From: Alejandro Valle Baeza (valle@SERVIDOR.UNAM.MX)
Date: Sun May 06 2007 - 15:44:26 EDT
Counterpunch
May 3, 2007
The Harder They Come ...
A Stock Market Post-Mortem
By MIKE WHITNEY
"There's class warfare, all right, but it's my class that's winning."
--Investment tycoon, Warren Buffett
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 a crash-landing. 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 low interest helium swirling into the largest credit
bubble in history. But there are big changes on the way. 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.
The real damage is just beginning to materialize.
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.
Housing has been the main engine for growth in the US in the last 5
years accounting 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, which will trigger 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.
Stay tuned.
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 (collateralized debt
obligations) 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 rapidly tumbling towards 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?
It depends on the aftereffects of the subprime meltdown. The defaults on
existing mortgages are only part of the problem. The real issue is how
the "credit dependent" stock market will respond to the tightening of
lending standards. As liquidity dries up in the real estate market; all
areas of the economy will suffer. (We've already seen a downturn in
consumer spending) Wall Street is addicted to cheap credit and it has
invented myriad abstruse debt-instruments to get its fix. 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 great birds flapping overhead as
they focus their gaze on the carrion below. Once the stock market
collapses and the greenback flattens out on the desert floor; they'll be
plenty of smiley faces preparing for the feast.
Conway is right, though, 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. Like he
says, "It cannot go on forever." And, we don't expect that it will.
Mike Whitney lives in Washington state. He can be reached at:
fergiewhitney@msn.com
--
Posgrado Facultad de Economía
Av. Universidad 3000 Circuito interior
México 04510, DF México
Tel. 55-56222148 fax 55-56222158
Página web: http://usuarios.lycos.es/vallebaeza
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