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Thu

03

May

2007

Post Mortem for the Stock Market
Thursday, 03 May 2007 15:12
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; 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.
 
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a guest said:

0
stock market is an anglosaxon fraud . a dis4ease ythey spread the world over to take over the world

August 2002



It really is funny when the english media start telling to all and sundry that while it may be that U.S. has some reason to lose shares in the stock market and while the rest of world has lost stock market for so long it is some special god given right of london stock market not to fall or atleast not to fall as others have. Why?thses english propagandist who have been champion of globalization and have told others country that evrything in one country affects other country(though not aparently england even if england produces nothing of sort and her so called service industry is run by constipated looking arse faced low lif salesman and women), ; these people are now saying that england's accounting system and stock market is different than americas. Till other days they have been telling that their system is best because it is very much like american system.
Whole thing smacks of rats(in this case british) leaving the ship(america) when the rats fear of ship sinking.After it ion the strenght of american power that this thrid rate country called england has had such a boom time while the real industrial giants like japan and Germany have been in recession for years(no globalizatio effect there).In fact poplke should throw their economic book ab=nd theory and examine how a thrid rate country like england has nbeen able to survuive let alone propsper.ofcourse the english were fisrt to glee when they initaited downfall of japanese and far east market-no advice at that time to put money into equity as good value as they talk of in their case now. The english spies in form of jopurnalist put a lot (billion) of false paper money into Soviet russia during may-december 1900 to bankrupt soviets. ofcourse the englsh have been trying to thwart Euro for a long time-only when they are successful then they think of joining eueo-in fact europe should not allow britian to join euro.Also english media and govt. have been indulging in industrial sabotage of european countries thru the anglosaxon network of satellite and net , telephone spying and tapping-even E.U. rightly had complained about it-it was hushed just as it was in case of money laundering by british through their so called tax heaven off shore islands.
In fact for last 20 years and more so in last 15 years the english have shown their true clour-after cold war it is clear that the impotent english have been trying to piggy back pon american strength(americans in majority are not anglosaxons)and thru america england treis to bully other nations-install dictators their and then those dictators without peoples supprt are asked to bring the money to england and buy house in london-that creates housing boom and this nation of plumbers(graduation from pirates to shopkeepers then plumbers now) feels very happy with inflated house prices and low qulaity housing and infrastructrue-the money from abroad comes to london stock exchange and fuels the stock price. The london stock price should be forced to be lowered to one fourth of its present price becasue the rest is all false pumped up price with no real value. wht does england produce that any country would want? the real indutrial nations of the worls -Japan, germany have been in recesssion for last 10years while this england has been booming after gulf war for no reason other than becasue it falsley persuaded other countries and their dicataors to bring money to london and starve the rest of worrld. For God' sake the english plumber does not even eat healthy food.--atleast not non infected.england -which has preached globalization to evryone-must be forced to import better and healtheir food from other countries and make british farmers go to heaps because they desrve to be finished.After imf has ruined many farmers in the rest of world so what is special about dirty smelly british famers who produce infected smelly industrial food fit for pigs like the british farmers.

the accounting system and evrything in england is reeling with corruption with collusion amongst government, media and business class -inflitrating academia even and polluting every thing in the socail ,ecnomic and political field of this pirate turned shopkeeprs turned plumber country.In fact the corruption is so widespread that the stock market is not worth even ft100index of 1000 let alone 4000. The world must force the london stock market to fall below 1000 and more-first the dictator countries of the world and others must take money out from here and get it in some other country-though england have 98 percent market of off shore tax heaven for corrupt and money lanudered money there is no reason why england can not be forced to obey civilized laws just as the rest of world does and close all money laundery business through tax heavens.
 
May 03, 2007
Votes: +0

g Anton said:

0
None
Of course your right, but do not hold your breath. These things almost always take much longer than you would think. Do not underestimate the power of US government intervention into "free" markets. Every avalanche needs a precipitator--perhaps a big hit on the dollar caused by the new Chinese investment agency?
 
May 05, 2007
Votes: +0

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