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The Bailout Plain Truth and the Silent Economic Depression

Stock-Markets / Credit Crisis 2008 Sep 09, 2008 - 07:43 PM GMT

By: Mike_Stathis

Stock-Markets Best Financial Markets Analysis ArticleMy 2 cents on the Bailout
Without even looking, I’d be willing to guess that 2 out of 3 articles on most financial blogs are on the bailout of the GSEs. I’m willing to bet it will dominate headlines for months to come. Before I move on to more relevant material, I think Americans need to start asking some critical questions. If they were “too big to fail” as Paulson, Bush, Bernanke and other cronies insist, why were they allowed to operate with exemptions from the SEC Acts of 1933 and 1934? If they were “too big to fail” why didn’t Washington take over the GSEs in 2004 after the accounting fraud was detected. If they were “too big to fail” why were they transformed into shareholder firms with virtually no regulation, no accountability, no transparency and allowed to act irresponsibly? The implied backing by the government made it certain that a bailout was eminent. But doesn’t government backing also come with accountability?

Anyone who believes the losses from Fannie and Freddie will be limited to Washington’s $25 billion figure are naïve. Keep believing the same liars who have done nothing but mislead you throughout this entire crisis and you will be left with nothing. I’m confident the losses will be at minimum $100 billion, and possibly $200 billion. But I wouldn’t be surprised if the losses were higher. How did I come up with these numbers? Using similar techniques to forecast a 30% to 40% correction in oil when it spiked to $147. If you really want to know, email me and I’ll tell you.

More Pandering
McCain and Obama talk about the need for more accountability, specifically in the financial industry. Apparently, they don’t seem to understand the meaning of the word. Accountability to me means those who engage in unfair business practices, fraud and other exploitative activities face the jury. Yet, Franklin Raines, former CEO of Fannie Mae is doing quite well after accounting fraud was exposed under his watch. Let me be clear. In my opinion, Mr. Raines belongs in prison, along with hundreds and perhaps thousands of others who orchestrated this catastrophe with reckless disregard for anyone except their own selfish greed. Instead, Obama is consulting him for advice on the housing crisis.

More Lies from Bush
Bush told Americans this bailout would ensure a more stable housing market for Americans. What he didn’t say is the obvious….it isn’t going to help current homeowners. This record-setting bailout only works to refuel America’s swollen credit bubble. And in the process, it only helps the banks. If taxpayers are going to fit the bill for this mess, don’t you think all executives from Fannie and Freddie from the past 8 years should be forced to return all compensation they received? If they don’t think that is fair, ask them what they think about a 10-year prison sentence.

Short-term Implications
In the short-term, mortgage rates will drop since credit and liquidity risk for the mortgage machine has eased. In addition, the dollar will rise (as long as no new banking concerns surface) while gold and oil will fall (independent of any weather related damage in the Gulf or announcements by OPEC to cut production). But the problem isn’t so much that consumers can’t find good mortgage rates. Rates have been very low for many years. The real problem is trying to convince people to buy homes as prices continue to fall while inflation soars. The idiots in Washington seem to think we can consume our way out of this mess and they will be proven wrong…again, just as they were a few years ago.

So for now, forget Fannie and Freddie. It was obvious what would happen. It’s a played-out soap opera for now. If it wasn’t obvious for months what would happen, you might consider changing who you listen to for insight. I won’t waste anymore time dealing with this issue until after November, when the ultimate direction of the GSEs has been determined by the next president. And if you think the bailout will give the stock market a permanent boost you should apply for a spot on CNBC because you have no idea what’s going on. We are just now in the early stages of the de-leveraging process. And it’s going to get really nasty, not just in the US, but around the globe.

More Realities on Greenspan
In 2006, I proved irrefutably in Ph.D thesis-like fashion that the economy was very weak, with no real improvements registered since the dotcom collapse. This thesis was turned into a book, “America’s Financial Apocalypse,” originally meant for institutional investors but later revised for the average Joe. Yet, it took a lot longer to write than Alan Greenspan’s mysterious Ph.D thesis, which for some reason NYU has refused to release. Hey Alan, are you going to come clean? At least admit you screwed the US economy and the American people. It might actually improve your horrendous reputation.

While millions of consumers are struggling, Alan Bubblespan appears to be doing quite well. He now works for Paulson & Co., which gladly hired him after clearing $13 billion from the sub-prime mess. That’s $13 billion transferred from previous homeowners to a hedge fund, compliments of the Bubble Maestro. The man obviously has no conscious.

Let’s forget about Alan for now. The history books will take care of him. I want to move forward and focus on what’s next since I haven’t seen many out there with the insight and motivation to tell you. Those who have been reading my articles and books or listening to me on the radio know I have been dead right. I’ll review some of these forecasts shortly.

History Always Repeats
Can you imagine what would happen to the bank, Wall Street, real estate and mortgage executives if they were in China? They wouldn’t be around by now. But this is America, where CEOs commit accounting, shareholder and taxpayer fraud, destroy companies and leave with $200 million while taxpayers and investors end up screwed. It’s happened in the past; not just during the dotcom bubble but over and over for decades. And of course it’s happening now. You better believe it’s going to happen again and again unless you call for the heads of these crooks and vote every single member of Congress out of office.

As we know, politicians will call for action and accountability but only a few scapegoats will be selected - a couple of guys from Bear Stearns, Credit Suisse and a few others. But not the CEOs. Never the CEOs. That would be un-American. Let me be clear. America is a mess and Washington is a joke. If there is no real punishment for negligence and fraud, of course they aren’t going to be on the ball. Of course it’s going to happen again. It’s the same rules of conduct for CEOs.

President Bush has created quite a legacy for himself. One that might only be equaled by by Alan Greenspan. But of course most people have short memories. As a consequence, it is likely that in the future, there will be another Bush in office and another Greenspan as Fed chairman. Now I understand why it’s so important to study history.

I Repeat…
I continue to be amazed by so many out there, from the pundits with their agendas to the so-called experts who zoom in on every grain of short-term optimism with an electron microscope while explaining away the reality. Not much has changed since I last wrote. Let me repeat in case you haven’t been following me. We are going to see…

 An earnings meltdown
 Hundreds of bank failures over the next few years
 Hundreds of hedge fund blow ups
 Soaring corporate defaults
 A huge junk bond market
 A large oil correction which will rebound and make new highs down the road
 Real estate prices collapse by 30% (35% worst case scenario)
 DJIA falling to the low 10,000, and possibly to the 9000s thereafter
 And probably somewhat of an improvement in certain sections of the economy in 2009, specifically housing, due to a decrease in ARM resets
 Soaring problems in housing in 2010 and 2011.
 Soaring mortgage and interest rates in 2011
 Global recession
 15 million foreclosures by 2016
 Several defaults by US cities
 Resurfacing of the pension crisis
 Bailout for banks, autos and airlines
 A rebound in the global economy in a few years for most nations with Asian and Latin America leading the way, while the USA lingers
 I can almost guarantee you that by 2012, oil, gold and inflation will be at new highs while the dollar will have reached new lows.

And much more. Take note that many of these forecasts were made in 2006 and have not been changed. Now if we could just find one Washington or academic economist who made forecasts beyond a month that held up, we might be getting somewhere. Don’t hold your breath.

If you think I’m a perma bear or some doom and gloomer you are very wrong. I am a realist and I get paid to be right. I don’t get paid to sell anyone lies like most of the pundits. Remember, I’m not selling anyone one gold or some bear fund. I’m writing to expose these liars and guide you through this disaster. I’m writing to help you understand that you need to stop listening to the media because they are lying. Some of them are just that stupid that they believe the crap they are fed by Washington and the “experts.” When the US economy turns around you had better believe I will be the first to write about it with excitement. Based upon the changes needed, I do not anticipate that happening for several years.

There is only one way to stop the pain. Let the wounds bleed out and heal on their own. Thereafter, healthcare must be universal, free trade must be restructured, and America’s badly broken free market system must be restructured. Unfortunately, those reforms simply aren’t going to happen as long as the media continues to lie and as long as lobbyists exist, because as you might realize by now, corporate America controls Washington. And together with the banks, the media has partnered with these elitists to maintain their control.

Dollar Bulls Watch Out Below
Now let’s focus on the dollar because quite frankly I’m getting a bit annoyed at those who are claiming the rally is real. Anyone who is remotely familiar with asset price movements knows that even the biggest declines are eventually met with corrections, just like soaring oil is correcting. You’ll recall I first mentioned the likelihood of a 30% to 40% correction when oil was making its highs, so the current sell-off is not at all surprising. The key thing to focus on is the long-term trend. Until it changes you need to understand that the dollar is headed for new lows. I cannot say when. But I will guarantee you it is unless there are significant fundamental changes, which would take several years of very aggressive domestic and foreign economic reform.

Keep in mind that the weakness in the dollar is a reflection of the inherent weakness in the US economy. The dollar is the tail of the economy. And as we know, the tail does not wag the dog unless you live in la-la land like so many in Washington. So for those of you who seem to think that a strong dollar will strengthen the economy you are wrong. Only by creating a strong economy will the dollar strengthen. And I am talking about a truly strong economy; one that creates high-quality jobs in America, not overseas; one that leads to surpluses instead of deficits. And one that leads to affordable basic necessities. In fact, the only recent strength in the economy has been due to a weak dollar which has boosted exports.

Once again, if you dare venture into the US stock market, I advise you stick to health care and oil. I like UnitedHealth (recently sold and waiting for the pullback to bottom) and Pfizer. As for oil, I advise you to stick with the oil trusts. It’s a great time to enter (or reenter) positions in some of these trusts like I plan to do. I’ll add that some of the oil explorers are beginning to look attractive, but I currently do not see anything absolutely compelling. If you want an idea where oil is ultimately headed, ask God. Anyone who claims they know for certain is either an idiot or lying. For whatever it’s worth, I made some forecasts a month ago, which show probabilities for each price ranges. Of course there are always a few other names in other industries that will have very compelling valuations, but my call on healthcare and oil is for passive investors.

If I turn out to be right, the smart money is gearing up to short the dollar and buy oil….not now, but soon. As well, they are waiting for compelling buy signals for gold and silver. For now, the GSE bailout is sure to force both down. The suckers are loading up on the dollar. What they fail to realize is that the real dollar crisis has yet to occur.

Fooling You with Simpleton Arguments
The pundits and economists continue to make simpleton arguments, such as the current conditions are no way like the depression. They claim that the government made many changes that would prevent the same thing from happening again. They claim that depressions cause deflation. Sure. But that does not mean inflation cannot be the lead into a depression. If things are so different now, why is the US approaching the price declines in real estate seen during the depression? If things are so different now, why has the Fed had to resort to measures not seen since the depression? If things are so different now, why did the New Deal solution to the depression era real estate crisis (Fannie Mae) collapse? All of you guys in denial really need to get with the program.

The Next Great Depression
No we won’t see 33% unemployment like in the depression. Why? Well for starters, Washington fudges all of the data. I have discussed this in detail in the past. As well, the bar for what are considered jobs has been lowered since the depression. Today, you can say you’re employed if you’re a part-timer, you work at McDonalds, you’re a valet or massage therapist (no disrespect to any of you who might be employed in these occupations but let’s face it, they don’t give you a pension plan or healthcare benefits).

Instead of massive unemployment, we will see significant unemployment combined with massive underemployment. Already, my estimates are that the real unemployment rate is approaching 9% while the underemployment rate is 20 to 25%. Over the next few years, the underemployment rate will continue to increase and could top 50%. As well, we won’t see banks close their doors because we have the FDIC. Sure, it will run out of reserves most likely within the next 2 years, but that doesn’t matter because the Fed will just print more money, causing higher inflation. All of this will put further downward pressure on living standards. The devastation won’t be due to a crisis, it will be only heightened by a crisis. The real devastation will be due to the transfer of wealth and jobs overseas. It will be a silent depression.

The Silent Depression
In a few years, the real estate and banking crisis will have cooled off and Washington will start reporting much improved numbers. But things will only get worse. Real wages won’t budge, inflation for basic necessities will remain high and most likely be higher, and job quality will continue to decline. It will be a silent depression because there will be no crisis. You won’t feel the full effects on any given day. If you are in the lucky majority, you will go to work and carry out your life as usual. But you just won’t be able to make ends meet like in the past. Each year it will get worse so you’ll spend more on credit. And when you retire, you will know that you have lived through a depression because you will run out of money. The smaller minority will have a much worse fate.

So What’s Next ?
Besides the forecasts discussed above, I am willing to bet there will be a massive collapse of the CDS market. I have mentioned this several months ago but it is worth mentioning again. Most likely, once the newly proposed changes for these derivatives take affect in a few months, Washington will think the problem has been fixed. But I’m willing to bet we are going to see a huge derivatives meltdown which will most likely be triggered by hedge fund failures. Whatever happens, I can state with confidence that the end is far from over. Remember, most banks still have to unwind the 30x leverage. And the margin requirements are increasing each day for hedge funds. The winding down process is going to create a global apocalypse. YOU HAD BETTER BE PREPARED.

On a positive note, it’s not the end of the world so go out and have a beer and try to humor yourself while making fun of all of the dirty, rotten, crooked, lying idiots who robbed you blind. Meanwhile, they’ll be sitting in their yachts waiting for the storm to pass so they can get in on the next scam. This is the reality of America after all.

I’ve received a number of inquiries by accredited investors asking me to start a hedge fund. A fund requires a full-time (actually overtime) commitment that would prevent me from splitting my duties between the public markets as an investment strategist to hedge funds and the private markets as a venture partner, where I am involved in healthcare telemetry. This is where my real focus currently lies. But with the venture capital market drying up with no end in sight, I just might reconsider a complete shift to the public markets. So for those of you whom I’ve failed to respond, I’ll let you know if things change. Thank you for your kind comments and support.

By Mike Stathis

Copyright © 2008. All Rights Reserved. Mike Stathis.

Mike Stathis is the Managing Principal of Apex Venture Advisors , a business and investment intelligence firm serving the needs of venture firms, corporations and hedge funds on a variety of projects. Mike's work in the private markets includes valuation analysis, deal structuring, and business strategy. In the public markets he has assisted hedge funds with investment strategy, valuation analysis, market forecasting, risk management, and distressed securities analysis. Prior to Apex Advisors, Mike worked at UBS and Bear Stearns, focusing on asset management and merchant banking.

The accuracy of his predictions and insights detailed in the 2006 release of America's Financial Apocalypse and Cashing in on the Real Estate Bubble have positioned him as one of America's most insightful and creative financial minds. These books serve as proof that he remains well ahead of the curve, as he continues to position his clients with a unique competitive advantage. His first book, The Startup Company Bible for Entrepreneurs has become required reading for high-tech entrepreneurs, and is used in several business schools as a required text for completion of the MBA program.

Restrictions Against Reproduction: No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the copyright owner and the Publisher. These articles and commentaries cannot be reposted or used in any publications for which there is any revenue generated directly or indirectly. These articles cannot be used to enhance the viewer appeal of any website, including any ad revenue on the website, other than those sites for which specific written permission has been granted. Any such violations are unlawful and violators will be prosecuted in accordance with these laws.

Requests to the Publisher for permission or further information should be sent to

Books Published
America's Financial Apocalypse: How to Profit from the Next Great Depression . Condensed Ed. Copyright © 2007.
Cashing in on the Real Estate Bubble . Copyright © 2006.
America's Financial Apocalypse: How to Profit from the Next Great Depression . Copyright © 2006.
The Startup Company Bible for Entrepreneurs: The Complete Guide to Building Successful Companies and Raising Venture Capital . Copyright © 2004 and 2005.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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