Too Big To Save

Dear @profile_first,

Here's the latest Martenson Report entitled "Too Big to Save".

The latest government budget proposal from the executive branch is out, and it's a masterpiece of fiscal irresponsibility. Clocking in at $3.6 trillion, it sports a deficit that is 12.5% of the projected GDP for FY2009 (fiscal year). It also displays no sacrifice in any quarter, as everything is funded, and then some. Sure, the priorities shifted between administrations, but a lack of spending limits did not.

"But this is an emergency!" we are told, implying that it's not the right time to be pulling in our spending horns. This argument rests on the assumption that our problems can be fixed through additional deficit spending. However, the facts suggest that we are suffering from too much debt and too much deficit spending, not the opposite.

It's vital that we truly diagnose our problems correctly, or we run the risk of applying "solutions" that are actually the medical equivalent of giving poison to a poisoning victim. In this case, I strongly disagree with the "solution" of throwing borrowed money at every problem that arises. The problem is not rooted in "too little money," but in mal-investment and a lack of savings, both of which are being compounded by these "solutions."

Worse, solutions only apply when we face a problem - not when we face a predicament. Predicaments do not have "solutions," they only have outcomes. Teetering near the edge of a cliff is a problem with a solution. Finding yourself in the air after falling off a cliff is a predicament with a range of possible outcomes, but no "solutions." Problems are generally reversible. Predicaments are not.

So are we facing a problem with solutions (e.g., TARP funding, bailout money, stimulus and deficit spending, etc), or a predicament with a range of less-than-hoped-for outcomes?

In this report I will make the case that our financial system is "simply too big to save" and therefore represents a predicament. You should plan accordingly.

The basic predicament is that the government/Wall Street cannot imagine any other world than one of constant expansion, and they are displaying this tunnel vision in every single program and effort announced. Every program is designed to "get us spending again," as though that were a clear remedy and a desirable outcome. Instead, I hold the view that a solid economy is built upon production and savings and that's it. Borrowed money, especially money "borrowed" from thin air, is not the same as real capital from savings.

"Thin air money" is false and based on nothing. It may act like money for awhile, but then its fraudulent character is eventually exposed, as money outstrips goods and services and results in inflation.

Everything I do in my work compels me to move, nudge, and cajole people toward understanding two main things: 1) We are not going back to "how things were," and 2) There are discrete actions people can take to minimize their personal sense of disruption through the changes and even end up with a higher quality of life than before. But first, we have to shed the last vestige of belief that we're going to somehow return to the immediate past. We are not. It is neither mathematically nor economically possible. If we are smart about it, we should be thankful for this crisis, as it gives us a golden opportunity to reassess where we are headed and how we'd like to live our lives along the way.

Let's start with some economic data before moving onto the continued erosion of bank and financial company stock prices and what that implies.

First up, there's been some slight upward movement in bond yields, but absolutely nothing like what we would expect, given the amounts of new sales involved. A nearly insatiable appetite for US debt seems to be coming from somewhere right now. Perhaps it's legitimate foreign demand, perhaps it is central bank ‘thin air' money. Who knows?

Even though bond yields have moved a bit up lately, I expected a lot more than we've seen to date. This is good news for everybody who has not yet finished making their personal preparations, because when the US bond market cracks, there really won't be much maneuvering room (or time) left to convert your dollars to anything useful.

But for now? It seems to me like the bond market is consuming all the government can issue without much of a hitch at all:

[blockquote]Feb. 26 (Bloomberg) -- Treasuries fell for a third day as the government sold $22 billion of seven-year notes in the last of three auctions this week as it issues an unprecedented amount of debt to spur the U.S. economy. The government sold a record $94 billion of notes this week.

Treasuries pared losses after today's seven-year note sale yielded 2.748 percent, compared with an average forecast of 2.715 in a Bloomberg News survey of seven trading firms. The government last issued seven-year notes in April 1993, when it sold $9.76 billion at a yield of 5.58 percent.

The seven-year auction's so-called bid-to-cover ratio, which gauges demand by comparing the number of bids to the amount of securities sold, was 2.11. Indirect bidders, a class of investors that includes foreign central banks, were awarded 38.7 percent of today's sale. Comparable data is not available from the government.[/blockquote]

The way I figure it, when you can convince someone to lend $22 billion dollars to an insolvent nation in the midst of the greatest insolvency crisis in history for seven years at a measly 2.75%, there's no sign of any potential disruption in the US treasury market. Yet. If this crisis has taught me anything, however, it is that perceptions can shift in the blink of an eye. We'll continue to keep a close eye on the market.

While the auctions seem to be proceeding smoothly, the chart for the 30-year bond looks like it could break down at any moment. "Head and Shoulders" patterns have a habit of doing that (as marked by the "H" and the "S"s), while a date with the 200-day moving average (the red line) seems inevitable. A failure there and we could see some rapid price drops and associated yield gains.

USB smaller.jpg.

Next up, the stock markets. As I am sure you are aware, they finished at the lowest daily close since 1996. We are now at 12 years without a nominal gain in the stock market, but on an inflation-adjusted basis? Don't ask.


Note above that the decline in the S&P was marked by exceptionally high volume, which is usually what is required to break past a former low (which was in November). Some of this extraordinary volume can be attributed to just a few stocks, principally financial stocks, which had a horrible day, capping off a horrible week, capping off a horrible year.

Before we talk about those, let's review an updated version of the Level II asset table, which I have been displaying for almost a year now. It has been remarkably predictive, and this is not a surprise to me; I expected it to be, and this is why I have been showing it frequently over time.

The table shows which companies engaged in the riskiest type of lending and in the highest amounts. Remember a "Level III" asset is merely a financial holding of some sort that cannot be priced in the open market. Typically, these are the most exotic of derivative products, but we might also suspect they consist partly of merely embarrassing mundane items that management wishes to obscure from current view.

Given all that's happened, it really not much of a surprise to see so many of the companies on this list either crossed out (having gone bankrupt, been acquired, or been nationalized) or circled (indicating a severe breakdown in their stock price and a probable date with dissolution or nationalization.)

Level III assets updated 2-28-09.jpg

We'll get to the charts of the red-circled companies in a second. First, I want to discuss the purple arrows.

Insurance and Pensions

The insurance companies are in trouble for the same reason that pensions are in trouble. While you have not heard a lot about pensions lately, that's only because Congress recently gave companies with pensions a special waiver, allowing them to avoid having to put sufficient money into their pensions to match the projected liabilities.

What pensions and insurance companies do is they project future liabilities, take in money, invest that money to grow in proportion to the liabilities, and then pay out that money over time. Both principally invest in stocks and bonds.

In the case of insurance companies, it's often a "heads we win, tails you lose" sort of an arrangement, with investment surpluses flowing to their bottom line and negative performance resulting in higher insurance premiums for you and me.

But the interesting part here is that, although we cannot directly see pension performance figures because they are buried deep within murky footnotes in company annual reports, we can track the stock prices of insurance companies.

The results are not pretty. Of course, you already knew that by looking at the table above, didn't you?

Here are the charts, in order, for the insurance companies on the table above.


Status: Approaching November lows.

Chart: This is NOT a company I would buy into at this point.



Status: Approaching November lows.

Chart: High volume melt-down on Friday is a bad sign. Looks like it will test the November lows. I would NOT own this stock at this point.



Status: Broken through the November lows.

Chart: This is NOT a company I would have a policy with at this point, let alone own their stock. Something is very wrong with this company's financial health here.


Hartford Insurance Group

Status: Approaching November lows.

Chart: This is NOT a company I would buy into at this point.


Summary of insurance and pensions

We are facing a severe test of both our pension and insurance industries, which I would estimate have a collective shortfall of more than a trillion dollars in assets compared to liabilities. Nobody is talking about this much (yet), but it's coming. We have a gigantic pension and insurance bill coming due, and soon. Hold that thought.

Banks & General Electric

While I have been tracking the banks and GE for you for a bit more than a year, I've never seen anything quite as dispiriting as the recent action of the stocks of the largest banks in the world.

Again, starting at the top of the list and moving down, we begin with Citigroup. [Note: I will skip over JPM, GS, and MS, since their stock prices, while battered, are holding up enough that we can ignore them for the moment.]


Status: Utterly crushed and well below the November lows.

Chart: This company is all but dead. Nationalization and dissolution are the only options here. What a stunning collapse on Friday. This stock alone traded nearly 2 billion shares on Friday - once a milestone for the entire market! - and closed below all prior lows in convincing fashion.


Bank of America

Status: Wallowing about in the sub-$5/share range.

Chart: Too big to fail? I suppose the people still buying this stock are betting on exactly that. Otherwise, there's not much cheery to note about this company's stock price performance and what that indicates about its current and future prospects. This looks and smells like a nationalization candidate.


Wells Fargo Corporation

Status: Slightly better than the rest; still not a happy camper.

Chart: I would not want to be holding this stock at this time. Unless there's some sort of a dramatic rescue by the government, this chart says that this company is facing some serious difficulties. I guess absorbing Wachovia (also on the table above) was not such a keen idea.


General Electric Corporation

Status: GE cut its dividend on Friday, something it had never done since its inception in 1899. Investors hated that news, driving the stock to its lowest close in 14 years. While the dividend cut was the news, I suspect something darker lurks on GE's balance sheet, and I think it's tied to the Level III assets issue, as outlined in the table above. The unfortunate aspect here is that GE is an extraordinarily well-run company that makes great products. They also happened to dabble, if that's the right word, in exotic financing schemes and products, and that is dragging them down at exactly the wrong time.

Chart: This is just a nasty chart. I have been advising people to get out (and stay out) of GE for quite some time. There is nothing in this chart to change that view at this time.



The summary of all these charts and observations is that pretty much the entire financial universe continues to crumble. This raises the prospect that, collectively, all these companies are "too big to save," no matter what the intentions and hopes of the new administration or this nation. I see several trillions of dollars needed to merely stabilize the situation. But to return it to its former glory? Sorry, not this year, not next year, and maybe not ever.

You need to consider your situation if the financial system suffers further erosion, as the options before our government are few, shrinking, and growing less and less palatable by the day.

Frankly, I still see "printing" as the only politically viable option, yet this carries risk that the US dollar, and most other fiat currencies worldwide, with precious few exceptions, will suffer a dramatic loss of utility, which is a fancy way of saying "a massive decline in value."

More immediately, it is now time for you to consider how you will be interacting with friends, neighbors, colleagues, and your wider local community during the rest of this year. Everybody will need some form of help as we all cope with the deleterious effects of a bursting credit bubble.

From here on out I may switch from observing and cataloging the financial decay to sharing my experiences in forming local groups and making preparations that are less about finances and more about community and securing physical needs. I am interested in your thoughts on this.