Christopher Whalen doesn’t expect the good times to last much longer -- especially for the big banks.

Tech Ticker
11/17/10
Millions of Americans are still struggling to find work in the aftermath of the 2008 financial crisis. Meanwhile, Wall Street is enjoying another banner year, earning an estimated $19 billion in 2010, according to a report by New York State Comptroller Thomas DiNapoli. That would make it the fourth-most profitable year for the industry.

Christopher Whalen, co-founder of Institutional Risk Analytics, doesn’t expect the good times to last much longer -- especially for the big banks. Whalen thinks they’re headed for a world of trouble -- although if you follow his comments, you know he’s been saying that for at least a year. (See: The "Real" Economy Is Dying: Q4 "Going to Be a Bloodbath," Whalen Says.)

"The crisis is going to come when people realize this current GDP level… is normal," he says, referring to the economy's 2% annual growth rate last quarter. That realization will lead to a sell-off in bank stocks, he predicts. “I don’t see how they (the stocks) can go up if we have down revenues and uncertain GDP.”

The heart of the problem remains flawed and risky real estate loans banks are still holding; Whalen says two-thirds of big banks assets are shrinking as a result.

“There’s a lot of losses in the system that investors haven’t seen yet,” he tells Henry in this clip. “All the industry is willing to do is admit to as much loss as they have cash flow, this quarter,” something banks are allowed to do now that the mark-to-market accounting rules have been removed.

Compounding the problem is a low interest rate environment that is becoming less beneficial to banks. Whalen says net interest rates margins are shrinking – meaning the spread between the rate banks borrow at and the rate they collect on their loans is shrinking, as older loans expire or get refinanced.

Zero interest rates are also making matters worse for the real economy, as Whalen details in his new book Inflated: How Money and Debt Built the American Dream.

Ben Bernanke's zero-rate policy is causing havoc with corporate pension funds expecting and needing to make greater returns to meet funding obligations, he says. “I think we’re going to have big trouble next year if we don’t let rates go up. Even 1% compounded is better than zero."

Fortunately, it’s not all bad across the board. The smaller, regional banks, are recovering. US Bancorp and BB&T, are two Whalen speaks favorably of, although, to avoid conflicts, he does not personally own any bank stocks.

Chris Whalen: California Will Default On Its Debt (makes Ireland look incidental)

Tech Ticker
11/16/10
Municipal bonds have plummeted in recent days, as investors have suddenly focused on huge state and city budget deficits that there's no easy way to fix.

Nowhere has this collapse been more visible than California, which faces a massive $25 billion shortfall and red ink for as far as the eye can see.

After years in which every looming financial crisis has been met with a government bailout, you might think that the same solution awaits California, as well as all the other states that have huge obligations that they can't afford to meet.

But this time that may not happen, says Chris Whalen, a financial industry analyst and Managing Director of Institutional Risk Analytics.

In fact, Whalen thinks that California will default on its debt--hammering all the pension funds and other investors who have loaded up on apparently safe state bonds.

The state won't immediately default, Whalen says. It will start by issuing the same sort of IOUs that it issued to by itself time during its budget crisis last year. But, eventually, the debts will have to be restructured, and this will result in those who own California's bonds receiving less than 100 cents on the dollar.

Why won't California just get a bailout?

Because the Republicans now control Congress, Whalen says. And also because, if California gets bailed out, dozens of other states will immediately line up with their hands out. The public is fed up with bailouts, Whalen says--and eventually, the country will be forced to face up to its bad debts and write them off.

Of course, if Whalen is right, the country could have a major crisis on its hands. California is hardly the only state in trouble (click here to see the worst ones), and pension funds and other "safe" investments that Americans depend on will get hammered if states begin to default.

Fixing state and local obligations will also require the renegotiation of pensions and salaries that government workers have long since taken for granted. And they certainly won't give those up without a fight.

Of Course The Fed's Latest Plan Won't Work, "We're Still Deleveraging!" Gary Shilling

Beginning in 1982, Americans spent their

way to apparent prosperity

Tech Ticker
11/15/10

The theory behind most of what the Federal Reserve does to stimulate the economy is this: If we make money cheaper, people will borrow more of it--and then they'll start spending again.

That theory works in most recessions. When the economy begins to weaken, the Fed cuts interest rates. Banks, companies, and consumers see that it now costs less to borrow money to buy the things they want to buy. So they borrow money and buy them. And the economy strengthens again.

But we aren't in a normal weak economy, says economist Gary Shilling of A. Gary Shilling and Co. We're in a "deleveraging" economy. And that means that we will keep reducing our debts and borrowing, no matter how cheap money gets.

The key to understanding the difference between today's economic weakness and normal economic weakness, Gary says, is to look at the past 30 years.

Beginning in 1982, Americans spent their way to apparent prosperity. Savings rates plummeted, as consumers spent almost everything they earned. Home equity withdrawals soared, as consumers realized they could use their rapidly appreciating houses as personal ATM machines. And, across the economy, total debt surged to a previously unheard-of 375% of GDP.

But now all those forces have reversed. Savings rates are climbing again, as consumers realize they have almost nothing left to retire on. Home equity withdrawals have ceased, because house prices have stopped appreciating and started falling (Gary thinks they'll fall another 20%). And consumers are looking at ways to reduce their debts, not borrow more money.

These trends will continue for at least another decade, Gary Shilling thinks. He lays out this theory in his new book, "The Age Of Deleveraging."

The economy will grow in the next decade, Gary says, but it will grow much more slowly than it has grown in the past. Unemployment will remain high. Consumers will continue to be forced to embrace a new frugality. And no matter how cheap the Fed makes money, overall borrowing will continue to decrease.

In the process of this, stocks will do poorly. House prices will fall another 20%. Only Treasury bonds will do well.

October Jobs Report: Just another Government Fabrication

Government changed the "seasonal adjustment"

it made to the payroll numbers--and,

in so doing, boosted the number of "jobs"

created in October by 100,000.

(Rome continues to burn)

By Henry Blodget
Business Insider
11/13/10
Remember last Friday's payrolls numbers--the ones that blew away expectations about the number of jobs created and got everyone talking about recovery again?

Well, even at the time those payroll numbers were confusing, because the other part of the jobs report--the "household survey"--showed yet another crappy number.

But by pointing to the crappy household number and ignoring the payroll number, the bears seemed to be trying to make lemons out of lemonade.

But it turns out that there was a simple reason why the payroll numbers looked so good--a reason that had nothing to do with underlying strength of the jobs market.

What was that reason?

The government changed the "seasonal adjustment" it made to the payroll numbers--and, in so doing, boosted the number of "jobs" created in October by 100,000.

Stephanie Pomboy of MacroMavens (via John Mauldin) explains:

• " 'The seasonal bar which the payroll data must jump was (inexplicably and dramatically) lowered from prior Octobers.
• " 'Thus, in October 2009, the BLS set the bar at 870,000 jobs, similar to the 840,000 it anticipated in October 2008. This year, by contrast, it lowered the bar to 768,000. Mumbo, jumbo, payrolls presented "an upside surprise" of 100,000.'

Alan Abelson of Barrons (again via John Mauldin) adds the following:

"According to John Williams at Shadow Government Statistics, the BLS' fiddling with the figures via what he calls 'seasonal-factor games' actually created 200,000 phantom jobs last month. John cites such finagling as the reason his prediction of an October decline and a rise in the jobless rate was wrong. It also explains why seasonally adjusted payrolls were revised upward by 110,000 in September, including 56,000 in August."

In other words, it wasn't that there were a surprising number of jobs created in October. It was that the government changed its "seasonal adjustment" assumption in a way that made it look as though there were a surprising number of jobs created in October.

Now, seasonal adjustment is an art not a science. And maybe the new seasonal adjustment is more defensible than the old one. But if our government is going to publish a number like this that represents such a major "surprise," we would expect it to at least be upfront about the reasons for the surprise.

And in this case those reasons had NOTHING to do with the jobs market, and EVERYTHING to do with the seasonal adustment assumption.

Jim Grant interview with Henry Blodget

Jim Grant, one of the country's premier financial analysts and historians, has had a front row seat on Wall Street for more than three decades. Unlike most people who work on Wall Street, moreover, Jim actually works on Wall Street: His office is right across the Stock Exchange.

A former Barron's staff writer, Jim founded the beloved Grant's Interest Rate Observer close to 30 years ago. Even in an age of 24/7 online news, the publication remains one of the leading authorities on debt, bonds, Japan and the economy.

Jim has a stuffed bear in his office and a sinking-Titanic paperweight on his desk. We sat down with him recently for an exclusive interview to discuss an array of issues, including a possible bond bubble, the state of the union, and the economy.

Watch below the full half-an-hour interview. We'll be publishing highlights from it over the next few days.

This interview is part of our Inspiring Performers series, presented with limited commercial interruption.