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Post Mortem for the Stock
Market
By Mike Whitney
"There’s class warfare, all right, but it’s my class that’s
winning." Investment tycoon, Warren Buffett
05/01/07 "ICH"
-- -- -The real estate market is crashing faster than anyone
had anticipated. Housing prices have fallen in 17 of 20 of the
nation’s largest cities and the trend lines indicate that the
worst is yet to come. March sales of new homes plummeted by a
record 23.5% (year over year) removing all hope for a quick
rebound. Problems in the subprime and Alt-A loans are
mushrooming in previously “hot markets” resulting in an
unprecedented number of foreclosures. The defaults have slowed
demand for new homes and increased the glut of houses already on
the market. This is putting additional downward pressure on
prices and profits. More and more builders are struggling just
to keep their heads above water. This isn’t your typical
1980s-type “correction”; it’s a full-blown real estate cyclone
smashing everything in its path.
Tremors from the real estate earthquake won’t be limited to
housing—they will rumble through all areas of the economy
including the stock market, financial sector and currency
trading. There is simply no way to minimize the effects of a
bursting $4.5 trillion equity bubble.
The next shoe to drop will be the stock market which is still
flying-high from increases in the money supply. The Federal
Reserve has printed up enough fiat-cash to keep overpriced
equities jumping for joy for a few months longer. But it won’t
last. Wall Street’s credit bubble is even bigger than the
housing bubble---a monstrous, lumbering dirigible that’s headed
for the cliff. The Dow is like a drunk atop a 13,000 ft cliff;
inebriated on the Fed’s cheap “low-interest” liquor. One wrong
step and he’ll plunge headlong into the ether.
The stock market cheerleaders are ooooing and ahhing the Dow’s
climb to 13,000, but it’s all a sham. Wall Street is just
enjoying the last wisps of Greenspan’s helium swirling into the
largest credit bubble in history. But there’s trouble ahead. In
fact, the storm clouds have already formed over the housing
market. The subprime albatross has lashed itself to everything
in the economy ---dragging down consumer confidence, GDP and
(eventually) the stock market, too. No one will be spared.
So why the stock market keep hitting new highs?
Is it because foreign investors believe that American equities
will continue to do well even though the housing market is
slumping and GDP has shriveled to the size of a California
raison? Or is it because stockholders haven’t noticed that the
greenback getting clobbered every day in the currency markets?
Or, maybe, investors are just expressing their confidence in the
way the U.S. is managing the global economic system?
Is that it---they admire the wisdom of borrowing $2.5 billion
per day from foreign lenders just to keep the ship of state from
taking on water?
No, that’s not it. The reason the stock market is flying-high is
because the Federal Reserve has been ginning up the money supply
to avoid a Chernobyl-type meltdown. All that new funny-money has
to go somewhere, so a lot of it winds up in the stock market.
Evergreen Bank’s Chuck Butler explains the process in Thursday’s
Daily Pfennig:
“The Fed may have quit publishing the M3 data, but they continue
to publish all the data that goes into the calculation and our
friends over at Shadow Government Statistics have a chart which
demonstrates
why the Fed decided to keep M3 under wraps. A look at the chart
shows the Fed is pumping up broad money supply at an astounding
rate of 11.8% per year! All of this rapid money supply growth is
reflected in an increase in equity prices. The stock market
needs to rise just to keep pace with all of this newly-created
money. As long as the Fed doesn't rock the boat with another
rate hike or by turning off the spigot of money flowing into the
markets, the equity markets will continue to run.”
Ah-ha! So the Fed gooses the money supply, stocks shoot up, and
everyone’s happy---right?
Wrong. Growth in the money supply should (closely) parallel
growth in the overall economy. So if GDP is shrinking (which it
is) and the money supply is increasing then—Viola!—inflation.
(“11.8%” to be precise)
Of course inflation doesn’t affect the investor class or their
fellow-scoundrels at the Fed---the more money floating around
the markets the better for them. It’s just the opposite for the
pensioner on a fixed income or the salaried wage-slave who gets
a 15-cent pay raise every millennia. They end up getting ripped
off with every newly-minted greenback.
But then that’s the plan---to shift zillions from one class to
another through massive equity bubbles. All it takes is
artificially-low interest rates and a can of WD-40 to keep the
printing presses rolling. It’s so simple we won’t dignify it by
calling it a “conspiracy”. It’s just a swindle, pure and simple.
But it never fails.
Every time the Fed prints up another batch of crisp $100 bills;
they’re confiscating the hard-earned savings of working class
people and retirees. And, since the dollar has dropped roughly
40% since Bush took office in 2000; the government has absconded
with 40% our life savings.
That’s the truth about inflation; it is taxation without
representation, but you won’t find that in the government’s
statistics. In fact, the Consumer Price Index (CPI) deliberately
factors out food and energy so the working guy can’t see how the
Fed is robbing him blind. The only way he can gauge his losses
is by going to the grocery store or gas station. That’s when he
can see for himself that the money he works so hard to earn is
steadily losing its purchasing power.
The big question now is how long will it take before foreign
creditors wise up and see the maxed-out American consumer is
running out of steam. As soon consumer spending slows in the US;
foreign investment will dry up and stocks will tumble. China and
Japan have already slowed or stopped their purchases of US
Treasuries and China has stated that they plan to diversify
their $1 trillion in US dollars in the future. This has lowered
demand for the dollar and decreased its value in relation to
other currencies. (The dollar hit a new low just last week at
$1.36 vs. the euro)
A slowdown in consumer spending is the death-knell for the
dollar. That’s when there’ll be a stampede for the exits like
we’ve never seen before—with each of the world’s central banks
tossing their worthless greenbacks into the jet-stream like New
Years’ confetti. According to Monday’s Washington Post that
moment may have already arrived. As the Post’s Martin Crutsinger
says, “Consumer spending rose at the slowest rate in five months
in March while construction activity managed only a tiny gain,
weighed down by further weakness in housing”.
The connection between housing and consumer spending is
critical. Not only has housing been the main engine for growth
in the US in the last 5 years; it has also accounted for 2 out
of every 5 new jobs and hundreds of billions in additional
spending through home-equity extractions. A downturn in consumer
spending means that foreign investors will have to look for more
promising markets abroad; triggering a steep reduction in the
amount of cheap credit coming into the country via the $800
billion trade deficit. This will slow growth in the US while
further weakening the dollar.
Can you say stagflation?
The present currency and economic crises were brought on by
Bush’s unfunded tax cuts, unsustainable trade deficits, and the
Fed’s hyperinflationary monetary policy. These policies were
executed simultaneously for maximum effect. They were entirely
premeditated. Many people now believe that the Bush
administration and the Federal Reserve are intentionally
creating an “Argentina-type meltdown” so they can privatize
state owned assets and usher in the North American Union--the
future “one state” alliance of Canada, Mexico and US--along with
the new regional currency, the Amero.
We’ll see.
Nevertheless, monetary policy is not the only reason the stock
market is headed for a fall. There’s also the jumble of scams
and swindles which have been legalized under the rubric of
“deregulation”. New rules allow Wall Street to take personal
liabilities and corporate debt and repackage them as precious
gemstones for public auction. It’s the biggest racket ever.
Consider the average hedge fund for example. The fund may have
originated with $10 billion of its own cash and swelled to $50
billion through (easily acquired) credit. The fund manager then
creates an investment portfolio that features CDOs and Mortgage
Backed Securities (MBS) to the tune of $160 billion. The
majority of these “assets” are nothing more than shaky subprime
loans from struggling homeowners who have no chance of meeting
their payments. In other words, another man’s debt is magically
transformed into a Wall Street staple. (Imagine if you, dear
reader, could sell your $35,000 credit card debt to your drunken
brother-in-law as if it was a bar of gold or a vintage Ferrari.
That, believe it or not, is the scam on which bond traders
thrive)
So, the fund is leveraged, the assets are leveraged and (guess
what) the investors are leveraged too---either buying on margin
or borrowing oodles of cheap, low interest credit from Japan to
maximize their profit potential.
Get the picture; debt x debt x debt = maximum profit and
skyrocketing stock prices. That’s why the face value of the
market’s equities far exceeds the world’s aggregate GDP. It’s
all one, big debt-Zeppelin and it’s on a quickly-descending
flight-path to planet earth.
KABOOM!
Deregulation works like a charm for the gangsters who run the
system. After all, why would they want rules? They’re not
thinking about capital investment, productivity or
infrastructure. They’re not building an economy that serves the
basic needs of society. They’re looking for the next big
mega-merger where two monolithic, maxed-out corporations join in
conjugal bliss and create a mountain of new credit. That’s where
the real money is.
Wall Street generates boatloads of cyber-cash with every merger.
This pushes stock prices up, up and away. Deregulation has
turned Wall Street into the biggest credit-generating Cash-Cow
of all time—spawning zillions through seemingly limitless
debt-expansion. These virtual dollars were never authorized by
the Federal Reserve or the US Treasury—they emerge from the
black whole of over-leveraged uber-transactions and the magical
world of derivatives trading. They are a vital part of Wall
Street’s house of mirrors where every dollar is increased by a
factor of 50 to 1 as soon as it enters the system. Assets are
inflated, debt is converted to wealth, and fiscal reality is
vaporized into the toxic gas of human greed.
Doug Noland at Prudent Bear.com explains it like this: “We've
entered a euphoric phase of financial arbitrage capitalism with
extreme Ponzi overtones, a pyramid scheme of revolving credit
rackets and percentage spread plays completely abstracted from
any reality of fruitful activity. The reason we don't even call
"money" by its former name anymore is precisely because we
realize at some semi-conscious level that "liquidity" is not
really money. Liquidity is a flow of hallucinated surplus
wealth. As long as it flows in one direction, into financial
markets, valve-keepers along the pipeline, like Goldman Sachs,
Citibank, or the hedge funds, can siphon off billions of buckets
of liquidity. The trouble will come when the flow stops -- or
reverses! That will be the point where we will rediscover that
liquidity really is different from money, and if we are really
unlucky we'll discover that our money (the US dollar) is
actually different from real wealth”.
Noland is right. The market is “a pyramid scheme of revolving
credit rackets and percentage spread plays” and no one really
knows what to expect the flow of liquidity slows down or
“reverses”.
Will the stock market crash?
This is the question that looms over the sudden blow-down in
subprime mortgages. As liquidity dries up in the real estate
market (through tightening lending standards) the aftershocks
are expected to ripple through the entire economy raising havoc
with a stock market that is addicted to ever-increasing amounts
of cheap credit. Wall Street needs its credit fix and it has
invented myriad abstruse debt-instruments to get it. But what
happens when investment simply withers away?
According to WorldNetDaily.com Jerome Corsi that question was
partially answered in a letter from the Carlyle Group’s managing
director William Conway Jr. Conway confirms that the rise in the
stock market is related to “the availability of enormous amounts
of cheap debt”. He adds that:
“This cheap debt has been available for almost all maturities,
most industries, infrastructure, real estate and at all levels
of the capital structure.” (But) “this liquidity environment
cannot go on forever. The longer it lasts, the worse it will be
when it ends…….Of course when ends, the buying opportunity will
be once in a lifetime."
Ah, yes; another wonderful “buying opportunity”!?!
You can almost feel the breeze from the wings of the great birds
flapping overhead as they focus their gaze on the carrion below.
Once the stock market collapses and the mighty greenback
flattens out on the desert floor; they’ll be plenty of smiley
faces preparing for the feast.
It’s true; the stock market IS floating on a cloud of cheap
credit created by a humongous trade deficit, artificially low
interest rates, and a 10% yearly expansion of the money supply.
And, like Mr. Conway says, “It cannot go on forever”.
We’d might as well select the funereal dirge and the
pall-bearers now while we still can. No since waiting ‘til the
last minute.
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