Karl Denninger and Matt Davio aka @MIssTrade solve the World’s Financial Problems from miss trade on Vimeo.

So who exactly is Karl Denninger?  Well his credentials are pretty extensive:

Author of “The Market Ticker”

Former CEO of MCSNet

Operator of TickerForum.com

Full Time Trader since 1998

Seeking Alpha Certified

Recipient of 2008 Reed Irvine Accuracy In Media Award

So without further ado, here’s Karl Denninger and his take on the future outlook.

“Karl, can you tell us more about your background and the roadmap to your success today? Knowing some of your credentials, your past experiences must have been diverse and interesting.”

I’ve been an entrepreneur since leaving college.  The most-noted part of my professional experience is probably running MCSNet in Chicago, a large regional Internet Company in the 1990s that was ultimately sold to Winstar in 1998.  I have been actively trading since that time, and have been around and in the market in one form or another since the late 80s.

“Why did you start your blog and the Ticker Forum? How have they impacted you?”

I began publishing The Market Ticker in 2007 due to what was clearly the same sort of outrageous BS that occurred in the 1990s.  We keep repeating the same mistakes and frauds – only the names change, not the fundamentals of the game.

In the ’90s the dominant “investment meme” was to hype companies based on “EBIDTA”, ignoring the fact that the “IDTA” was big enough to make sure that “E”, after subtraction, would never be positive. That didn’t stop many of these stocks from selling for $100, 200 or even $500/share.  Most were ultimately zeros and the entire scam was to suck in another fool to sell your shares to – before it all blew up in your face.

The 2000s were the same game, writ larger – suck in another idiot to buy your house, your CDO, your worthless debt securities.  All in the name of so-called “growth” – and all fraudulent.  When I caught WaMu paying dividends out of capitalized-interest (that is, negative amortization promises to pay in the future) on bubble houses in California where defaults had already started to ramp I decided that I had seen enough and that the public deserved to know – before they got robbed again.

The last time (in the 1990s) only a handful of people went to prison even though there were literally tens of thousands that conspired in the frauds that ripped off America.  This time the cast of evildoers was even larger, and so far, we’ve jailed one (Madoff) for real and have one more (Stanford) in the dock awaiting trial. I believe there should be literal thousands under indictment including the people at the ratings agencies, all the major bank executives and others, but unless the American people wake up they will never understand why their job is gone, their wealth is gone, their house is gone and none of it was an accident or “random” – it was all a premeditated and outrageous fraud.

“I believe you have been trading full-time since the late 90s. Is your current “job” trading and managing your sites? What does your day look like?”

I’m generally awake by 6:00 Central to scan the news flow, put finishing touches on various articles for The Market Ticker, get some breakfast, see my daughter off to school and pull myself a couple of espressos.

The day is spent with my face buried in four monitors hooked to a bank of computers and a “back office” cluster system built on Unix that runs basically everything (including my home, where all of this is centered) during the trading day.  I watch a wide panoply of market indicators, including interest rates, FX, market internals, a passel of proprietary indicators of my own design and a handful of individual issues, and post and follow the forum (at http://tickerforum.org) through the day.

After the market closes I typically put out a 15-20 minute technical analysis video on the day’s action, transcode and upload it, and then go about my evening, usually finishing up around 6:00 pm or so.

“I personally admire the work you do for your blog, especially the amount of data packed contents that many will not find via a typical financial media. What are some of the resources and tools you use for your extensive research?”

I have a “deck” of information sources, all boosted with technology; I make wide use of RSS along with contacts developed over the years and am a voracious reader.  God blessed me with the ability to speed-read material to discern whether there’s something of value to be delved into at a later time; those items get filed away for TICKERS throughout the day, and either get dispatched during the day or occasionally written “for tomorrow” in the evenings.

“Now anyone who follows you will agree that you’re not the most bullish guy when it comes to today’s economy.  You cover various topics such as housing, debts, government, corruption and the financial system that all lead to subpar data.  Of all things “bad”, what scares you the most in today’s environment?”

Debt – and our nation’s refusal to deal with the fundamentals of exponential growth functions.  Mathematical functions are immutable – you can argue with them all you want and paper over their effects for a while but doing so only makes the eventual outcome worse.

The fact is that we haven’t grown our economy for the last 10 years and perhaps for the last 20 – we’ve instead blown debt-based bubble after debt-based bubble, but our productive output hasn’t kept pace.  GDP has been overstated for years due to intentional manipulation of inflation statistics (CPI) which has given cover to people to claim “growth!” when in fact what has really happened is fancy accounting games supported by off-balance sheet exposures and grade-inflated ratings.  This malinvestment must come out of the system for a sound economy to emerge, and the longer we wait to do it the worse the pain we will suffer in the process.

“So in today’s market, what type of investments are you making?  Are you on the short side? I know you’re eyeing Best Buy (BBY) short for one.”

The market (since March 09) is currently engaged in what amounts to a liquidity-pumped blow-off and monetization of Federal and Agency debt – a continuation of the fraudulently-claimed “growth” of the 2003-07 period.  But the real economy says the “green shoot” meme isn’t just misplaced, it is an outright scam.  Our government claims 211,000 people lost their jobs in August, as just one example, but the household survey says the real number was nearly a million.  The difference?  People who gave up – the job market is so bad that nearly three quarters of a million working-age people simply stopped looking.  If you look at sales tax and shipping numbers – places where you actually count things instead of “seasonally adjust” them – you see a very different picture than what’s being shown to you on Tout TV.

All markets mean-revert over sufficient amounts of time.  Take the speculative froth out of the various markets and the S&P could easily trade under 400 in the next 12-18 months.  The spread between actual forward economic fair value and where the market is has never been higher in the post-war period where we have data solid enough to analyze.

“Any comments on your recent engagements with Dennis Kneale? I personally enjoyed the ‘debate’ very much. Any thoughts on the recent cancellation of his CNBC show?”

CNBC, like all major media outlets, is all about advertising.  In my opinion Dennis’ attack on the blogosphere was a huge mistake; the mainstream media has been absolutely derelict in their duties; it is the alternative media that has been pulling back the curtain of fraud for the last several years.  In 1999 and 2007 CNBC was unabasedly bullish and in fact in early 2000 Jim Cramer (before he was “Mad Money” on CNBC) made a famously-bad call that any company that wasn’t “new economy” was trash – he went on to put forward his “buy list” that, had you listened to him, flatly wiped you out.  In 2007 the number of calls for 1600+ on the SPX from CNBC were deafening.  How did that work out for those who believed?

Just watch CNBC’s ADVERTISING and you’ll see where their focus is.  Their advertisers make nothing if you’re not in the market in some fashion and their corporate parent (GE) will suffer horribly if credit expansion can’t be re-established.  Both are trying to fight the math as are Bernanke, Treasury and Congress – this can only be done through more bubble-blowing and lies, and eventually the piper must be paid.

“Pax Americana” and selling hope is a time-worn strategy that unfortunately for Dennis went beyond threadbare into the realm of willful ignorance of reality.  Being in a badly-handicapped timeslot certainly didn’t help; what CNBC needs in that period is someone willing to take the other side, but how do they put someone like that (such as myself) on the air given their corporate parent’s interest along with those of their advertisers?  He was given an impossible task that was destined to blow up in his face, and it did.

Here’s the actual clip of the debate.

[There is a video that cannot be displayed in this feed. Visit the blog entry to see the video.]

“Lastly, knowing what you know, what advice would you give to your audiences as far as investments in the years to come?”

Return of capital is more important than return on capital.  Put another way, the first rule of investing is “don’t lose money!”  Everyone wants to chase a winner; this, unfortunately, is why most investors lose compared to the markets over time.

It is fine to speculate with money you can afford to lose, but your core capital should never be exposed to a market that is trading on bubble economics unless you’re close to the door and can leave fast – and for most investors that’s not possible with their “long-term” funds.  The key to long-term outperformance (the real goal in any such portfolio) is to STAY OUT during times like this, and take advantage of long-term (and deferred) tax advantages during periods when the markets are trading on fundamental value.  I’m not interested in someone’s one-year or even two or three-year return – my interest lies in what you can do over decades.

I have to live on my portfolio; if I lose my core capital I get to hand out carts at WalMart or ask “would you like fries with that?”  So far I’ve got more than a decade under my belt since “formal retirement” with a portfolio beta around 0.5 and a total return that has utterly destroyed the S&P 500′s over that time period.  That’s the goal for any long-term investor, and in that I’m succeeding.

In the early 1990s I took advantage of those who had to “puke assets” at a nickel on the dollar to build a business.  Severe economic dislocations bring these opportunities with the really big events like this happening only once in a lifetime.  I believe we are in the early stages of this sort of event, and you will be able to buy hard assets – land, buildings, machinery – for a nickel on the dollar or less in the coming years.  If I’m right, and you are liquid and have funds, you will over the next decades be able to capitalize on this and make a fortune.  There were thousands who held their cash tight to the chest during the early parts of the 1930s and when the opportunity arose bought for cash, then sat patiently and waited for the money to come to them.  That’s not “get rich quick” but it IS “get rich certain” over the course of 20 or more years.

Remember that it is risk-adjusted return that matters, not “pure alpha”, especially when the market is trading on hype and hope.  Until and unless we see the fraud outed and credit contracts to a sustainable level you’re not investing – you’re gambling.   In my opinion core capital should never be deployed in such a market – wait for the better opportunity.

Thanks again for the participation Karl.  Definitely enjoyed the responses.  Hope the readers enjoyed it as much as I did.