More economic sense from Karl Denninger

I've had occasion before to quote Karl Denninger and his financial news Web site, 'The Market Ticker'. The more I read him, the more he strikes me as one of the few analysts who are actively and openly warning us of the financial and economic reality we face today. Too many others are 'sugar-coating the bitter pill', not being honest about all they know - or just plain not knowing enough.

Two recent articles on TMT have reinforced my opinion. The first deals with the impact of Adjustable-Rate Mortgages (ARM's) on the housing market. Some excerpts:

If we do a dispassionate examination of the math we can examine what's coming, and we will discover precisely why those who are calling for an economic recovery are dead flat wrong.

. . .

... there were about $750 billion of these loans originated between 04-08, and almost none of the losses from them have been taken by the banks. These loans are severely underwater and recovery is going to be lucky to reach 50% on them. (These loans, incidentally, are what sunk IndyMac, Downey Federal Savings and others.)

That's another $350 billion in direct losses to the banks and other institutions that has to be taken and which is not being accounted for in the so-called "green shoot" claims, or in bank share price valuations. To quantify this in terms of market developments it is five times the "extra capital" that the banks have raised, five times the TARP funds that are being repaid, and one half the entire original TARP allocation.

These losses are real, they are inevitable, and they are currently being intentionally hidden instead of discussed and dealt with.

These loans are almost all going to blow up, and that will dump another million homes on the market as foreclosure sales, further hammering valuations and inventory levels. This source of existing homes is about 20% of all home sales inventory across a given year - a massive supply increase.

This is why Bernanke and everyone else have been so desperate to restart the housing ATM. It is why they are desperate to stop prices from correcting to sustainable levels, even though the futility of this exercise has now been shown to be fact, not conjecture, as the government and Fed policies have caused long-term interest rates to rise instead of fall.

They know that when, not if, the other $350 billion in direct losses show up - and they will, starting now and running through 2011, that the banks that are supposedly "well-capitalized" will be shown to in fact be insolvent.

They know the math is irrefutable, they know that it is impossible to stop this, and they know that both the credit and stock markets will be decimated when these losses become realized.

To add insult to injury the intentional obfuscation and lies on this point by the media and "pump monkeys" - that is, sell-side folks who are trying to convince you to buy from them, that is, to take financial instrument inventory from them at a price higher than fair market value, given these facts, are nothing other than self-serving bullcrap that is intended to do you harm for their benefit.

. . .

There is no possible way we will avoid the economic damage from these Option ARMs and this is not reflected in any market - not the stock market, not the housing market, and not the general economy.

The math is never wrong.

There's more at the link. Emphasis is the author's.

Mr. Denninger's second article examines the costs involved in 'Obama Care' health proposals. Some excerpts:

We ran a $189.7 billion deficit this last month folks. Annualized this is a staggering $2.276 trillion dollars - for one year.

That's the difference between tax receipts and spending.

$2.276 trillion dollars.

We cannot keep doing this. Our lenders (the Chinese, Saudis and others) will not permit us to keep doing this.

If we don't stop this stupidity, here and now, interest rates will start to move dramatically higher.

You have already seen mortgage rates rise by some 20% in less than two months.

They could easily double from here.

A $200,000 house that was bought with a 5% mortgage is worth $104,984 if rates rise to 12%.

Let me put this in simple English so you understand what is being done to you with our incompetent, unsustainable and delinquent government policies:

Your home will have its current, depreciated due to the housing bust value, cut in half again if we don't cut this crap out right here and now.

That's right.

But it gets worse.

See, businesses have to borrow too. And their interest costs will double as well, which means lots of job losses, as interest expense is money that can't go to payroll. In fact, it means many millions of additional job losses, and an unemployment rate that will rise to 20% or more.

I realize that nobody is happy about the cost of health care, including me.

But there are some very inconvenient facts related to health care in America that nobody wants to discuss, yet we must discuss them and come to some understanding in this country among all citizens.

As just one example you consume somewhere between 80 and 90% of all health care dollars that you will ever consume in your last year of life. If you do not have the money to pay for this, currently society will pick up the tab. It is in no small part due to this fact that we have the funding problem within Medicare today.

We provide "free" medical care to illegal immigrants. There is, of course, no such thing as "free" medical care - what really happens is you get billed for it as a citizen, either directly in your health insurance costs or in your taxes, yet the illegal immigrant pays nothing and receives the same service you get. Is this just? Is this sustainable?

We have some $53 trillion in unfunded liabilities in the "social programs" in this country right now. We cannot possibly come up with that much money. If we were a bank, we would be shut down as insolvent. Foreigners and others are realizing this and are diversifying out of the dollar, and out of our Treasuries.

This trend will continue until and unless we stop spending more than we make - both individually and as a nation.

At some point the revenue that the government can obtain by borrowing will dwindle and interest costs will rise to the point of being unaffordable.

At that point a very disorderly shutdown of many services that Americans consider essential, such as Social Security and Medicare, will take place - not because the government wants to, but because it is literally out of money.

We can solve this problem, but pandering won't do it. Nor will platitudes. Simply put, that last year can't be yours if you are unable to personally afford it.

Illegals cannot be funded in their health care by citizens.

There is more to a real solution, but these two facts are indeed facts, yet I do not expect our government to face them.

But if we do not, then your home will be destroyed, your job security will be destroyed, and ultimately, your nation may be destroyed.

. . .

... without solving those two primary problems, the math will not work and the bad effects will come.

Count on it.

Again, there's more at the link. As before, emphasis is the author's.

I highly recommend reading both articles in full, and making Mr. Denninger's 'The Market Ticker' part of your daily 'must read' list of Web sites. It's on mine. This man speaks truth.

Peter