$4 Trillion Dollar Nightmare

Good Evening Folks!

What a day today. Congrats to anyone who played the short side. Ladies and gentleman, the wheels are about to fall off.

There were some stunning developments in the markets today as we saw further signs of a full blown economic collapse. Here is a nice summary from Bloomberg:

"Jan. 29 (Bloomberg) -- Prospects for an economic recovery this year dimmed after reports today showed new-home sales collapsed, durable-goods orders slumped and a record number of Americans collected unemployment benefits.

“There really isn’t any hiding place in this economy,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.

Orders for goods designed to last several years fell in December for a fifth month, the longest slide since comparable data began in 1992, the Commerce Department said today in Washington. Sales of new homes fell to an annual pace of 331,000, a rate that would take more than a year to clear the glut of unsold properties.

Today’s figures may heighten Federal Reserve officials’ concern, expressed yesterday after their policy meeting, about a “significant” danger the economy won’t start recovering until 2010. The intensifying housing crisis will also make it harder for President Barack Obama to arrest the industry’s decline with proposed tax breaks and steps to slow mortgage foreclosures.

The Labor Department said the number of Americans collecting jobless benefits soared to a record 4.776 million in the week ended Jan. 17. Along with the slump in durable-goods orders, the figures reflect efforts by companies from General Motors Corp. to Caterpillar Inc. to downsize amid a pullback in both domestic spending and demand from overseas.

For the full year, purchases of new houses fell a record 38 percent to 482,000, the fewest since 1982, Commerce said. The median price for all of 2008 fell 7 percent, the most since 1970, to $230,600.

The supply of homes at the current sales rate jumped to a record 12.9 months’ worth in December. That is more than twice as much as the five-to-six months supply that the National Association of Realtors has said is consistent with a stable market."

Sales of new houses dropped in all four regions, led by a 28 percent decrease in the Northeast and a 20 percent slump in the West.

The shrinking real-estate market is costing more and more jobs, from banks and homebuilders to manufacturers and retailers."

Quick Take:

Do I even need to say anything here? This is what happens when bubbles burst. I picked up a nice chart that puts the scale of this housing crisis into perspective. Here is the historical inflation adjusted history of housing prices since 1890 from Dr. Shiller of Case/Shiller index fame:

Does anyone still want to buy a home anytime soon? "Reversion to the mean" in this instance is going to be extremely painful. Housing prices still have a long ways to go on the downside until we get back to historical norms. This of course will do nothing but further deteriorate our banks balance sheets. Buying a home won't make sense for at least several years.

The job losses are only making things worse. Who wants to make a 30 year commitment on a loan when you have lost or are about to lose your job? On top of that: What bank would ever lend to them in the first place?

We now have close to 5 million people in this country that are now unemployed. Jobless claims rose again this week up to 589,000. Start preparing for a once in a lifetime collapse everyone. Hoard cash and buy necessities. This is really getting serious.

$4 Trillion Dollar Nightmare Spooks The Bond Market

It appears that it may cost $4 trillion to clean up our banking system. The bond market immediately crapped a brick once word of this got out:

"WASHINGTON (Reuters) - The cost of restoring confidence in U.S. financial firms may reach $4 trillion if President Barack Obama moves ahead with a "bad bank" that buys up souring assets.

The figure far exceeds even the most pessimistic estimates of how great the loan losses might be because there is so much uncertainty about default rates, which means the government may need to take on a bigger chunk of bank debt to ease concerns.

Goldman Sachs economists said ideally the public sector would step in to remove the hardest-to-value assets, which would alleviate nagging worries about future losses and hopefully help get lending going again.

"Unfortunately, with an unprecedented meltdown in mortgage credit and a deep recession in the broader economy, there is a great deal of uncertainty about the value of almost every asset," they wrote in a note to clients.

The government would not necessarily have to spend the full $4 trillion to buy the assets. If it follows the model used in a Federal Reserve program to support consumer and small business loans, the government could potentially put up just 10 percent of the total.

Spending $400 billion would certainly be more palatable to Congress than $4 trillion. It may not even require that much additional funding. Economists estimate that perhaps $250 billion of what remains in the $700 billion bailout fund could be devoted to the "bad bank."

That money could buy bad assets, which would then be repackaged and sold to investors to raise more money which could then by recycled to buy more assets.

Stephen Stanley, chief economist at RBS Greenwich Capital, said although that sounds similar to the sort of financial engineering that spawned the credit crisis in the first place, it would be structured so that the central bank or whichever agency oversees the program is last in line to take losses.

"If things turn out so bad that the Fed ends up on the hook for $1 trillion in losses, then the financial sector, the economy, and everything else will be dead anyway," he said."

Quick Take:

I'm not making this stuff up guys. Click on the links. Sometimes this disaster feels like a bad dream to me. I never could have imagined that the USA would ever destroy itself.

So how did the bond market react? Take a look at the yields on the 10 year:

Well if that isn't an ugly reaction than I don't know what is! Yields soared throughout the day as the treasury market reacted to reality that they now must finance a new economic stimulus. The $4 trillion bailout news that came out of Washington put further pressure on treasuries later in the day. A bond market dislocation would not suprise me if the government doesn't start buying treasuries. Bond traders essentially called Ben's bluff by bailing out of treasuries today. We all know where that ends if the Fed tries to do this. Either way Ben is now screwed.

Making things worse is the fact that the bond market is already getting dwarfed with supply as we attempt to pay for this debacle. There was a 5 year auction today that yielded 1.82%. This was higher than expected according to Bloomberg. This is a bad sign folks. Demand for our paper is already rapidly deteriorating and we haven't even "gotten started" as we prepare to finance our massive government "bailout" spending.

Bottom Line:

I must admit that today was very depressing. Everything is pointing towards a total financial washout and reset. Our country is not prepared for such an event. We are a country that's filled with people that believe they are entitled to live the "good life". Americans have spent like drunken sailors and saved nothing for the last 25 years We have no idea what its really like to forced to sacrifice. There will be a lot of anger, violence, and rage before we accept it.

On the trading side it was a very positive day. My QQQQ's PUTS worked out nicely. I also put my short back on SPG this morning which worked out nicely because the stock really deteriorated towars the end of the day. SPG's earnings are out tomorrow.

Usually when you see that kinda price action somebody knows that their earnings are going to stink. I didn't get a chance to enter anymore shorts because there was such a big move down near the open. I don't like to short the hole. I only did it on SPG because their earnings are out tomorrow and the stock wasn't down too much when I picked up my PUTS. SPG's balance sheet is a mess folks, and I gotta think their earnings are not going to be pretty.

I am starting to wonder if the 4th quarter GDP may have also gotten leaked. Stocks were shredded across the board. I held both shorts into the close. I may hop out in the morning if we see a big move down on a bad GDP #.

Thats about it today folks. Lets all hope we can find a way out of this without too much suffering. Today's news and the bond market action was terrifying IMO.

Obama will make his move very soon in terms of how he plans to stimulate us out of this crisis. Lets hope he gets it right.

I have my doubts.