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…