Fw: Must Read Division

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Stephen Pizzo

Pinder Joe

Thursday, May 03, 2007 10:38 AM

NFR: Must Read Division

 

 

Post Mortem for the Stock Market

By Mike Whitney

Created May 2 2007 - 11:11am

 

 

" 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.

 

 

_______

Mike Whitney

About author Mike Whitney lives in Washington state. He can be reached at

fergiewhitney

 

 

Stephen P. Pizzo

Author/Journalist

www.newsforreal.com

www.stephen.pizzo.com

 

 

I finally figured out the only reason to be alive is to enjoy it.

- Rita Mae Brown