes Merrill to more risk?

Nothing in the I Bank world is ever quite what it seems. Remember what we said in yesterday's blog, capital is a difficult thing to both create and keep. And, leverage works in both directions.

More on the show today. Join us and call in.

Here is a link to the story:

http://www.bloomberg.com/apps/news?pid=email_en&refer=us&sid=atfHM8sh2xtw

I have always found that an aptitude for mathematics is an essential skill for a financial professional (or talk show host). Captain obvious, at your service!

Let's take the case of a change in value of an asset. Let's say a hypothetical house was purchased for $300,000 and the down payment was 25%, or $75,000. This results in a mortgage of $225,000. This means your debt to equity ratio was 3:1, $225,000 in debt divided by $75,000 in equity.

Now, let's say that same house declines 25% in value, as many markets around the country have. This means that the house is now worth $225,000. Your debt to equity ratio is now infinite. Your house is worth $225,000 and you owe $225,000. You nave no equity and, consequently, you have an incalculable debt to equity ratio, $225,000 in debt divided by $0 equity.

This minor mathematical inconvenience is the root of our financial situation. All typical reserve calculations are irrelevant. All coverage ratios cease to exist. All debt to equity ratios have been decimated and lending capacity reduced, in many cases, to below zero, effectively requiring debt outstanding to be recalled, when possible, and no issuance of incremental debt. This shrinks capital (debt plus equity) and makes the available capital very expensive.

What does this mean? This means that, with fractional banking (and investment banking) that the smaller the equity, the greater the leverage and the greater the effect of any change in equity. On the upside, leverage is your friend, allowing you to feel like a financial Batman.

However, on the downside, your equity disappears faster than Casper in a blizzard. With the unconscionable leverage of many, if not all, financial institutions, this means that your equity has gone from a positive to a negative. We know that a negative equity means that you MUST reduce your lending, unless, of course, you reduce your reserve requirements to $0 or 0%, in which case, there are no rules anymore so let's make up new ideas, laws and controls as we go. This results in bad policies and laws that reduce the ability to short investments and inject huge capital guarantees and cash into zombie companies and industries.

We have now arrived at this financial and economic precipice. You cannot create equity out of thin air. The Government may print more money but money is a debt; it is not equity. The only way many financial institutions can survive is for shadow equity to be created, giving the illusion of real equity. When the FED exchanges good (or relatively good) treasuries for bad Level 2 and Level 3 assets, negative equity was exchanged for positive equity. The bad equity now sits on the FED's books.

At this point, people like me would offer to buy this bad debt of a few pennies on the dollar but as long as the FED does not sell it, it looks like an even swap, treasuries for bad paper, thereby protecting the illusion of a sufficient equity base of the financial institutions.

Here is the real problem. This is nothing more than a guarantee without equity or substance. It is no different than the Department of Education backing Sallie Mae bonds, the Federal Government finally explicitly backing Fannie and Freddie or the FDIC backing IndyMac. There comes a point in time when all of the guarantees of all these institutions are finally recognized to be vapid assurances. Investors finally accept the fact that each of these guarantees will be honored but with no change in equity backing them. That will, indisputably, lead to massive inflation.

I believe that this is the real message we must take from the current market.

Buy gold, buy silver, short the market, take a closer look at puts, research ETF's that are inversely related to the market. Remember, you can make money in a market like this. Just bet on any investment that prospers during this "inconvenient asset revaluation period".

Should anyone disagree with this conclusion, call the show and take away our WWF ("World Wide Financial") tag team championship belt that was awarded (by us to us) for understanding the current situation better than any other host or team of hosts.

I hope that you win and take our belt. That means that we are wrong and we all live to fight another financial day. If we win, we really all loose.

Pop quiz.

Did anyone read the news late Friday that the new housing assistance bill passed?

Did you wonder why a bill of this "significance" and "importance" was so ill-reported?

For those of us that believe and know that deficits and debts do matter, while the bill does provide some $300B in mortgage "assistance", did you notice that the national debt ceiling was raised to $10.6T?

Essentially, our recognized national debt as nearly doubled in 7 years. Let's not forget that this amount does NOT include the now explicit guarantee of Fannie and Freddie of $12T. Nor does it include the unfunded liabilities of...who really knows...but estimates run from $40T to $60T.

First, thanks to several shy but pretty creative monks many years ago, we have a double-entry method of accounting. That means nothing is created out of thin air. For every debit there is a credit. Therefore, in order for the U.S. to spend, it must first borrow, as we have a national debt, a massive and growing deficit and no reserves. This is neither a new nor a unique thought. It is fact. If this were not true, then why track the national debt - for kicks?

If we could create wealth and "money" (in any form) out of electronic bits and bites, then why not just create a million dollars for everybody in the U.S. and eliminate poverty? BECAUSE YOU CAN'T!!!

The current postulation is that as long as we create this whole transaction in our own currency, then we can create as much "money" as we like. Unfortunately, this is partially true...but...the effect would be the ultimate end-game of "Helicopter Ben" and it would create massive inflation. That would be bad enough but we continue to import things and those things will become massively more expensive as we debase our currency. The real race is to see which country can debase their currencies faster.

If we accept this as true, and I defy anyone, anywhere to challenge this statement with even a whiff of a fact, then we must consider the burden of this deficit and why it matters. Right now, our national budget is about $3T annually (not including huge amounts of "off-budget" things such as war). Of this $3T, 1/6th or $500B is interest on our debt. The debt ceiling just increased by about $1T. Interest on this additional borrowing alone will be about $40B, at our current borrowing costs. That is a huge increase in the annual deficit, a deficit that must be financed by borrowing.

Come on, folks, this has to matter to you at some point.

Look at the "what-if's. What if the U.S. incremental cost to borrow increases? The deficit and the debt increase. As the debt increased, the interest carry increases and the deficit increases. What if the FED needs to be re-financed by the Treasury? When the FED craps out on the last of the $1T or so of capital it has (and it has already committed $500-$600B), it must go to the Treasury and ask for more securities. The Treasury must then float these securities (borrow) and give them to the FED. What if we give away another stimulus package? Where do you think that money comes from? What if we need another mortgage bailout? What if the FDIC, with about $53B of capital (before the $8B it spent on IndyMac or the two bank failures this weekend) needs more capital? What if $300B just isn't enough to save the 3-5 million homes already in or expected to enter foreclosure within the next year?

Time for the comic relief of the chart above, thanks to our friends at The Sovereign Society. Banks have borrowed nearly $200B through January of 2008. Other borrowings have brought the total amount borrowed from the FED to $500-600B. The FED has taken instruments of completely unknown value and exchanged them for still relatively valuable Treasury securities. Yes, this is old news, but the national debt ceiling now exceeding $10T is new news. And it matters. Just like it matters to you when you have more debt than you can service.

The payoff of this column, since our entire BizRadio and Wall Street Shuffle teams are committed to giving you the tools to make a better financial decision, is that you should take inflation very seriously. In fact, the only treatment for the problems we have right now (notice I did not say "cure") is inflation. Bet on it, bank on it, invest accordingly. Bernanke is praying for it and he is pulling out all the stops to create it. He knows the alternative is massive deflation, and that is something no one wants or knows how to cure.

The U.S. is nothing more that than the collective earning and borrowing capacity of its citizens based upon the opinion of those that would lend to us. At some point, these numbers matter. It is at that point that we will really understand the term "defend the dollar".

The very uncomfortable reality is that our dollar is strong only as long as the world believes we will defend it. That defense could have been with a sound fiscal and monetary policy but it will depend, ultimately, upon the lenders' perception of our military strength and their perception of our willingness to use it.

Maybe that this the real reason Cheney said that "deficits don't matter". I respectfully disagree.

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John and I and the entire BizRadio Team (including our trusty Operations Manager in Dallas who keeps us running, Ed Moyer) all want to thank you for joining us and listening.

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I believe in the "End of Days" concept for the American Consumer. While I'm not sure exactly what the signs are or what the final sign will be, I can say with certainty that we are managing to leverage every valuable asset we have. When we have run out of things to borrow against, that will be the last sign. Until then, for the American Consumer, these will have to do (and these are pretty darn close to the final act):

The Seven Signs of The Financial Apocalypse of the American Consumer
1) Reverse mortgages
2) Life settlements (for the sellers)
3) Negative am, Alt-A, sub-prime, cash-back mortgages
4) Property tax loans
5) Payday loans
6) Debit cards for your 401K
7) Paying your mortgage with your credit card

I have friends in the property tax lien business. It is huge in Texas. If you cannot pay your property taxes, you can go to a firm that lends you the money at 18% interest over 48 months. They take a lien on your home. In Texas, this lien jumps to the head of the priority line, even jumping in front of your first mortgage holder.

Even people that own $3 million homes are borrowing the $90,000 of property taxes due.

You would think this is almost an entirely risk free investment, as property taxes are about 3% of the value of your home annually. A lender lends 3% of the value of your home to you and pays your taxes for you and they take a first lien.

Know what is slowing this lending practice right now?

The lack of qualified applicants!

Can you imaging? You are so concerned about the borrower paying back your puny 3% loan and worried that the property that you have taken as collateral won't sell that you won't lend 3% against the property. AND you have a first lien?

That, my friends, is truly amazing. And just a weeeee bit concerning.

Our next post will list the Seven Signs of the Financial Apocalypse of our federal government.

The big question is whether this is a permanent consumer buying shift.

If it is, this is a big problem for an economy that prides itself on being more than 70% consumer driven.

Also, as you drive through familiar neighborhoods, have you noticed browner and slightly less manicured lawns? And, in the evenings, have you noticed that many homes are dark that were previously lighted at night?

Think this has anything to do with your July power bill was up more than 50% from July of 2007? How do you think increased water prices are affecting the average American?

A better question is what do you think winter heating bills will do to consumption?

Does anyone think this is just a small problem with middle America? I have friends that have what once were considered to be great middle class jobs. They now have problems just meeting their monthly obligations. And they have no wage pricing power. And they face increased commodity costs. And their home value is declining. And their 401K's and retirement plans are shrinking.

This is not just your neighbor's problem. If the average American consumer is struggling, the nation struggles. If the nation struggles, the exporters of the world struggle. If that happens, your choice of investments, no matter where they are in the world, face challenges.

Never was there a better time to remember Will Rogers when he said that he was more concerned with the return of his investment rather than the return on his investment.

And just one more thing. In that Freddie and Fannie have contributed some $170 million dollars over the last few years to campaigns and lobbying...

Can they still do it if the U.S. Government REALLY is backing their paper now? Or if the FED REALLY makes an investment into some new class of preferred stock in either or both of these companies?

At what point does a private company become a GSE then become a ward of the country?

Can we at least stop them from now using our tax dollars and guarantees to lobby our Congress?

You heard it on "The Wall Street Shuffle" weeks before this release. And we have no inside information, just a lot of common sense...and we read everything.

NEWS ALERT
from The Wall Street Journal


July 17, 2008

J.P. Morgan Chase posted a 53% fall in net income to $2 billion, or 54 cents a share, from $4.2 billion, or $1.20 a share, a year earlier. The decline in earnings was driven partly by a higher provision for credit losses. Items related to the acquisition of Bear Stearns amounted to a net loss of $540 million. The firm beat analysts' expectations of on average 44 cents a share.

Chairman and Chief Executive Officer Jamie Dimon said, "Our expectation is for the economic environment to continue to be weak -- and to likely get weaker -- and for the capital markets to remain under stress. We remain conscious that since substantial risks still remain on our balance sheet, these factors will likely affect our business for the remainder of the year or longer."

FLASH - Bernanke admits that inflation is both a hidden tax and a monetary phenomenon.

Watch the video.


http://www.house.gov/paul/index.shtml

Care to watch the CEO of Indymac, the second largest bank failure, at a press conference this weekend?

Listen to the words carefully. You will hear something that is entirely untrue but it is carefully scripted to suggest that your deposits are safe and secure.

Let me know if you pick it up.

http://www.youtube.com/watch?v=YWObzm9O1Nc

By the way, THIS is what you have been seeing as the "OFFICIAL" unemployment rate.

Please read on...

I can't make this up, folks. Hot off of the Bureau of Labor Statistics ("BLS") press.

FLASH : REAL UNEMPLOYMENT NEAR 10% - and that is our own lying number (I added for effect).

And, guess what? It was over 8% for May of 2007 - LAST YEAR! Did you read that anywhere? Noooooooo. You read unemployment at historical lows - 4.5%.

These definitions are real and also from the BLS. Please focus on the hitherto unmentioned crazy relative locked in the basement - U-6.

Definitions of U-1 to U-6:
U-1: Persons unemployed 15 weeks or longer, as a percent of the civilian labor force
U-2: Job losers and persons who completed temporary jobs, as a percent of the civilian labor force
U-3: Total unemployed persons, as a percent of the civilian labor force (the official unemployment rate)
U-4: Total unemployed persons plus discouraged workers, as a percent of the civilian labor force plus discouraged workers
U-5: Total unemployed persons, plus discouraged workers, plus all other “marginally attached” workers, as a percent of the civilian labor force plus all “marginally attached” workers
U-6: Total unemployed persons, plus all “marginally attached” workers, plus all persons employed part time for economic reasons, as a percent of the civilian labor force plus all “marginally attached” workers

U-6 IS the real unemployment, as bad as it gets. It is still a lie but it's now more like a really, really big white lie.

No more needs to be said.

This is a lot like the FED no longer publishing the M-3 measure of the money supply because it so, so, so massively disturbing. They know what it is but they no longer publish it. Best guess of folks that try to continue to calculate it...in excess of 20%...per year.

Or consider the insulting "core" inflation numbers of 3%+/-. Does anybody actually live without energy or housing or any other "adjusted-out" items?

Are you now beginning to understand why you feel like you have been in a recession?

Of course you do because you've been in one one for more than a year.

Wait until the next post for a discussion of Greenspan's ultimate bonehead thought. This one, if we un-correct his correction, would reduce GDP by nearly 2%. Sooooo, for as long as our "reported" GDP has been less than 2%, we have actually been in a recession.

So, we have understated unemployment, understated inflation and understated growth in the money supply. And these are just the first three crazy relatives!

Ah, I feel so clean now. Now we can talk about ALL of the other relatives in the basement. It's actually a small compound down there. We'll bring them up one at a time to get you used to them...slowly.

Hell, some one left the basement door open...they are all coming out...they're hideous...derivatives, Alt-A mortgages, negative am mortgages, consumer loans, real government deficits, real government debt, unfunded government liabilities, Level 3 assets...AAARRRGGGHHH!

By the way, check out the June 22nd blog. Very prophetic.

You don't have to be smart. You just have to read a lot and think like a sneaky bastard...just like a Central Banker or the head of the Treasury.

To make money, you don't need a lot of warning. I think 19 days was enough.

Did anyone else short Freddy or Fannie or think Indy would fail?

An you call yourself "Shufflers"!

What do you think will fail next?

To the tune of the intro to "The Rockford Files":

"Eh, yo, Danny Boy. This is your buddy, Fat Sally…Sal Minela. You still bustin’ knee caps? I gotta couple of stugotts been a little light recently and I need some persuasive collections. Names Skinny Fannie, Fast Freddy and their pal Mini Indy. It’s about $6 trillion with the vig. U interested? Call me."

OK, let's go over this again.

1. You can't lend money to people that can't pay it back.

2. You are not a government that can print money so you must either earn it, borrow it or have someone buy your equity.

3. Contrary to some folk's opinion, money is not just digital bit and bites created at the Treasury's or the FED' whim.

4. If you leverage your equity 30:1 (or even 220:1 ala Bear Sterns), just a weeeee little decline in the market wipes out your equity and, therefore, your capital structure.

"What we have here is a failure to communicate."

Let's remember just what our government is. It is nothing more than the collective capabilities of all of its citizens. That's it. We, as productive citizens, produce value in excess of what we consume, after tax (or at least that is what we are supposed to do). This is called savings.

Then there is the government. It is funded by our taxes. These taxes may be invested in things that last, such as bridges, roads, utilities, etc. We can spend it on social requirements such as the military. We can spend it on the necessary expenses of our country (though you and I might differ on the definition of "necessities"). Then, after all of this investing and spending, we still don't have enough, the country may use our collective ability to service new debt and we can borrow. To support that debt, we must pay interest, but that interest must be paid out of our taxes UNLESS you have a giant governmental negative-am economy.

That is it! We have a giant negative-am country!!!

We tax, we spend more than we tax, we borrow to spend and we borrow to pay the interest on the debt we borrowed. How do we get away with it? We have a giant printing press. The world uses our currency and they have wanted our dollars. Also, it helps that we have 13 or so aircraft carriers, a large number of "boomers" (submarines that break things, not you and me), an even larger number of warheads and the demonstrated ability and desire to use them to defend liberty and capitalism (OK, not really but it sounds good). This is the real meaning of "defending the dollar".

But, you and I do not have a trigger in our hands so our debts must be paid and serviced. We don't have a personal printing press.

Another truism: Most people think that assets are fixed in value and debt is variable. It is quite the opposite. Assets vary in value and debt is fixed.

As an example, you buy a house for $500,000 and borrow $475,000 (a very generous, by current standards, 5% down). If, just if, the value of your home declines by 25%, as they have in many parts of the country, your home is now worth $375,000 BUT you still owe $475,000. You must pay that off somehow and you must service the debt while you owe it.

If you don't pay this debt, the bank looses money. That loss reduces their equity and they can now lend less. Less lending, less growth capital, higher rates, etc.

This is right where we are now. Over valued assets everywhere supported by too much debt and too little income to service the debt. This is true for individuals and for the country.

And for Fannie and for Freddy and for Indy. And the "ands" just keep on coming!

Yes, I know that I have always been inspired by Ross Perot's charts (he has a new web site with new charts "perotcharts.com").

This chart, however, is a real game changer.

For everyone who thinks the consumer may return soon, therefore driving stocks back up, think of this. For our Texas listeners, most of whom heat their homes with natural gas, see what impact natural gas prices will have on your disposable this fall and winter.

Let's round for effect. Last fall, natgas spot was about $7. Today it is about $14. Assuming that it does not go up any more this year, your home heating bill will more than double, after taxes and fees.

Soooooo, if my monthly home heating bill was $700 last year, this year it will be $1400.

We pause for effect...

Did anyone out there plan to spend $500-$1000 more each month to heat their homes? What effect do you think this will have upon disposable incomes? Think this will make consumers spend more or less? And this is just the heating bill. This does not include the increased cost of virtually everything else.

Just food for thought when deciding upon whether we have a bottom in sight anywhere. Especially financials. If financials are struggling with write-offs, what do you think this massive decrease in disposable income will have on the propensity of consumers to pay their outstanding obligations? My bet is that write-offs and foreclosures will continue to increase dramatically. And this is if the natgas prices just don't go up any more.

Cash, puts, shorts, precious metals seem a whole lot safer right now. Obviously, if you believe that the tops are in for energy, then take another tack. If you believe that energy is flat to increasing or if you think some further conflict is probable in the Middle East, this chart might be conservative by the end of this year.

Pull out your crystal ball and take your choice.

And just one more thing...why isn't it a bigger deal that the FED has chosen to bail out the IBanks? Notice, I did not say the commercial banks. If the I Banks, why not companies? Why not individuals?

I know this is a tiresome question, but it is one that I will continue to ask.

And, with all credit to Ed Wallace on KLIF, when the government bailed out Chrysler with a $2B loan in the early 80's, they made Chrysler sell off their GulfStream Aerospace subsidiary. Has the FED asked ANY I Bank to sell off even one of their aircraft, let alone a whole division, let alone cut their salaries, let alone eliminate their bonuses or sell even one Maserati?

But, you are expected to honor all of your debts...with less disposable income because of the inflation that the FED caused.

I never deny anyone an opportunity to earn more money. I am, however, quite upset about those that not only don't earn their living but lose what you may have given them to invest and yet continue to pay themselves outrageous sums essentially with your money through FED guarantees.

And, just don't listen to anyone that says the FED's money is not your money. When the FED needs more money, after they have used up their $1T balance sheet, they go to, you guessed it, the Treasury for a fill-up. Where does the Treasury get their money? Yep...you.

By the way, stay tuned for our new super-sized, Wall Street Shuffle blog and site. News from our men on the street, our regular guests, our hidden mics, insights that are truly ahead of the curve, John Sheely's commentary, our show schedules and other really cool things.

Or, at least, that is the plan. It should be here by mid-July. Just in case, include us in your prayers tonight!

I wish I had something pithy, clever, funny or profound to say about this chart. I don't.

Except that I told you a long time ago. that this would happen And, contrary to the dog poo you've heard about this being the 7th or 8th inning, the home team hasn't come to bat yet.

And, for those of you in REITs ("Re-allocating Equity and Income Trusts" - that is your equity and income being re-allocated to someone else), "The pain, Boss, the pain".

Local and regional banks made a lot of money lending to residential and commercial builders, not buyers. And I do mean "made". Simple deductive reasoning, that which is lacking almost everywhere right now, suggests that major bank and their ugly step sisters, the I Banks, made A LOT of bad home loans, securitized them and sold them off. This inflated home prices beyond all imagination, someone woke-up and figured it out, buyers stopped buying, lenders stopped lending, no more HELOCs, home prices fell, developers failed, loans were written off, the economy took a dive, consumer's disposable income dropped and consumer demand dropped.

What did I forget? Oh, yea, that's right, RETAIL and COMMERCIAL building continues, financed primarily by local and regional banks. Let's not forget the commercial REITs. And just what happens when consumption drops, the supply of retail and commercial space increases and retail and commercial building continues? Failed new projects, declining rents and a general failure to meet the rosy projections that tempted you into these investments in the first place. This will result in a rather pronounced "headwind" for commercial and retail property investments. And soon.

Of course, you can follow the general advice of investment professionals and "hang in there for the long term". That's rich. Buy high, ride it down, hang in there for years and, then, you are finally back to even many years in the future with an aging building that has been vacant for years.

There aren't too many places to hide from a "general risk re-pricing" (I call it deflation, but what's in a word?). One place might be in all of the retail and commercial space that will be very vacant very soon.

Here is a short test.
1. Has anyone seen this ad?
2. If so, where?
3. If you saw this ad, why do you think the FDIC ran this ad? And why now?

There are many reasons to advertise. You need customers (the FDIC does not), you need investors (the FDIC does not), you need institutional support (the FDIC does not), you need institutional awareness (the FDIC does not).

Or it can be a public service announcement. Now we are on to something. But why would the FDIC want the public to be aware of the FDIC and its insurance limitations?

Simple...public confidence.

Now add that to the massive hiring spree that the FDIC is in right now. They are making every effort to rehire past employees with bank foreclosure experience, especially those with RTC (the Resolution Trust Corp. that worked to manage and "resolve" the S&L crash of the early 1990's).

Bank losses have not yet begun to be realized, let along recognized. About 80 banks are now on the FDIC watch list. Only 4 have failed in recent years but the watch list is growing.

By the way, have investors recently lost money in an FDIC insured account? The ad implies no but the real answer is, surprisingly, yes. Anyone with balances in excess of $100,000 (coincidentally the amount of the paper currency in the ad) have not had those excess balances honored.

So be sure that you manage your personal and corporate deposits with this in mind. There are many ways to keep more than $100,000 in each bank but it does take diligent cash management, especially if you have a corporate operating account with regular daily transactions in excess of this limit.

Call us at the Wall Street Shuffle if you want to know how to protect your deposits. Probably a lot of listeners want to know how but just won't take the time to ask.

I'm not saying that the crisis is not over for financial institutions, I'm really not. I am, however, saying that the crisis has barely begun.

My CSIQ (Common Sense Intelligence Quotient) tells me that if a bank takes a loss, it goes directly to equity. If equity is impaired, then reserves are impaired and, therefore, lending limits. Assuming that the bank was fully leveraged (as most are), then every dollar of loss must be replaced with a dollar of new equity. This has not happened.

So, new lending must be curtailed. And it is, right now. Tighter lending standards, greater equity requirements for borrowers and higher interest rates all have the effect of reducing lending. Reduce lending and you reduce bank earnings and the cycle starts all over again.

This is the essences of de-leveraging. HELOC (home equity lines of credit) are cut, personal and corporate lines of credit are cut, unused credit card available credit is cut. Decreasing home prices result in reduced re-fi's, especially cash back re-fi's.

This whole process will put immense strain on our banking systems. Add to this the soon-to-be problem loans to regional and local banks from commercial and retail and residential developers that will fail and you have the virtually complete recipe for increasing financial system failures.

How any moron, including Cramer (last week), could say that it's time to bottom fish in financials right now is beyond me. I'm not the brightest fisherman out there but I can safely say that shorting financials, virtually any financial, will be a much better bet than anything in Las Vegas, or better than just about any other financial advice out there. You are highly skilled (and often just plain lucky) when your winners exceed your losers. Betting against the financials is still the best game in town.

I thought that you might find this interesting, just in case someone asks what our governement, the BLS, feels is the current BEST case for May '08.

False Premise

"Our nation has come to expect the Federal Reserve to step in to avert events that pose unacceptable systemic risk...But the central bank has neither the clear statutory authority nor the mandate to anticipate and deal with risks across our entire financial system.

We should quickly consider how to appropriately give the Fed the authority to access necessary information from highly complex financial institutions and the responsibility to intervene in order to protect the system so they can carry out the role our nation has come to expect."

Short but sweet, folks...this is an argument, not a debate. The argument is based upon this entirely false premise put forth today by our idiot savant Treasury Secretary, Henry Paulson.

Just who said that we have "...come to expect..." the FED to step in and do anything? I didn't. You didn't. Nobody asked them to save us from anything. Did you ask them to bail out a private investment bank with the ultimate result that risk taking actually increased because there is a new sheriff in town with bail cash for all?

And, petty though this may sound, who in Hell asked them to save us from them?

Though many voices will say this is wrong...well...who really cares what "many voices" will say. The fact is that inflation is a monetary occurrence. Inflation is not possible without too much liquidity. And the FED has accommodated this liquidity rush with the best financial drugs known to man...massive credit and low interest rates and ridiculously low reserve requirements. Oh, and by the way, virtually no enforcement of existing regulations. Remember Greenspan's "What could I have done?" bit?

A house of financial mirrors...every direction looks right and yet every direction is wrong. Raise rates and kill any hope of a real estate recovery and huge losses become unimaginable losses. Lower rates and systematic inflation is assured and the dollar drops like George Michael's pants in Central Park.

In reality, the FED wants inflation and a lower dollar. Inflation, in the vision of the FED, will lead to rising incomes. At least that is their hope. Wage pricing power is completely non-existent right now. But IF the FED can move wages up, then perceived purchasing power increases and real estate has a chance. Values begin to grow again, the existing debt may be paid off in cheaper (devalued) dollars and everyone feels better and richer.

But, like a stripper bathed in red stage lights, all is not what it seems. The FED is actually focusing NOT on commodity prices as their "canary in the mine" but rather the very thing that they need to make this whole plan work...wages! That's right, the FED is actually using wage increases as a signal to "act decisively" to ward off that nasty inflation because it should be obvious to all that rising wages are bad and rising prices are good.

What kind of world does the FED live in? You are going to tie your decision to fight inflation to an increase in wages...Really?...Seriously?

Didn't the FED just assure us of the next worst thing next to deflation - stagflation? That is the very definition of stagflation - rising prices and flat wages.

The name of the game right now is real wealth preservation, adjusted for inflation. A rate of return of even 12% is a sucker's bet with inflation running 7-10% and taxes of 35%. Add a risk free rate and a risk premium and you need high teens returns to beat inflation and earn a small net return to assure growing purchasing power.

I can still hear Will Rogers saying "Last year we said, 'Things can't go on like this', and they didn't, they got worse."

"The three stages of magic:

First, there is the setup, or the "Pledge," where the magician shows the audience something that appears ordinary but is probably not, making use of misdirection.

Next is the performance, or the "Turn," where the magician makes the ordinary act extraordinary.

Lastly, there is the "Prestige," where the effect of the illusion is produced. There are "twists and turns, where lives hang in the balance and you see something shocking you've never seen before."[

From the movie “The Prestige”.


Bernanke is the illusionist.

We are the audience.

We must be willing to suspend disbelief. We paid for the ticket. We know that a railroad car or the Statue of Liberty cannot disappear. But we want to believe they can. We want to be entertained.

The setup, or the “Pledge”, is a fair market and real, inflation adjusted growth. It seems normal and fair but all is not what it seems.

The “Turn” is the illusion of exceptional economic growth and prosperity beyond all rational expectations. Interest rates are low, zero down, cash back financing, asset values increasing far in excess of any wage and earnings growth. People making $50,000 per year are buying houses for $500,000. Houses are “flipped” for huge profits. Assets sell for more than the asking price. Wages increasing faster than prices. Security of social contracts (social security, etc.). $700T worth of derivatives that are perfectly hedged. Banks with sufficient reserves. Solvent muni bond insurers. Sufficient equity and cash flow for the debt load.

The “Prestige” is the appearance of real growth of your wealth and the financial stability of the US, all the while the “lives hanging in the balance” are real estate crashes, massive bank write-offs, increasing unemployment, historic rise in prices of oil, unimaginable federal budget deficits, a war in Iraq, prescription drugs, Medicare, Medicaid, Social Security, trade deficits, Sovereign Wealth Funds moral authority via their investments, complete lack of wage pricing power, record foreclosures, negative savings rates, increasing bank failures.

All of these are mis-directions. All real and, yet, you WANT to believe that these problems are solvable at the wave of a wand by the Illusionist.

You walk away from the event knowing what you saw can’t be real yet you still believe.

The only problem is that when you leave the theatre, the Pledge, the Turn and the Prestige, the entire illusion, stay in the theatre. You don’t have to go back and your memory of the illusion grows richer over time.

In the real world, you pay for that Illusionist each and every day with your tax dollars, your depreciating disposable income and your diminishing asset values. You feel richer but you are not.

Inflation erodes your purchasing power, deflation diminishes the value of your home. Your net worth increases BUT your real value, in terms of purchasing power, decreases.

The FED CANNOT raise interest rates and have economic growth. The FED CANNOT lower rates and stop inflation. They have finally reached their “Hobson’s Choice”…a choice that is really no choice at all.

We have no wage pricing power in a globalized world. We have no pent-up demand to drive a recovery via new jobs in manufacturing or service. Our real savings are decreasing.

To raise interest rates, oil must come down, thereby freeing up disposable income to pay the higher interest rates. But if rates increase, housing dies, more mortgage and credit losses, more FED lending to banks and investment banks, the FED runs out of balance sheet (about $1T total to work with but having used about $500B already), the FED goes to the Treasury for re-funding, that means more federal debt, higher federal interest costs, bigger budget deficits.

This is the quintessential “Hobson’s Choice” and the greatest illusion ever attempted.

The FED will not raise rates in this election year, no matter what the “Pledge” is.

And our audience will not suspend disbelief. Therefore, the illusion is no illusion at all.

Fade to black…

Why bad debt matters

This is the financial equivalent to the crazy uncle in the basement...something no one talks about or understands. It is bad debt.

Bad debt is a very different animal. Ask someone that is not in the business to define it and they'll get it wrong. Bad debt, also called charged-off debt, is the direct result of a customer not paying their bill. It is not past due debt or delinquent debt. It is debt that the customer has never paid and your company has fully reserved for the debt and your company now carries debt that is a net $0 value.

Let's take an easy example. Say your company revenues are $100. The average company makes about 10% or $10 in after tax profit. Built into this number is an expense to cover the cost of the part of the $100 in sales that are never collected. To be very simple, say that 1% or $1 has been expensed and charged to the bad debt reserve and the 10% net income is after this expense.

Next, assume that your company is public and trades for 20 times earnings. Your stock is worth 20 times $10 or $200.

Now, let's say that your bad debts go from 1% up to 2%. This is commonly referred to in the media as "only up 1%". It seems insignificant and nothing to talk about. Dismiss it. It's lost in the details. What are you worrying about?

He's why you should be very concerned. If the bad debt goes up from 1% to 2%, that means that your earnings have gone down from $10 to $9, or 10%. Your stock price has just gone from $200 down to $180.

Does that seem important to you? Now imaging that this bad debt goes up another 1 or 2 percentage points. This is real erosion of your stock price or market capital. All due to just a few more consumers and companies not paying their debt.

Most people think of this debt as mortgage debt because that is all the rage in the financial media. There is also auto loan debt, consumer debt, RV debt, boat debt, lines of credit, HELOCs, payday loan debt, signature loan debt, utility debt, property tax debt, bad check debt, overdraft fee debt, parking ticket debt, speeding ticket debt, library debt, medical debt and credit card debt.

And that is just the consumer side.

Don't forget commercial debt. Oooops, forgot LBO debt and derivative debt.

The point is that every dollar of unpaid debt destroys a much larger amount of capital. When that capital goes down in value, transactions based upon that asset value decrease in value. It's the equivalent to the "Dead man's spin" to a pilot.

The FED knew this when they bailed out the banks and the investment banks. These folks cannot earn money quickly enough to rebuild their capital base without significant FED intervention. Without the $400-$500B provided by the FED, many, many more banks and investment banks would have been in the trash heap by now.

Since the FED is taking care of the banks and the IB's, just who will take care of the consumer credit issuers, hhhhmmmmm?

So, next time someone says that debt charge-offs are up "just 1%", you now know that this is a rather nasty increase. Knowing this, financials are a very difficult long position right now as every bank, by its nature, makes loans and is exposed to the declining ability of both consumers and companies to service their debt.

Last point, now add into this equation just a slight drop in disposable income, due to, say, oil, food, taxes or some other such insignificant expense. Since disposable income as a percentage of gross earnings is at exceptionally low levels, just a small increase in expenses drives disposable income into the ground. And it is this very disposable income that allows you to service your debt.

Such simple circular logic, really. And now you know. Sleep well.

Did I mention Part Two of the "Black Gold Rope-A-Dope"?

Remember that owners, more than likely, are also speculators.

Accepting this premise, and acknowledging that there is enormous wealth (growing exponentially) controlled by oil owners and related sovereign wealth funds, this might lead one to conclude that even free markets may be moved (up and down) with relative ease by a very few.

Should this ring untrue, remember the huge silver bull market nearly 30 years ago when silver spiked to more than $50/oz. Members of the Hunt family had essentially full control of the delivery of silver. This was not acceptable to people with even more money than the Hunts and the rules were changed in the middle of the game, forcing several members of the Hunt family into virtual financial ruin.

Think this process can't happen again? It's happening right now as new rules have been discussed and proposed regarding futures trading of food related commodities. It should be noted here that the oil owners have accumulated far more wealth than the food commodity owners and these rules changes have not yet been proposed for oil.

Besides, it couldn't work anyway. Money goes where it is wanted. Over-regulate trading in the US and the trading will move elsewhere.

The current oil price hearings in the House right now are a side show - a game of "Three Card Monte" - for the entertainment of the American voters.

"Something must be done!"

"Something will be done!"

Our trusted, elected officials will ask even more insightful questions such as "Did you make more than $4m last year in salary?" to the heads of Big Oil. That will show Big Oil and the voters we are serious. Quick, ask them another question so that we can adjourn and get back to campaigning.

Which rules do you think will change first?

Just another thought about oil.

How are oil prices determined? Is it "Big Oil", oil executives, speculators, the "Government"?

There is no ambiguity. You'll never need to ask this question again. Here is the only complete and correct answer.

The only people that know where the price of oil is going are the folks that OWN the oil.

This is so simple, it defies logic that anyone even asks the question. Owners can raise prices until they squeeze out the last drop of profit. They can take the world to the brink of ruin. The world reacts and begins to kind of maybe think about thinking about maybe doing something about improving a completely dysfunctional energy policy. Just after investments are made in other energy sources, the owners WILL LOWER THE PRICES to make these alternative investments no longer financially feasible. New energy goes belly-up, and the owners RAISE THE PRICES again, only MUCH higher this time.

Black gold rope-a dope.

Holy sweet crude, Oil Man, this isn't news! The owners have done this EXACT SAME THING several times before to us. Are our brains so filled with useless crap and crippled with media induced ADD ("Speed Racer" comes to mind) that we can't remember what the owners have done to us over the last 35 years? Have we no long term memory?

Consider yourself completely armed for the next idiot that asks you this question. Be swift, be merciful, put him out of his moronic misery...and don't let him breed!

With all due credit to George Carlin, circa last century, these are the seven deadly words today...Inflation, stagflation, recession, depression, peak oil, sub-prime and gold. I believe that Carlin also hyphenated two of his words.
No one is to speak of these words. And never in threes (think "Beetlejuice" and you get the idea). God forbid that a politician, ANY politician, should utter any of these words. We might actually begin to understand the enormity of our dilemma.
More liquidity? More inflation, higher gold, higher oil, lower dollar.
Lower rates? More inflation, higher gold, higher oil, lower dollar.
More bailouts? More inflation, higher gold, higher oil, lower dollar.
No bailouts? Recession, Govt. and FED try to stop it, more liquidity, more inflation, higher gold, higher oil, lower dollar.
I sense a pattern...let's see...gutless and down right stupid politicians (both parties please step forward) making horrid decisions to further their careers and appeal to the unwashed and uneducated voters. Nearly 50% of voters pay little or no federal income taxes soooooooo...that means that this 50%+ can vote for the remaining 49% to support them virtually without consequences. Since these voters don't have to work for it, environmentalism, global warming and tree hugging sound like good things to be "for". Therefore, we are "for" these causes with no plan to deal with the effects. Pols know this so they either intentionally or unintentionally pander to this block.
Oil companies-bad, profits-bad, polar bears-good, environment-bad...or good...depending upon perspective. Suspend gas tax for summer-good, build refineries-bad, beg the Saudis to produce just a few drops more oil-good (but not for our national stature). Nuclear-bad.
I really think every putz in Washington needs a basic class in cause and effect.
Today would be the effect. The cause has been happening for many years. No new nuclear plants for 30 years. No new refineries for about half that time. Can't drill off the coasts even though China and other countries drill just outside our national waters. Now we wonder why this happened all of a sudden. Oil goes up, jobs go away, the economy is "sluggish" (Did you ever think about the derivation of the word "sluggish"? To be like a slug. In this context, it sounds just a bit more repulsive rather than politically correct.)
This is all about supply. We have not even touched the surface of demand. 85m barrels of oil produced each day, 85m barrels of oil consumed. If you remember your basic college economics, the moment that there is 1 more barrel of oil demanded than there is supply, the incremental price of that barrel is indeterminate. It is what anyone can or will pay. And the price does not have to go up gradually. Just look up or remember the 1973 and 1979 oil crisis.
Everything old is new again and here we are with all kinds of causes and all kinds of effects. Only this time, the world is playing the game at the same time.
By the way, the peak oil for the US occurred in the mid-70's, more than 30 years ago. No one said we were quick studies...

If anyone thinks the financial crisis is over, then why are the banks and IB's selling their LBO debt at deep discounts AND financing the transactions at capital costs BELOW their actual cost of capital (not counting the gifts from the FED)?

The FED's money is the Treasury's money and the Treasury's money is YOUR money. Sooo...that means that the banks are using your money to rid themselves of problem debt and finance it at cheap rates subsidized by you.

But, then again, it's only a problem once everyone figures it out.

Just don't ask the question "Exactly how much debt do we owe?" While relevant, it's not immediately life threatening. It's like saying "OK, we owe $1mm and we make $100k but I can afford the payments."

But don't EVER ask the question "And just how much does it cost to service that debt?" This question is just a bit more timely, like a femoral laceration. This is the same as "Holy Cow! If I add up all of my mortgage debt, car loans, credit card debt, boat loans, second home mortgage, HELOC's, RV loans, credit lines, student loans (that I am paying for my kids), payday loans to cover the past due credit card payments, property taxes, con summer loans to pay for the new furniture and plasmas and any anything else that comes out of my paycheck, I might have just a weeeee problem here." Time for the wife to work a double at the Thrifty Mart.

OK, think of that and then add lots and lots and lots of zeros and you begin to get the idea that consummers and the government might be in the deep end with lead flippers. Or, just don't ask...

Don't believe everything you hear about "core" inflation and the "CPI" rate. Try going to the Bureau of Labor Statistics web site (bls.com) and take a look at the rates of inflation for various goods and services. I love the fact that the only thing that was cheaper in 2007 was apparel as that was virtually all made in China.

And don't talk about wild extrapolations. Inflation is worse now than in 2007. Go to the grocery, buy gas, take a vacation, pay your utilities or try to get a job in trucking.

Also, remember that inflation has the greatest effect upon average Americans as this group (no matter how you define "average") has the most fragile disposable income and is the most exposed to daily expenses of fuel and food. Oh...that's right...the government DOESN'T count food or fuel in their posted inflation rates.

But you DO eat and drive, don't you? And don't listen to the line of BP (bull poop, for those with sensitive ears) saying that inflation is only when the dollar declines. Any time your purchasing power declines, whether via dollar decline or demand/supply imbalance, you get less for each dollar you earn and that is inflation.

To make matters worse, we have virtually no pricing power when it comes to wages, due to globalization, so we are left with price inflation, stagnant wages, shrinking purchasing power, tighter credit, declining home prices and less disposable (and savable) income.

When has this combination ever been bullish? Can the market really see into the future six months and this bull rally is really a vision of future bounty? Well...NO...if the market was so darn good, you would have not had the collapse of financials and Bear Sterns.

So, the lesson of the day is do your research, trust the facts (when you can find them) and see how your financial life is changing. If you expect to be better off in six months, then maybe the market can see the future. If you are not so sure, then why are you long financials? After all, you must be betting that the FED will continue to lend against (really buy, but that is another story) bad mortgages, the Department of Education will buy bad student loans, some agency will buy bad credit card debt, the Department of Are You Kidding Me, You Spent How Much on that Boat? will buy bad boat loans, the Department of Commerce (I'm running out of Departments) will buy bad corporate debt, the Treasury Department will buy 1/5 of 1% of bad derivatives (did I mention that amounts to about $1T US dollars?) and so on and so on...

The only full employment job category in the nation is printing press operators...pass me the oil, boys, she's gonna blow....

By the way, welcome to our new fans in Oklahoma City, Chicago, Detroit, Ft. Worth, Dallas, Houston and around the country via podcasts and simulcasts.

OK, folks, I finally found the ultra secret combination that gets me into this blog! Sorry that it has taken so long but we are here now and the party can start!

The financial world isn't ending but the rules are changing. Throw out the old rule books and watch how the FED and the Treasury re-write the game. Pay careful attention because they have taken a lot of the penalties out of the game...think the championship game in RollerBall with Ben Bernanke as the head of the Houston team (OK, too obscure - go rent the movie - THE ORIGINAL version - and you'll understand).

If the FED or the Treasury or any government agency now stands ready to guarantee every piece of bad mortgage, student loan, LBO loans and other types of financial toxic waste that only the bankers got fee rich when they birthed these securitized hell spawns, what makes you think that the folks that actually OWE these debts are now MORE willing to pay?

A financial Yucca Mountain is just a few strokes of a President's pen away. See it grow, feed it with your tax dollars and then just water it a bit with other give-aways and entitlement programs. The Manhattan Project had nothing on this little gem of a financial MOAB (see reference to Taliban cave dwellers having the air sucked right out of their caves)!

I'm not the brightest bulb in the pack but if you think your rich uncle is going to leave you a fortune very soon, my guess is that you begin to work just a weee bit less and begin to anticipate the unearned windfall coming your way. Paying your bills somehow now seems just a little less important.

These guarantees will do more real harm that good. Oh, it will feel good for a while until you realize that each and everyone of us, as taxpayers, are taking it in the shorts with increasing federal debt, higher inflation and more interest on the federal debt. Depending upon how large these guarantees get, the bigger the problem. A drunk has to sober up sometime.

Remember, the big, bad voodoo daddy of all such guarantee programs, Social Security, is neither very social nor very secure and it is eating our national fiscal lunch. Do you think any of these guarantee programs will be better administered or have better consequences?

Final thought, would you ask your brother-in-law (the one your wife MADE you hire because "he really needs a job"), who nearly ruined your company by posting the combination to the company safe on "My Space" because he thought it would be safe and because he couldn't remember it), to run your finance department, manage your retirement plan and balance your check book? Any thoughts as to why it's a good idea to ask the FED to "manage" all institutions that affect our economy?

"Hey, Ben, grab me a beer, NASCAR is on." How did that work out for you, huh?