May 1, 2007
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 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.
Showing posts with label stock markets. Show all posts
Showing posts with label stock markets. Show all posts
Wednesday, May 2, 2007
Monday, April 30, 2007
All the World's a Bubble
Follow the Money
Jeremy Grantham: All the World's a Bubble
By Brett Arends
Mutual Funds Columnist
4/27/2007 10:07 AM EDT
How high will the Dow go? 15,000? 20,000?
How about 36,000?
While euphoria sweeps stock markets here and worldwide, there are at least a few voices of dissent.
One, unsurprisingly, is legendary value investor Jeremy Grantham -- the man Dick Cheney, plus a lot of other rich people, trusts with his money. Grantham, chairman of Boston firm Grantham Mayo Van Otterloo, has been a voice of caution for years. But he has upped his concerns in his latest letter to shareholders. Grantham says we are now seeing the first worldwide bubble in history covering all asset classes.
Everything is in bubble territory, he says.
Everything.
"From Indian antiquities to modern Chinese art," he wrote in a letter to clients this week following a six-week world tour, "from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips; it's bubble time!"
"Everyone, everywhere is reinforcing one another," he wrote. "Wherever you travel you will hear it confirmed that 'they don't make any more land,' and that 'with these growth rates and low interest rates, equity markets must keep rising,' and 'private equity will continue to drive the markets.' "
As Grantham points out, a bubble needs two things: excellent fundamentals and easy money.
"The mechanism is surprisingly simple," he wrote. "Perfect conditions create very strong 'animal spirits,' reflected statistically in a low risk premium. Widely available cheap credit offers investors the opportunity to act on their optimism."
And it becomes self-sustaining. "The more leverage you take, the better you do; the better you do, the more leverage you take. A critical part of a bubble is the reinforcement you get for your very optimistic view from those around you."
It's something to think about the next time you hear someone tell you that the stock market will keep rising simply because the world economy is doing so well. That would make sense only if we were paying a constant price for each unit of world GDP, instead of higher and higher prices for one slice of that GDP -- equity.
Grantham concludes that every asset class is expensive today compared with historic averages and compared with the cost of replacing it. By his calculations, the only assets likely to beat inflation by any significant margin if you hold them for the next seven years are managed timber, "high-quality" U.S. stocks, and bonds.
As noted in this column several weeks ago, Grantham's U.S. "high-quality" stocks include Home Depot (HD) , Merck (MRK) , Wal-Mart (WMT) , AT&T (T) , Pfizer (PFE) , Johnson & Johnson (JNJ) , Exxon Mobil (XOM) , UnitedHealth (UNH) , Verizon (VZ) and Lowe's (LOW) .
"The bursting of [this] bubble will be across all countries and all assets, with the probable exception of high-grade bonds," Grantham warned. "Since no similar global event has occurred before, the stresses to the system are likely to be unexpected. All of this is likely to depress confidence and lower economic activity."
Ouch.
Grantham sees two big potential catalysts that might turn this bull market into a bear: a surge in inflation, leading to higher interest rates, and a squeeze on profit margins, which are currently running way above long-term averages.
As for timing, he concedes that's impossible to predict. But here's the kicker: Even Grantham thinks you probably need to be bullish right now. The reason? Most bubbles, he notes, go through a short but dramatic "exponential phase" just before they burst. Like Japan in 1989 or the Internet in early 2000.
"My colleagues," wrote Grantham, "suggest that this global bubble has not yet had this phase and perhaps they are right. ... In which case, pessimists or conservatives will take considerably more pain."
Jeremy Grantham: All the World's a Bubble
By Brett Arends
Mutual Funds Columnist
4/27/2007 10:07 AM EDT
How high will the Dow go? 15,000? 20,000?
How about 36,000?
While euphoria sweeps stock markets here and worldwide, there are at least a few voices of dissent.
One, unsurprisingly, is legendary value investor Jeremy Grantham -- the man Dick Cheney, plus a lot of other rich people, trusts with his money. Grantham, chairman of Boston firm Grantham Mayo Van Otterloo, has been a voice of caution for years. But he has upped his concerns in his latest letter to shareholders. Grantham says we are now seeing the first worldwide bubble in history covering all asset classes.
Everything is in bubble territory, he says.
Everything.
"From Indian antiquities to modern Chinese art," he wrote in a letter to clients this week following a six-week world tour, "from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips; it's bubble time!"
"Everyone, everywhere is reinforcing one another," he wrote. "Wherever you travel you will hear it confirmed that 'they don't make any more land,' and that 'with these growth rates and low interest rates, equity markets must keep rising,' and 'private equity will continue to drive the markets.' "
As Grantham points out, a bubble needs two things: excellent fundamentals and easy money.
"The mechanism is surprisingly simple," he wrote. "Perfect conditions create very strong 'animal spirits,' reflected statistically in a low risk premium. Widely available cheap credit offers investors the opportunity to act on their optimism."
And it becomes self-sustaining. "The more leverage you take, the better you do; the better you do, the more leverage you take. A critical part of a bubble is the reinforcement you get for your very optimistic view from those around you."
It's something to think about the next time you hear someone tell you that the stock market will keep rising simply because the world economy is doing so well. That would make sense only if we were paying a constant price for each unit of world GDP, instead of higher and higher prices for one slice of that GDP -- equity.
Grantham concludes that every asset class is expensive today compared with historic averages and compared with the cost of replacing it. By his calculations, the only assets likely to beat inflation by any significant margin if you hold them for the next seven years are managed timber, "high-quality" U.S. stocks, and bonds.
As noted in this column several weeks ago, Grantham's U.S. "high-quality" stocks include Home Depot (HD) , Merck (MRK) , Wal-Mart (WMT) , AT&T (T) , Pfizer (PFE) , Johnson & Johnson (JNJ) , Exxon Mobil (XOM) , UnitedHealth (UNH) , Verizon (VZ) and Lowe's (LOW) .
"The bursting of [this] bubble will be across all countries and all assets, with the probable exception of high-grade bonds," Grantham warned. "Since no similar global event has occurred before, the stresses to the system are likely to be unexpected. All of this is likely to depress confidence and lower economic activity."
Ouch.
Grantham sees two big potential catalysts that might turn this bull market into a bear: a surge in inflation, leading to higher interest rates, and a squeeze on profit margins, which are currently running way above long-term averages.
As for timing, he concedes that's impossible to predict. But here's the kicker: Even Grantham thinks you probably need to be bullish right now. The reason? Most bubbles, he notes, go through a short but dramatic "exponential phase" just before they burst. Like Japan in 1989 or the Internet in early 2000.
"My colleagues," wrote Grantham, "suggest that this global bubble has not yet had this phase and perhaps they are right. ... In which case, pessimists or conservatives will take considerably more pain."
How much further do the bulls have to run on Wall Street?
By Stephen Foley in New York
Published: 27 April 2007
Hang out the bunting, prepare the sandwiches and the fizzy pop, get ready for a street party. A Wall Street party. The US stock market is very, very close to reaching an all-time high, and it could break the record at any moment.
Publish
But hang on, regular readers will be saying, didn't the Dow Jones Industrial Average power into virgin territory last autumn? Indeed, didn't it just shoot through the 13,000 barrier for the first time on Wednesday?
Yes and yes. The Dow is the most visible measure of the US stock market and has served well as a yardstick for 111 years, but it measures just 30 stocks. The much wider S&P 500 has claim to be the best measure of US equities, and it remains a tad over 2 per cent below its dotcom-era peak. It is this index that Wall Streeters measure their performance against, and it is a record on this index that will trigger the big party.
Either way, though, we are definitely into party season. The stock market is surging, whichever way you measure it. Company profits are growing faster than anyone dared hope. Their profit margins are at 50-year highs. The US economy continues to grow, too, albeit at a slower pace this past year, confounding the sceptics. Corporate executives are confident enough in the outlook to embark on brave merger-and-acquisition deals that boost the share prices of companies likely to be taken over. Lenders are confident, too, and are advancing plenty of money to companies to finance such deals and to hedge-fund investors to play the stock market. Wall Street banks are raking in more money than they ever have before.
And the best thing about this party is that there are so many party-poopers about.
David Tice, investment adviser to Prudent Bear mutual funds, is one. Share prices and other assets have been driven high because of "global liquidity and massive credit that comes from ignoring risks. Credit lending is going to be more restrained in the future. This market is going to go down".
Richard Bernstein, chief investment strategist at Merrill Lynch, often sounds like another. "Valuations are fair, but nothing more. Investors who claim that stocks are immensely undervalued probably are not aware that S&P 500 earnings are the most cyclical in history. Low price/earnings ratios might simply reflect peak earnings rather than value. This was certainly true for the housing stocks during the past year or so."
There are so many warning voices, and they have a coherent case. They argue that the US consumer economy is teetering. House prices in many parts of the country have taken a dive and sales of existing homes fell at their sharpest rate in 18 years last month. Mortgage arrears and now repossessions have been rising steadily, and in the riskiest parts of the mortgage market - the so-called sub-prime market - defaults by the poorest homeowners are running so high that several lenders have gone bust.
Investment strategists at Citigroup, the US investment bank, have an intriguing tool for judging these things, an amalgamation of different measures of investor sentiment which it calls its "panic/euphoria model". It says the tool is very useful in predicting the future direction of the market and guiding what an investor should do: buy when it shows people are panicking about the economic and investment outlook, sell when there is euphoria. It has only recently crept back into neutral territory, after being in "panic" for most of the past six years.
Tobias Levkovich, the bullish chief investment strategist at Citigroup, came back from a tour of European investors this month, with a new list of their worries. "The primary investment concern relating to equities remains the direction of earnings, given that US corporate margins sit at 50-year highs. Investors often cite worries about geopolitics, oil prices, sub-prime credit contagion, housing, twin deficits, negative savings rates, protectionism, terrorism, inflation, jobs and the weak dollar as reasons for holding back from buying stocks, but these catalysts are not the issue by themselves - the issue at hand is that they all have earnings ramifications."
At the start of last month, it was the fear of "contagion" from the sub-prime market meltdown, the fear that major financial institutions would suffer destabilising losses from their dealing with sub-prime lenders, which contributed to the stock market's wobble.
Since then, though, giant banks have promised that their exposure is limited, that their own levels of bad loans are not growing as fast as investors had feared. As in the financial sector, so it is across the rest of corporate America. Most of the country's biggest companies have now reported their profits for the first three months of the year, and they have averaged growth of 11 per cent, exactly the same as in the fourth quarter of 2006. Analysts had predicted a growth rate of barely half that.
In short, the stock market's revival from its wobble in March, the Dow's 126-day progress from 12,000 to 13,000, and its 80 per cent surge since the bear market nadir in 2002 - all has been largely justified by improvements in corporate earnings.
The average S&P 500 stock is valued at a little below 16 times its reported earnings of last year, and at a little over 16 times the consensus estimate of the coming year's earnings. This does not take the market into territory that would be called irrational exuberance.
And the confidence that those estimates of future earnings are sound, if not even conservative, are based on a view of the Federal Reserve's ability to keep the economy on an even keel. A Treasury bond auction yesterday was priced with a yield lower than expected, another example of the market's belief in interest rate cuts soon to prop up a slightly weaker economy.
Even admitting clouds over the US economy, bulls argue that the addition of China, India and other emerging markets to the super-league of economic nations means that global growth can continue without it. More than half of the earnings of the Dow's 30 industrial giants come from overseas, so they are fatter in dollar terms and they are able to offset any US slowdown.
Richard Jeffrey, chief economist at Ingenious Securities in London, said: "Stock markets around the world are telling us two things. First, they are telling us that there is a high degree of confidence that the world's central banks will be able to successfully manage their way through the various issues they face without causing undue turbulence, without inflation becoming a problem or the US economy going into a recession. Second, there is also a recognition that the global economy is no longer so dependent on the US. The American economy is no longer the sole locus of growth, so the impact of a slowdown in the US is not as large as it once was."
There are other factors to be pulled into the mix to explain the outsize performance of the US stock market. The phenomenon of "de-equitisation" is one, which is adding a little scarcity value to equities. Massive share buy-back programmes by cash-rich companies are boosting earnings per share and returns on equity, and as a result reducing their number of shares in issue. And all the while, private equity funds are snapping up bigger and bigger chunks of corporate America. The past year has seen the 17-year-old record for the biggest ever private equity buy-out finally surpassed not once but several times.
Lest we contribute any temptation to euphoria, the final word should go to Merrill Lynch's Mr Bernstein, who adds a bum note related to the weakening US currency. "The dollar is falling, and much of the stock market's rally is simply 'money illusion' - that is, it takes more less-valuable dollars to buy the same asset. In euros, the Dow has been flat for six months. In a global sense, the US stock market's rally is not a growth story."
Published: 27 April 2007
Hang out the bunting, prepare the sandwiches and the fizzy pop, get ready for a street party. A Wall Street party. The US stock market is very, very close to reaching an all-time high, and it could break the record at any moment.
Publish
But hang on, regular readers will be saying, didn't the Dow Jones Industrial Average power into virgin territory last autumn? Indeed, didn't it just shoot through the 13,000 barrier for the first time on Wednesday?
Yes and yes. The Dow is the most visible measure of the US stock market and has served well as a yardstick for 111 years, but it measures just 30 stocks. The much wider S&P 500 has claim to be the best measure of US equities, and it remains a tad over 2 per cent below its dotcom-era peak. It is this index that Wall Streeters measure their performance against, and it is a record on this index that will trigger the big party.
Either way, though, we are definitely into party season. The stock market is surging, whichever way you measure it. Company profits are growing faster than anyone dared hope. Their profit margins are at 50-year highs. The US economy continues to grow, too, albeit at a slower pace this past year, confounding the sceptics. Corporate executives are confident enough in the outlook to embark on brave merger-and-acquisition deals that boost the share prices of companies likely to be taken over. Lenders are confident, too, and are advancing plenty of money to companies to finance such deals and to hedge-fund investors to play the stock market. Wall Street banks are raking in more money than they ever have before.
And the best thing about this party is that there are so many party-poopers about.
David Tice, investment adviser to Prudent Bear mutual funds, is one. Share prices and other assets have been driven high because of "global liquidity and massive credit that comes from ignoring risks. Credit lending is going to be more restrained in the future. This market is going to go down".
Richard Bernstein, chief investment strategist at Merrill Lynch, often sounds like another. "Valuations are fair, but nothing more. Investors who claim that stocks are immensely undervalued probably are not aware that S&P 500 earnings are the most cyclical in history. Low price/earnings ratios might simply reflect peak earnings rather than value. This was certainly true for the housing stocks during the past year or so."
There are so many warning voices, and they have a coherent case. They argue that the US consumer economy is teetering. House prices in many parts of the country have taken a dive and sales of existing homes fell at their sharpest rate in 18 years last month. Mortgage arrears and now repossessions have been rising steadily, and in the riskiest parts of the mortgage market - the so-called sub-prime market - defaults by the poorest homeowners are running so high that several lenders have gone bust.
Investment strategists at Citigroup, the US investment bank, have an intriguing tool for judging these things, an amalgamation of different measures of investor sentiment which it calls its "panic/euphoria model". It says the tool is very useful in predicting the future direction of the market and guiding what an investor should do: buy when it shows people are panicking about the economic and investment outlook, sell when there is euphoria. It has only recently crept back into neutral territory, after being in "panic" for most of the past six years.
Tobias Levkovich, the bullish chief investment strategist at Citigroup, came back from a tour of European investors this month, with a new list of their worries. "The primary investment concern relating to equities remains the direction of earnings, given that US corporate margins sit at 50-year highs. Investors often cite worries about geopolitics, oil prices, sub-prime credit contagion, housing, twin deficits, negative savings rates, protectionism, terrorism, inflation, jobs and the weak dollar as reasons for holding back from buying stocks, but these catalysts are not the issue by themselves - the issue at hand is that they all have earnings ramifications."
At the start of last month, it was the fear of "contagion" from the sub-prime market meltdown, the fear that major financial institutions would suffer destabilising losses from their dealing with sub-prime lenders, which contributed to the stock market's wobble.
Since then, though, giant banks have promised that their exposure is limited, that their own levels of bad loans are not growing as fast as investors had feared. As in the financial sector, so it is across the rest of corporate America. Most of the country's biggest companies have now reported their profits for the first three months of the year, and they have averaged growth of 11 per cent, exactly the same as in the fourth quarter of 2006. Analysts had predicted a growth rate of barely half that.
In short, the stock market's revival from its wobble in March, the Dow's 126-day progress from 12,000 to 13,000, and its 80 per cent surge since the bear market nadir in 2002 - all has been largely justified by improvements in corporate earnings.
The average S&P 500 stock is valued at a little below 16 times its reported earnings of last year, and at a little over 16 times the consensus estimate of the coming year's earnings. This does not take the market into territory that would be called irrational exuberance.
And the confidence that those estimates of future earnings are sound, if not even conservative, are based on a view of the Federal Reserve's ability to keep the economy on an even keel. A Treasury bond auction yesterday was priced with a yield lower than expected, another example of the market's belief in interest rate cuts soon to prop up a slightly weaker economy.
Even admitting clouds over the US economy, bulls argue that the addition of China, India and other emerging markets to the super-league of economic nations means that global growth can continue without it. More than half of the earnings of the Dow's 30 industrial giants come from overseas, so they are fatter in dollar terms and they are able to offset any US slowdown.
Richard Jeffrey, chief economist at Ingenious Securities in London, said: "Stock markets around the world are telling us two things. First, they are telling us that there is a high degree of confidence that the world's central banks will be able to successfully manage their way through the various issues they face without causing undue turbulence, without inflation becoming a problem or the US economy going into a recession. Second, there is also a recognition that the global economy is no longer so dependent on the US. The American economy is no longer the sole locus of growth, so the impact of a slowdown in the US is not as large as it once was."
There are other factors to be pulled into the mix to explain the outsize performance of the US stock market. The phenomenon of "de-equitisation" is one, which is adding a little scarcity value to equities. Massive share buy-back programmes by cash-rich companies are boosting earnings per share and returns on equity, and as a result reducing their number of shares in issue. And all the while, private equity funds are snapping up bigger and bigger chunks of corporate America. The past year has seen the 17-year-old record for the biggest ever private equity buy-out finally surpassed not once but several times.
Lest we contribute any temptation to euphoria, the final word should go to Merrill Lynch's Mr Bernstein, who adds a bum note related to the weakening US currency. "The dollar is falling, and much of the stock market's rally is simply 'money illusion' - that is, it takes more less-valuable dollars to buy the same asset. In euros, the Dow has been flat for six months. In a global sense, the US stock market's rally is not a growth story."
MARKET'S RISE TIED TO DOLLAR'S DIVE
HOLY DOW! MARKET'S RISE TIED TO DOLLAR'S DIVE
By TERRY KEENAN
April 29, 2007 -- THIS week the Dow Jones in dustrial average hit 13,000 for the first time ever, and the U.S. dollar fell to new record lows against the euro and the pound.The former milestone was greeted with media fanfare and scores of headlines, while the latter garnered little attention at all.
But the two are closely connected - an anemic dollar means a lot more than pricey cappuccinos and hotel rooms for American travelers to Europe; it's also translating into powerful earnings for the very companies that make up the Dow - big blue-chip multinationals who get a large chunk of their profits from overseas.
It's also why Wall Street has clocked nearly 40 record closing highs in the last six months, despite sobering news from the housing market and a big deceleration in the domestic economy. The wall of worry that Wall Street has been climbing is the same one the dollar has been descending.
Stocks such as IBM tell the story. While Big Blue saw domestic sales rise a mere 1 percent last quarter, sales in Europe, Asia and the Middle East soared by more than 12 percent.
In fact, the incredible shrinking dollar is packing a powerful two-pronged boost for the Dow. Not only do the Dow 30 companies now derive a record 48 percent of their sales from overseas, the rest of the world is growing much faster than the U.S. In other words, it's a good time to be an exporter with a weak currency.
And the latest numbers bear that out: Of the 20 Dow stocks reporting for the first three months of the year, 17 noted the positive currency effects of the weaker greenback. It's the key reason S&P profits look to come in with gains of better than 7 percent - more than twice initial expectations.
But if the dollar becomes too cheap, our foreign friends could get uneasy and decide to park their money elsewhere, sending stocks into a swoon.
Wall Street loves a weak dollar, unless it becomes too weak, then it becomes a "dollar crisis."
Even with the once-almighty greenback at new lows, we're not there yet. But don't forget the dollar the next time you're checking out the Dow.
TERRY KEENAN is anchor of Cashin' In, an investing program that appears on Fox News Channel on Saturdays at 11:30 a.m. E-mail terry.keenan@foxnews.com.
Thursday, April 26, 2007
Dow at 13,000. How to account for the disconnect?
Wednesday, April 25, 2007
Call us skeptical by gimleteye
You read and hear the same news we do. Yesterday, on a day the Dow Jones Industrial Average closed above 13,000 for the first time, a new Wall Street Journal/NBC News poll disclosed that only 22 percent believe the nation is headed in the right direction.
How to account for the disconnect?
Wall Street apparently believes that the consumer economy is strong. But is consumer confidence really so different from what people feel about the war in Iraq and the collapse of the housing markets and sharply tightening credit across the nation?
It is true that Wall Street has always tended to view gridlock in Washington as good for business, and business is generally good in a time of war.
We look, though, at the disparity in wages, between the economic elite and the mass of Americans ("Income inequality grew significantly in 2005, with the top 1 percent of Americans--those with incomes that year of more than $348,000--receiving their largest share of national income since 1928, analysis of newly released tax data shows." NY Times, March 29, 2007) and believe that something else is going on.
The earth has been "flattened" by globalization. Americans have benefited from high quality goods manufactured in low wage nations, but those benefits are diminishing. People are very anxious, and with good reason.
A dollar of US labor no longer towers over our neighbors or trading partners. We are not educating and training American workers fast enough to compete for higher paying jobs in the new global economy. Hungrier workers are getting those jobs.
It doesn't mean we aren't working hard. We are. In urban areas where housing costs have skyrocketed, two wage-earner families are on a fast treadmill just to keep pace with a single wage earner family, a few decades ago. And businesses are finding out that the last dollar of productivity squeezed by technological efficiencies is not necessarily protecting the higher paying jobs that remain.
The stock market is agnostic to the difficulties ordinary Americans are experiencing. The stock market likes what globalization is doing for large multinational corporations, whose executives are part of a new economic elite, defined by the highest wage differential with ordinary workers since the Great Depression.
The markets are glad. Americans are sad and increasingly irrelevant to the operation of the world economy.
In Nation this week, William Greider interviews economist Ralph Gomory who explains, "America... becomes increasingly dependent, buying from abroad more and more of what its citizens consume and producing relatively less at home. US incomes stagnate as the high-wage jobs disappear and US exports become a smaller share of the world total."
Greider writes, "The conventional win-win assurances... are facile generalizations ... some nations, in other words, do indeed become 'losers'."
What seems to be driving both foreign and domestic policy in the United States is the urgency of 'winners' to separate themselves from the afflicted losers of the global economy. It is not just the issue of wage disparity: that the "the top 1 percent (of income earners) recieved 21.8 percent of all reported income in 2005, up significantly from the 19.8 percent the year before and more than double their share of income in 1980. The peak was in 1928, when the top 1 percent reported 23.9 percent of all income." We all know what happened in 1928.
No, there are more subtle effects, like the fact that so many Americans are driving gas-guzzling SUV's while Exxon coasts from one record profit to the next, a promise sold to consumers by a domestic auto industry that claimed it could not afford high gas mileage standards, leaving Toyota to dismantle US jobs on the basis of better engineered and more fuel efficient products that US auto suppliers couldn't build then but apparently will have to build now, now that they have lost that war, and, American jobs.
We could be wrong. Every government bean counter and statistician for the government wants to find good news in the numbers and even will 'cook the books' (ie. how inflation is measured) when reality cuts too close to the bone.
We noted, yesterday, how the good news on manufacturing and exports highlighted the contribution of a single company, Boeing Aircraft.
It seems inevitable to us that the collapse of housing markets will drag the economy downward. We look at the cranes busily moving over the Miami skyline, hurrying massive condominiums toward certificates of occupancy, we watch our local county commission doing back flips to satisfy the greed of the development lobby, built on the back of liar loans, mortgage fraud, and incestuous relationships between builders and lenders, and shake our heads.
But we may not be wrong. We may just be early.
Wednesday, April 25, 2007
Stocksplosion
April 23, 2007
Whenever somebody complains about "the lies that George Bush & Co. told to get us into the Iraq war" (as Frank Rich did in The New York Times on Sunday), I wonder how those lies compare to the lies that the American public tells itself every day -- for example, that we could run America without oil from the Middle East, or that hybrid cars will save Happy Motoring, or that we can have an economy without producing anything of value.
Meanwhile, the Dow Jones index went up over a hundred points the same day that 32 people were massacred on a university campus. And bear in mind that the massacre did not occur late in the day but literally around the same time that the New York Stock Exchange rang its opening bell -- so that as the body counts mounted through mid-day, the stock markets only went higher! They must have liked what they saw. Then, the rest of the week, while the cable news Mommy-Daddies went through the familiar rituals of bewildered hand-wringing, and NBC released the trove of farewell videos sent in by shooter Seung-Hui Cho between killings, the Dow piled on another 250 points to close at an all-time record high just under 13,000.
Could the financial markets be more detached from reality, from life on the ground (or in a free-fire-zone classroom) in this nation?
Doug Noland over at Prudent Bear.com is right: 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 and others recognize the severe distortions in the finance sector, and they are surely correct to flag the implied dangers. But even these clear-eyed observers survey the disturbing finance scene without factoring the global energy situation. In a nutshell: world oil production seems to have peaked about 10 months ago. Being just past peak, there is still a huge amount of oil going into world economies. But being just past peak we are now seeing how complex systems proceed toward instability and breakdown when the underlying energy flow turns toward contraction.
The situation in finance is particularly sensitive and acute because an overall contraction in available energy means the end of industrial expansion (a.k.a. "growth") at "normal" rates of three to seven percent annually. More to the point, it means that certificates, contracts, deals, plays, and rackets pegged to the expectation of growth will lose their legitimacy. Meaning, stocks, bonds, collateralized debt obligations, hedges -- anything that represents the hope and expectation for more-of-anything -- will no longer be understood to represent real value.
The current euphoric hysteria should therefore be viewed as a form of disorder in its own right. The players in the markets are making their moves based on misunderstood signals. They think the world is awash in energy and prosperity. They believe Cambridge Energy Research Associates (CERA) and the Chairman of the Federal Reserve. They believe that the mortgage fiasco and the associated imploding housing bubble are just a couple of temporary zits on the handsome WASPy face that Wall Street presents to the world. In the background, though, feedback loops are aligning to rock the systems we depend on for daily life in the real world. Capital will become unavailable. Food will grow scarce. Trade will be interrupted. Mobility will be constrained. And an awful lot of pissed-off people will be poised to fight over the table scraps of industrial civilization.
Whenever somebody complains about "the lies that George Bush & Co. told to get us into the Iraq war" (as Frank Rich did in The New York Times on Sunday), I wonder how those lies compare to the lies that the American public tells itself every day -- for example, that we could run America without oil from the Middle East, or that hybrid cars will save Happy Motoring, or that we can have an economy without producing anything of value.
Meanwhile, the Dow Jones index went up over a hundred points the same day that 32 people were massacred on a university campus. And bear in mind that the massacre did not occur late in the day but literally around the same time that the New York Stock Exchange rang its opening bell -- so that as the body counts mounted through mid-day, the stock markets only went higher! They must have liked what they saw. Then, the rest of the week, while the cable news Mommy-Daddies went through the familiar rituals of bewildered hand-wringing, and NBC released the trove of farewell videos sent in by shooter Seung-Hui Cho between killings, the Dow piled on another 250 points to close at an all-time record high just under 13,000.
Could the financial markets be more detached from reality, from life on the ground (or in a free-fire-zone classroom) in this nation?
Doug Noland over at Prudent Bear.com is right: 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 and others recognize the severe distortions in the finance sector, and they are surely correct to flag the implied dangers. But even these clear-eyed observers survey the disturbing finance scene without factoring the global energy situation. In a nutshell: world oil production seems to have peaked about 10 months ago. Being just past peak, there is still a huge amount of oil going into world economies. But being just past peak we are now seeing how complex systems proceed toward instability and breakdown when the underlying energy flow turns toward contraction.
The situation in finance is particularly sensitive and acute because an overall contraction in available energy means the end of industrial expansion (a.k.a. "growth") at "normal" rates of three to seven percent annually. More to the point, it means that certificates, contracts, deals, plays, and rackets pegged to the expectation of growth will lose their legitimacy. Meaning, stocks, bonds, collateralized debt obligations, hedges -- anything that represents the hope and expectation for more-of-anything -- will no longer be understood to represent real value.
The current euphoric hysteria should therefore be viewed as a form of disorder in its own right. The players in the markets are making their moves based on misunderstood signals. They think the world is awash in energy and prosperity. They believe Cambridge Energy Research Associates (CERA) and the Chairman of the Federal Reserve. They believe that the mortgage fiasco and the associated imploding housing bubble are just a couple of temporary zits on the handsome WASPy face that Wall Street presents to the world. In the background, though, feedback loops are aligning to rock the systems we depend on for daily life in the real world. Capital will become unavailable. Food will grow scarce. Trade will be interrupted. Mobility will be constrained. And an awful lot of pissed-off people will be poised to fight over the table scraps of industrial civilization.
Thursday, April 12, 2007
NASD issues rare warning to investors
| Related Jobless claims unexpectedly jump 19,000 U.S. stocks headed to lower open MSNBC.com |
NASD issues rare warning to investors
By Michael Mackenzie and Richard Beales in New York
Financial Times
Updated: 9:42 a.m. MT April 11, 2007
A leading US securities regulator Tuesday issued a rare warning to investors over the record $321bn of debt being used to buy stocks and bonds.
The move highlights broader concerns expressed by financial watchdogs in the US and Europe about leverage used by investors of all kinds, including hedge funds.
NASD, which regulates brokers and trading, said the amount of debt taken on by investors to buy securities – known as margin – reached a new high of $321bn in February. Since December, the figure has exceeded the previous peak of $300bn set in March 2000, near the top of the internet stock bubble.
"We are concerned too many investors are unaware they could suffer substantial financial losses by using debt to purchase securities," said Mary Schapiro, chief executive officer of NASD. "By updating our alert on this topic, we hope to remind investors not to underestimate the risks involved."
The regulator's last such alert came in 2003.
An investor who uses margin borrows money, with interest, from a broker to buy securities. When the value of an investment falls, the broker can demand that the investor pay additional cash – known as a margin call – or sell securities to cover the call.
Jim Paulsen, chief market strategist at Wells Capital, said the greater use of margin reflected the growth of sophisticated trading strategies. But he noted that investors now use margin both to buy stocks and to sell them short, meaning the net risk could be lower than during earlier periods.
Stocks tumbled in late February and early March, resulting in margin calls being made to investors. In recent weeks, stocks have recouped most of their losses.
In a sign of broader concern over margin borrowing, watchdogs from the US and Europe are jointly examining whether the collateral that banks require of big clients such as hedge funds is sufficient.
Timothy Geithner, president of the Federal Reserve Bank of New York, said last year that allowing hedge funds to borrow too aggressively could weaken the financial system. Dealers and big banks should take "a cold, hard look" at the amount they lend to hedge funds and their margin practices for derivatives transactions, he said. Mr Paulsen, however, said today's market practices did not seem excessive.
"We are a long way off the frothiness that typified the bull run of the late 1990s," he said.
But Jack Ablin, chief investment officer at Harris Private Bank said the rise in margin was still a good indicator that investors were taking more risk.
"Stocks have had a terrific run and the recent rebound in the market has probably encouraged further risk taking," he said.
© The Financial Times Ltd 2007. "FT" and "Financial Times" are trademarks of the Financial Times.Copyright The Financial Times Ltd. All rights reserved.
Thursday, March 22, 2007
Manipulating Stock Prices and Oil Prices: It's in the Air
03.22.2007
Raymond J. Learsy
Raymond J. Learsy
In a revealing lapse, given his turbo charged cadence, CNBC's host Jim Cramer bragged about manipulating stocks. And then Cramer, no dummy he, added that the strategy -- while illegal -- "the Security and Exchange Commission never understands this," according to the New York Post.
Coincidently just a few days before, this writer appeared on a March 14 CNBC segment "Can We Trust OPEC".
My sparring partner , Jerry Taylor, a CATO Institute senior fellow opined that OPEC was merely a grouping of oil producers who played no significant role in oil pricing, "Prices are established by global supply and demand", he went on "OPEC ...has a minority control over global supply. It influences prices, perhaps, but it certainly can't establish prices. All they can effect is how much member states produce".
Liz Claman, hosting the segment for CNBC, pointed to the trading floor pictured in full action behind her, and rightly asked, isn't this where the market price is determined?
Demurring I pointed out that who is to say that the trading in oil futures isn't doctored as well. Taylor interjected that there is no way that the market could be manipulated. Trades are realized in markets all over the world, and the volume is massive. Further there was no academic evidence of such activity.
I countered that not only were OPEC supply constraints largely responsible for the 300-400% crude oil price increases over the last half dozen years but that BP was already under investigation by the CFTC for manipulating oil futures trading. That even though the trading in oil futures was massive, OPEC had the resources at its disposal that could readily permit it to deliberately influence price actions on the trading floor or the electronic ether. Time ran out and never was able to opine that it was not only within OPEC's capability, the very fact that it was a huge and diverse world market lent itself to opaque trading with minimal oversight. In consequence the possibility of manipulation by those with the means and interest becomes totally feasible (An Energy Agenda For a Newly Energized Congress, Part IV: Need For Urgent Congressional Oversight of Oil/Gas Futures Trading).12.11.06
Jim Cramer in admitting to doing what he did rendered an important service. He brought a human dimension to the reality of how readily markets can be manipulated. Multiply Jim Cramers' capabilities by the resources and world wide connections of OPEC and you begin to picture the possibilities. For a Jerry Taylor to dismiss it out of hand is, to my mind, nonsense. For a Liz Clayman to interject the question she did is exactly as it should be. At least at CNBC there is no slavish piety that it is always the invisible hand of market forces that bring us the price of goods and commodities.
Raymond J. Learsy is the author of the book Over a Barrel: Breaking the Middle East Oil Cartel. A graduate of the Wharton School, he made his life in the fast-paced, risk-filled world of commodities trading, beginning in 1959. In 1963, he started his own firm and over twenty years expanded from the U.S. into Canada, the United Kingdom, Luxembourg, Brazil, and Pakistan, trading in an array of bulk raw materials and commodities, shipping to customers worldwide. In the 1980s, he shifted gears as a private investor, from 1982 to 1988, served as a Reagan appointee to the National Endowment for the Arts. Currently, he is a member of the Woodrow Wilson International Center for Scholars. Learsy's richly-informed analysis of the international oil trade, OPEC, and its impact on the American and world economy has been featured in the National Review Online and the New York Times. He currently resides in Connecticut, and can be reached at triduane@aol.com.
Wednesday, March 21, 2007
The Slow-Motion Stock Market Crash
by Robert Kiyosaki
Posted on Monday, March 19, 2007, 12:00AM
When my book "Rich Dad's Prophecy" was released in 2002, most financial newspapers and magazines trashed it because I discussed a looming stock market crash. Ironically, much of what I predicted in the book is coming true earlier than I expected.
On Feb. 27 of this year, a 9 percent market sell-off in China sent ripples of fear through stocks markets across the world. In the United States, the Dow's one-day plunge of 416 points was the steepest decline since the market opened after Sept. 11, 2001.
So the question is: Should stock investors be worried? As you might expect, some say yes and some say no.
Correction or Crash?
Personally, if I were counting on the stock market for my retirement or to put my kids through college, I'd be worried. Why? Because from my perspective, even if the Dow were to miraculously soar through 15,000, the stock market has been experiencing a long, slow crash for years.
This February, investors witnessed a drop of $583 billion in U.S. market wealth. Many experts are quick to point out that this loss of wealth is a mere drop in the bucket when you take into account that the stock market has been going up for four years. Most market experts say that the market was due for a correction, which is true.
In fact, the recent 3.5 percent drop is miniscule when compared to the 21 percent drop of the S&P 500 back in 1987. By definition, such a small drop isn't even classified as a true correction. According to BusinessWeek, a full-fledged correction is defined as a 10 percent drop, and a bear market is defined as a 20 percent drop.
Comparing Apples to Oranges
So how can I say that the market is crashing even if it continues to go up? To see the true crash, educated investors need to compare apples to oranges, not apples to apples.
When you compare the Dow to the Dow, or the S&P 500 to the S&P 500, that's comparing apples to apples. The Dow at 12,000 appears better than the Dow at 9,000, just as an apple at $1 a pound looks better than at $1.50 a pound, even though it's still the same apple. All that's happened is the price per pound of the apple has gone up -- the apple hasn't changed.
Years ago, my rich dad taught me to be a comparison shopper, especially when it comes to investments. He said, "You need to understand value more than price. Just because the price of something goes up doesn't necessarily mean the value has gone up."
He also told me, "If prices go up without a corresponding increase in value, it means the value of the asset has actually gone down." This holds true for all assets, including stocks, bonds, and real estate.
For example, when the price of a house goes up it doesn't mean that the house is more valuable. And prices going up may mean that something else is going down in value. In today's global markets, what's going down is the purchasing power of the U.S. dollar.
The Dow vs. Gold
To get a truer picture of comparative values, compare the Dow to the price of gold. When the purchasing power of gold is compared to the purchasing power of the Dow, the Dow appears to be crashing.
That means the average investor will need at least a 15 percent annual return on their stocks or mutual funds just to stay ahead of the U.S. dollar's purchasing power erosion -- that is, just to break even.
In my earlier Yahoo! Finance columns, I used history to forecast the future by comparing the dollar to gold and oil over a 10-year period. Here's the data:
| 1996 | 2006 | Percent Increase | |
| Oil | $10/barrel | $60/barrel | 500 |
| Gold | $275/ounce | $600/ounce | 118 |
Table updated 3/21/07.
What Next?
What this means for you depends upon your bullish or bearish outlook, your financial education, and financial experience. For example, I hear many young people today saying that the price of real estate doesn't go down. This is a naive opinion due to lack of financial education and experience. I heard similar misguided opinions about stocks in the dotcom era, just before the market crashed.
Personally, I tend to heed former Federal Reserve Chairman Alan Greenspan's caution about a possible recession ahead. I predict that if there is a recession, current Fed chairman Ben Bernanke (and, in an attempt to hold onto the White House, the Republicans) will flood the market with more money at lower interest rates.
Then the purchasing power of the dollar will once again drop, asset prices may rise, and the financially naive will actually believe that the value of their assets -- houses, stocks, and mutual funds -- have gone up in value.
Thanks to Mike Maloney, my go-to guy for information on gold and silver.
Thursday, March 15, 2007
US Dollar Hit By Another Meltdown in the Dow
Japanese Yen Soars as Carry Trade Liquidation Resumes • New Zealand Dollar Sees Majors Losses Against the US Dollar and Yen
Wednesday, March 14 - 2007 at 01:49
US Dollar -The problems in the sub-prime lending market have become too much for even the most optimistic trader to handle. New Century Financial Corp, the poster child of the meltdown in the sub-prime lending sector had its shares suspended from trading on the NYSE today and will most likely be de-listed in the near future. Although the market had become somewhat accustomed to hearing about the problems at New Century Financial, it was not prepared to hear that mortgage delinquencies hit a 4 year high in the fourth quarter. In the sub-prime market, delinquencies reached 13.33 percent and even though non-subprime borrowers are far less likely to be delinquent on their loans, the rate has been growing since the first quarter of 2006. With the housing market just beginning to turn, the worst may be yet to come. The Dow has fallen close to 245 points or 2 percent today, marking the biggest one day sell-off since the 3.3 percent move on February 27th. Risk aversion has returned to markets with traders liquidating all of their risky and high yielding positions. Carry trades have been hit the worst with NZD/JPY falling by 2.2 percent, AUD/JPY falling by 1.51 percent and USD/JPY falling by 1.12 percent. In addition to the problems in the sub-prime sector, consumer spending fell short of expectations for the month of February. Headline sales rose a meager 0.1 percent while sales excluding autos fell 0.1 percent. This is the first drop in sales excluding autos since Oct 2006 and suggests that first quarter GDP will be particularly weak since sales were flat in the month of January. Cold weather and a downturn in the housing market are to blame as sales of furniture and building materials slip significantly. Weaker consumer spending at a time when the sub-prime lending sector is in disarray could force the Federal Reserve to cut rates as early as this summer. With both stock market and housing market wealth of Americans slipping, future growth looks extremely bleak. At this point, the US dollar has few reasons to rally but any further extension lower may not come until Thursday when we have producer prices, net foreign purchases of US Securities and the Philadelphia Fed index on the docket.
Euro - On a day when we have seen a massive liquidation of many currency pairs, the fact that the Euro has been able to remain unchanged is quite remarkable. The strength in the German ZEW survey is sure to have helped. Even though analyst sentiment deteriorated between February and March, the deterioration was far less than expected as concerns about the Value Added Tax increase and the recent interest rate hike remains limited. In today's market, it is all about relative performance and right now the outlook for the US economy is far more concerning than the outlook for the Eurozone. In fact, Bundesbank President Weber joined ECB's Liebscher in saying that the risks to price stability remain strong and because of that, the ECB will need to raise rates again. Compare that to the Federal Reserve who may need to cut interest rates before August and we have a very clear explanation of why the EUR/USD is still holding strong. Eurozone industrial production and French and Italian consumer prices are due for release tomorrow. None of these reports will be particularly market moving. Traders will have their eyes pinned on USD/JPY and the US stock market to see if both will continue to sell-off.
British Pound - The British pound has sold off against everything in sight as the pair comes under the pressure of carry trade liquidation. Having been one of the market's favorite carry trade currencies to invest in over the past few years, it has also become one of the first to be sold in this wave of carry trade liquidation. UK data released this morning was mixed. The RICS house price balance reported the weakest growth in prices in 9 months. Although this is the first of many indexes to report softer price growth, traders should not completely ignore it. The key to figuring out whether the BoE will raise rates again this year is housing. It is important to keep on top of how the housing market is faring because it is a key component to their decision making. Looking ahead, we have unemployment data tomorrow. The report is expected to be positive for the British pound with the number of claimants dropping and average hourly earnings rising.
Japanese Yen - Once again, the Japanese Yen has stolen the show by ending the day with the biggest movements in the currency market. Over the past few weeks, if you want trade volatility, you have to be in the Yen. With no economic data released last night, the move today was completely driven by the liquidation. The Dow and USD/JPY relationship remains very much intact, but even though USD/JPY sold off first, the sharp reversal in the Dow appears to have exacerbated the sell-off in USD/JPY. We will probably see a bit more liquidation since prior waves of carry trade selling over the past few years have resulted in an average loss of 8 percent. So far, USD/JPY has fallen approximately 4.5 percent. We are only expecting the revision to industrial production tonight. There are no Japanese data of consequence until the Bank of Japan monetary policy meeting next week so flows will continue to drive the fluctuations in the Yen.
Commodity Currencies (CAD, AUD, NZD) - The Australian, New Zealand and Canadian dollars have all sold off significant today as traders liquidated all risky assets. Even though the market was very bearish US dollars today, they were even more bearish the Australian and New Zealand dollars since these pairs offer a higher interest rate than the US and because of that, they have been the preferred carry trade currencies for the market. The New Zealand dollar fell 1.45 percent against the US dollar while the Australian dollar fell 0.57 percent. The stronger Australian business confidence and job advertisement reports may have helped to limit the slide in the Aussie. Meanwhile the Canadian dollar dropped because traders were concerned that the down turn in the US housing market and the US economy as a whole could have a spillover effect on the Canadian economy. Looking ahead, we are expecting New Zealand manufacturing activity and Australian consumer confidence tonight. These reports will most likely do little to shift the current market sentiment.
Wednesday, March 14 - 2007 at 01:49
US Dollar -The problems in the sub-prime lending market have become too much for even the most optimistic trader to handle. New Century Financial Corp, the poster child of the meltdown in the sub-prime lending sector had its shares suspended from trading on the NYSE today and will most likely be de-listed in the near future. Although the market had become somewhat accustomed to hearing about the problems at New Century Financial, it was not prepared to hear that mortgage delinquencies hit a 4 year high in the fourth quarter. In the sub-prime market, delinquencies reached 13.33 percent and even though non-subprime borrowers are far less likely to be delinquent on their loans, the rate has been growing since the first quarter of 2006. With the housing market just beginning to turn, the worst may be yet to come. The Dow has fallen close to 245 points or 2 percent today, marking the biggest one day sell-off since the 3.3 percent move on February 27th. Risk aversion has returned to markets with traders liquidating all of their risky and high yielding positions. Carry trades have been hit the worst with NZD/JPY falling by 2.2 percent, AUD/JPY falling by 1.51 percent and USD/JPY falling by 1.12 percent. In addition to the problems in the sub-prime sector, consumer spending fell short of expectations for the month of February. Headline sales rose a meager 0.1 percent while sales excluding autos fell 0.1 percent. This is the first drop in sales excluding autos since Oct 2006 and suggests that first quarter GDP will be particularly weak since sales were flat in the month of January. Cold weather and a downturn in the housing market are to blame as sales of furniture and building materials slip significantly. Weaker consumer spending at a time when the sub-prime lending sector is in disarray could force the Federal Reserve to cut rates as early as this summer. With both stock market and housing market wealth of Americans slipping, future growth looks extremely bleak. At this point, the US dollar has few reasons to rally but any further extension lower may not come until Thursday when we have producer prices, net foreign purchases of US Securities and the Philadelphia Fed index on the docket.
Euro - On a day when we have seen a massive liquidation of many currency pairs, the fact that the Euro has been able to remain unchanged is quite remarkable. The strength in the German ZEW survey is sure to have helped. Even though analyst sentiment deteriorated between February and March, the deterioration was far less than expected as concerns about the Value Added Tax increase and the recent interest rate hike remains limited. In today's market, it is all about relative performance and right now the outlook for the US economy is far more concerning than the outlook for the Eurozone. In fact, Bundesbank President Weber joined ECB's Liebscher in saying that the risks to price stability remain strong and because of that, the ECB will need to raise rates again. Compare that to the Federal Reserve who may need to cut interest rates before August and we have a very clear explanation of why the EUR/USD is still holding strong. Eurozone industrial production and French and Italian consumer prices are due for release tomorrow. None of these reports will be particularly market moving. Traders will have their eyes pinned on USD/JPY and the US stock market to see if both will continue to sell-off.
British Pound - The British pound has sold off against everything in sight as the pair comes under the pressure of carry trade liquidation. Having been one of the market's favorite carry trade currencies to invest in over the past few years, it has also become one of the first to be sold in this wave of carry trade liquidation. UK data released this morning was mixed. The RICS house price balance reported the weakest growth in prices in 9 months. Although this is the first of many indexes to report softer price growth, traders should not completely ignore it. The key to figuring out whether the BoE will raise rates again this year is housing. It is important to keep on top of how the housing market is faring because it is a key component to their decision making. Looking ahead, we have unemployment data tomorrow. The report is expected to be positive for the British pound with the number of claimants dropping and average hourly earnings rising.
Japanese Yen - Once again, the Japanese Yen has stolen the show by ending the day with the biggest movements in the currency market. Over the past few weeks, if you want trade volatility, you have to be in the Yen. With no economic data released last night, the move today was completely driven by the liquidation. The Dow and USD/JPY relationship remains very much intact, but even though USD/JPY sold off first, the sharp reversal in the Dow appears to have exacerbated the sell-off in USD/JPY. We will probably see a bit more liquidation since prior waves of carry trade selling over the past few years have resulted in an average loss of 8 percent. So far, USD/JPY has fallen approximately 4.5 percent. We are only expecting the revision to industrial production tonight. There are no Japanese data of consequence until the Bank of Japan monetary policy meeting next week so flows will continue to drive the fluctuations in the Yen.
Commodity Currencies (CAD, AUD, NZD) - The Australian, New Zealand and Canadian dollars have all sold off significant today as traders liquidated all risky assets. Even though the market was very bearish US dollars today, they were even more bearish the Australian and New Zealand dollars since these pairs offer a higher interest rate than the US and because of that, they have been the preferred carry trade currencies for the market. The New Zealand dollar fell 1.45 percent against the US dollar while the Australian dollar fell 0.57 percent. The stronger Australian business confidence and job advertisement reports may have helped to limit the slide in the Aussie. Meanwhile the Canadian dollar dropped because traders were concerned that the down turn in the US housing market and the US economy as a whole could have a spillover effect on the Canadian economy. Looking ahead, we are expecting New Zealand manufacturing activity and Australian consumer confidence tonight. These reports will most likely do little to shift the current market sentiment.
Wednesday, March 14, 2007
Markets shaken by US housing fears
10am update
Fiona Walsh, business editor
Wednesday March 14, 2007
Guardian Unlimited
Fiona Walsh, business editor
Wednesday March 14, 2007
Guardian Unlimited
The FTSE 100 index crashed more than 100 points this morning, falling 114.8 points at one stage amid fears of another global share sell-off.
There were widespread falls for leading shares, although prices had come off the worst by 10am, with the FTSE 100 recovering a little to 6,076.8 points. This is still down more than 80 points on the day and follows yesterday's 72 point slide.
Traders had been bracing themselves for a rough ride when London opened, after heavy losses on Wall Street and Tokyo, but the early rout was worse than feared. At its low point shortly after opening, the FTSE 100 index fell to 6,047.4 points.
Growing fears over the US economy are behind the latest stock market turmoil. US stocks plunged almost 2% on Tuesday amid increasing fears over the state of the American housing market, particularly the so-called sub-prime sector, where loans are made to borrowers with poor credit ratings.
New figures yesterday showed more and more homeowners across the Atlantic are falling behind with their mortgage payments and having their properties reposessed.
Fears that the mounting sub-prime crisis will spread to the wider US economy sparked a sharp decline in shares on Wall Street, with the Dow Jones Industrial Average tumbling by 242.66 points to 12,075.96, a fall of almost 2%, its second biggest one-day drop in almost four years.
Amid worries that the US problems could spread to the rest of the world, there were widespread losses in Asian markets overnight. In Tokyo, the Nikkei 225 index fell sharply, ending Wednesday's session more than 500 points lower, at 16,676.89, a fall of almost 3%.
Among the leaders, the banking sector was particularly hard hit. Shares in HBOS tumbled 49p to £10.27 and Barclays were 12.5p lower at 685p.
Mining stocks also suffered steep losses, with Xstrata down 62p to £23.05 and BHP Billiton 24p lower at £10.005.
Asian, European stocks plunge
By HANS GREIMEL, Associated Press Writer 1 hour, 1 minute ago
Asian stocks plunged Wednesday and European shares opened sharply lower after Wall Street chalked its second-biggest point drop in four years and rattled already nervous markets worldwide.
The tumble came just as international markets were recovering in recent days from sharp declines in early March amid concerns about overvalued stock prices and slower U.S. economic growth.
But those worries resurfaced as troubles at U.S. sub-prime lenders and lackluster retail sales pushed the Dow Jones industrials down nearly 2 percent Tuesday, sparking selloffs across Asia.
Stocks in Japan, Hong Kong, Malaysia, India and Australia all fell more than 2 percent, while shares in Singapore and the Philippines tumbled at least 3 percent.
In Europe, London's FTSE 100 dropped 1.7 percent shortly after the open, while Germany's DAX lost 1.8 percent. France's CAC 40 was also 1.7 percent lower.
On the Tokyo Stock Exchange, Asia's biggest bourse, the benchmark Nikkei 225 index sank 501.95 points, or 2.92 percent, to finish at 16,676.89 points. Foreign investors who bought up stocks during the recent rally led the selling, traders said.
Hong Kong's Hang Seng index fell 2.6 percent, Indian stocks dropped 3.1 percent, while Philippine stocks plunged 3.4 percent.
Overnight, the Dow fell 242.66, or 1.97 percent, to 12,075.96 amid concerns about problems at U.S. sub-prime lenders, who provide mortgages to people with poor credit. The U.S. Commerce Department also said sales at retailers rose a less-than-expected 0.1 percent in February, suggesting consumer spending might be waning.
"The U.S. sub-prime concern has cast a great shadow on Asia. The worry is that it could spill over and cause the U.S. economy to slow down, and this will cause a domino effect on the world economy," said Lee Cheng Hooi, technical analysis manager at EON Capital in Kuala Lumpur. "There could be more bloodbath to come."
Still, other analysts maintained that Asia's economic fundamentals remain strong and that the recent round of declines in stock prices were more likely a correction to cool markets that had risen too far too fast over recent months.
"The sell-off is in sympathy with the sharp sell-off we saw overnight on Wall Street, and it highlights the continued nervousness out there," said David Cohen, chief of Asian economic forecasting at Action Economics in Singapore.
"In perspective you could still say that this is a correction after the strong rally that was experienced for the previous several months around the world," he said.
While the U.S. retail sales data and mortgage news that prompted the sell-off on Wall Street "are a little concerning," fundamentals such as strong U.S. jobs data released Friday were still supportive of global equities.
"The world economy seems to be remaining on an upward trajectory," Cohen said.
The slump reversed a modest recovery in global markets from even bigger losses that started late last month with a sharp sell-off in Chinese stocks Feb. 27, which contributed to a 416-point drop in the Dow later that day.
The Shanghai Composite index fell 2 percent to 2,906.33 Wednesday. After gaining for six straight sessions the market was primed for a retreat, analysts said.
"This is the market's own adjustment after gaining for six days," said Zhu Haibin, an analyst at Everbright Securities in Shanghai.
In India, jittery investors sold off almost every blue chip stock, dragging the 30-share Sensitive Index, or Sensex, the benchmark index of the Bombay Stock Exchange, down more than 3 percent.
Indian shares have seen wild swings each time the global markets have turned weak. The Sensex fell 43 percent in May-June last year — only to bounce back to hit record highs. The Sensex reached an all-time high of 14,643 on Feb. 7, before losing about 2,000 points, or 14 percent, in the latest round of global declines.
Elsewhere Wednesday, Sydney's S&P/ASX 200 fell 2.1 percent, Singapore's Straits Times benchmark sank 3.35 percent, and South Korea's Kospi closed 2.0 percent lower.
____
Associated Press Writers Gillian Wong in Singapore, Eileen Ng in Kuala Lumpur and Toby Anderson in London contributed to this report.
Thursday, March 8, 2007
Is it payback time for world's borrowed prosperity?
Related
Man Group, Winton Hedge Funds Bruised by Market Rout
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From the Baltimore Sun
By Rolfe Winkler
March 8, 2007
Lots of people are asking what's happening to the stock market lately. Are we in for a crash or a protracted bear market? No one, of course, can say for sure. But an understanding of some of the key factors that have driven stock prices up the last few years suggests stocks are headed down from here.
Man Group, Winton Hedge Funds Bruised by Market Rout
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From the Baltimore Sun
By Rolfe Winkler
March 8, 2007
Lots of people are asking what's happening to the stock market lately. Are we in for a crash or a protracted bear market? No one, of course, can say for sure. But an understanding of some of the key factors that have driven stock prices up the last few years suggests stocks are headed down from here.
An interesting graphic in The Wall Street Journal two weeks ago, right before stocks fell so hard, showed that all of the world's top 20 stock markets were at yearly or all-time highs. Everybody was buying stocks. And it's not just stocks. Prices on many types of bonds are sky-high. Despite some areas of falling prices, real estate values are also still near all-time highs across the nation.
What could explain this? The biggest reason is that there is a record amount of cash around the world looking for a home. Investors have money to invest and so they're putting it anywhere and everywhere, bidding up the value of the assets mentioned above and many more.
That should be good, right? A record amount of cash means people are doing well, doesn't it?
Not so fast. It's crucial to understand where so much of this cash is coming from: It's borrowed. At some point, it has to be paid back.
For the last few years, investors worldwide have capitalized on rock-bottom interest rates to finance purchases of stocks, bonds, real estate, commodities and so on. When you buy things, their price goes up. But now it's payback time - literally.
Look at real estate. Over the last few years, it was very easy to borrow money to buy a house or a condo. In many cases, lenders stopped asking borrowers to provide proof of income before financing up to 100 percent of the purchase price of a home. But now, borrowers are discovering it's not so easy to pay a mortgage you can't afford.
A similar dynamic is playing out with stocks and bonds: The borrowing phase is ending and the paying-back phase is beginning.
Just as in real estate, investors have been borrowing record amounts of money to buy stocks and bonds the last few years. In late February, for instance, the New York Stock Exchange reported that money borrowed to buy stock (on "margin") reached an all-time high. With interest rates on yen near zero, hedge funds have been borrowing yen for virtually nothing to buy stocks. With junk-bond yields near all-time lows, leveraged-buyout firms have been borrowing billions to finance the purchase of huge public companies such as hospital owner HCA, commercial real estate company Equity Office Properties Trust, and, just last week, the utility TXU.
What's bringing on the payback period in stocks and bonds? One reason is that the Bank of Japan said last week it will raise interest rates on loans made in yen, forcing many hedge fund investors to sell the stocks they bought with borrowed yen. On the housing front, the implosion of subprime lending can only exacerbate the fall in real estate prices as borrowing to buy homes becomes more difficult. The bottom line is that easy credit to buy stocks, bonds and real estate may be a thing of the past.
When markets are driven up with too much borrowed money, it can set them up for a big fall. One of the key factors that led to the dramatic rise of stocks in 1929 was the explosion of broker loans to buy stock. It got pretty ugly when everyone was forced to pay back those loans over a short period.
The next Great Depression is likely not around the corner. The worldwide economy is probably too strong for that to happen. But we should never forget this lesson of 1929:
Markets that fly high with borrowed money can crash hard.
Rolfe Winkler, Chartered Financial Analyst, is an analyst at a hedge fund. His e-mail is rolfewinkler@yahoo.com.
Copyright © 2007, The Baltimore Sun
Stock Market Manipulation - The secret maneuverings of the Plunge Protection Team (PPT)
Stock-Markets / Analysis & Strategy
Mar 05, 2007 - 06:15 PM
By Mike Whitney
The Working Group on Financial Markets, also know as the Plunge Protection Team, was created by Ronald Reagan to prevent a repeat of the Wall Street meltdown of October 1987. Its members include the Secretary of the Treasury, the Chairman of the Federal Reserve, the Chairman of the SEC and the Chairman of the Commodity Futures Trading Commission. Recently, the team has been on high-alert given the increased volatility of the markets and, what Hank Paulson calls, "the systemic risk posed by hedge funds and derivatives.”
Last Tuesday's 416 point drop in the stock market has sent tremors through global system. An 8% freefall on the Chinese stock exchange triggered a massive equities sell-off which continued sporadically throughout the week. The sudden shift in sentiment, from Bull to Bear, has drawn more attention to deeply rooted “systemic” problems in the US economy. US manufacturing is already in recession, the dollar continues to weaken, consumer spending is flat, and the sub-prime market in real estate has begun to nosedive. These have all contributed to the markets' erratic behavior and created the likelihood that the Plunge Protection Team may be stealthily intervening behind the scenes.
According to John Crudele of the New York Post, the Plunge Protection Team's (PPT) modus operandi was revealed by a former member of the Federal Reserve Board, Robert Heller. Heller said that disasters could be mitigated by “buying market averages in the futures market, thus stabilizing the market as a whole.” This appears to be the strategy that has been used.
Former-Clinton advisor, George Stephanopoulos, verified the existence of The Plunge Protection Team (as well as its methods) in an appearance on Good Morning America on Sept 17, 2000. Stephanopoulos said:
“Well, what I wanted to talk about for a few minutes is the various efforts that are going on in public and behind the scenes by the Fed and other government officials to guard against a free-fall in the markets….perhaps the most important the Fed in 1989 created what is called the Plunge Protection Team, which is the Federal Reserve, big major banks, representatives of the New York Stock Exchange and the other exchanges and they have been meeting informally so far, and they have a kind of an informal agreement among major banks to come in and start to buy stock if there appears to be a problem. They have in the past acted more formally… I don't know if you remember but in 1998, there was a crisis called the Long term Capital Crisis. It was a major currency trader and there was a global currency crisis. And they, with the guidance of the Fed, all of the banks got together when it started to collapse and propped up the currency markets. And, they have plans in place to consider that if the markets start to fall.”
Stephanopoulos' comments have never been officially denied. In fact, as Ambrose Evans-Pritchard of the U.K. Telegraph notes, Secretary of the Treasury, Hank Paulson has called for the PPT to meet with greater frequency and set up “a command centre at the US Treasury that will track global markets and serve as an operations base in the next crisis. The top brass will meet every six weeks, combining the heads of Treasury, Federal Reserve, Securities and Exchange Commission (SEC), and key exchanges”.
This suggests that the PPT may have been deeply involved in last Wednesday's “miraculous” stock market rebound from Tuesday's losses. There was no apparent reason for the market to suddenly “go positive” following a ruinous day that shook investor confidence around the world. The editors of the New York Times summarized the feelings of many market-watchers who were baffled by this odd recovery:
“The torrent of bad news on housing is only worsening, with a report yesterday that new home sales for January had their steepest slide in 13 years...Manufacturing has already slipped into a recession, with activity contracting in two of the last three months. How is it then that investors took Mr. Bernanke's words as a “buy” signal?”
How indeed; unless other forces were operating secretly behind the scenes?
Market Rigging
“Gaming” the system may be easier than many people believe. Robert McHugh, Ph.D. has provided a description of how it works which seems consistent with the comments of Robert Heller. McHugh lays it out like this:
“The PPT decides markets need intervention, a decline needs to be stopped, or the risks associated with political events that could be perceived by markets as highly negative and cause a decline; need to be prevented by a rally already in flight. To get that rally, the PPT's key component — the Fed — lends money to surrogates who will take that fresh electronically printed cash and buy markets through some large unknown buyer's account. That buying comes out of the blue at a time when short interest is high. The unexpected rally strikes blood, and fear overcomes those who were betting the market would drop. These shorts need to cover, need to buy the very stocks they had agreed to sell (without owning them) at today's prices in anticipation they could buy them in the future at much lower prices and pocket the difference. Seeing those stocks rally above their committed selling price, the shorts are forced to buy — and buy they do. Thus, those most pessimistic about the equity market end up buying equities like mad, fueling the rally that the PPT started. Bingo, a huge turnaround rally is well underway, and sidelines money from Hedge Funds, Mutual funds and individuals' rushes in to join in the buying madness for several days and weeks as the rally gathers a life of its own.” (Robert McHugh, Ph.D., “The Plunge Protection Team Indicator”)
If a secret team is interfering in the stock market, it presents serious practical and moral issues. For one thing, it disrupts natural “corrections” which are a normal part of the business cycle and which help to maintain a healthy and competitive slate of equities.
More importantly, outside intervention punishes the people who see the weaknesses in the stock market and have invested accordingly. Clearly, these people are being ripped off by the PPT's back-channel manipulations. They deserve to be fairly compensated for the risks they have taken.
Moreover, artificially propping up the market only encourages over-leveraged speculators and smiley-face Pollyanna's who continue to believe that the grossly-inflated market will continue to rise. Rewarding foolishness only stimulates greater speculation.
The tinkering of the PPT is sure to erode confidence in the unimpeded activity of capital markets. It's astonishing to think that, after years of singing the praises of the “free market” as the ultimate expression of God's divine plan; these same conservative ideologues and “market purists” favor a strategy for direct intrusion. The actions of the Plunge Protection Team prove that it's all baloney. The “free market” is merely a public relations myth with no basis in reality. Saving the system will always take precedent over ideology; just as the “invisible hand” will always be overpowered by the manicured and mettlesome fingers of banking elites and Wall Street big wigs. It's their system and they're not going to let it get wiped out by some silly commitment to principle.
The free market system is supposed to be “self cleansing” through cyclical purges of over-inflated equities and over-extended speculators. Do we really want “central planning” from an unelected, Market-Nanny that re-jiggers the system according to its own economic interests?
The Plunge Protection Team may wrap itself in pompous rhetoric, but it operates like a Fiscal Politburo inserting itself into the market in way that promotes the narrow interests of its own constituents. It's an outrage.
Besides, the market is so fragile it trembles every time someone halfway around the world sells a fistful of equities. It needs a good shakedown.
The years of deregulation have taken their toll. The market is resting on a foundation of pure quicksand. Collateralized debt, rickety hedge funds, shaky sub-prime equities, and an ocean of margin debt are just a few examples of deregulation's excesses. These untested debt-instruments are presently bearing down on Wall Street like a laser-guided missile. It'll take more than Hank Paulson and his PPT “plumber's unit” to prevent the implosion.
Wall Street needs to regain its lost credibility with more regulation and stricter laws. The system needs a major face-lift. Still, even as the markets rumble and shake, Paulson rejects any move towards greater government supervision. According to the New York Times:
“Henry Paulson and top financial regulators said the government need not — and should not — provide greater oversight for the $1.4 trillion hedge fund industry, or, by extension, the trillions of dollars more in complex derivative transactions spawned by the industry. That stance is mostly free-market ideology run amok. But it is also based on the unproven assumption that unregulated investing, which dispersed risk and reduced volatility as markets surged, will continue to do so when markets tank.
The upshot is a one-sided bet for investors. They have explicit assurances from regulators and policy makers that almost anything goes when the markets are hot, and implicit assurances — based on past experience — that the Fed would lower interest rates to contain a financial crisis should one erupt. Unfortunately, there is no guarantee that easing up on rates would have the same powerful effect in a future crisis as it had in the past.
The next crisis appears to be building around weakness in the United States, not in Russia or Asia or South America. That means money could flow out of the country if markets were rattled. That would weaken the dollar and require speedy and complex remedial action by the world's central banks — not just a rate cut by the Fed.” (NY Times)
The Times is right, Paulson's “hands off” attitude is a classic example of “free-market ideology run amok”. A meltdown in the Hedge funds industry or the derivatives market would bring the entire economy crashing to earth. Paulson's Plunge Protection Team is a band-aid approach to a much more serious dilemma. It's time for the government to get involved and protect the small investor.
Paulson has shown that he understands the problem; he simply resists the solution. Just a few months ago he opined, “We need to be vigilant and make sure we are thinking through all of the various risks and that we are being very careful here. Do we have enough liquidity in the system"?
No, we don't. And Paulson knows it; that's why there's a plan to fiddle the system and try to “cheat the Reaper”. But it won't work. This is the biggest equity bubble in history. Neither increasing the money supply nor lowering interest rates will fend off the impending catastrophe. We need to address the mushrooming risk that has arisen from lending hundreds of billions in sub-prime loans, and from overexposure in the hedge funds and derivatives markets. These things need to be confronted immediately as they pose a “clear and present danger” which could set off a chain reaction of defaults and bankruptcies.
The world's markets are facing a global liquidity crisis which will become more evident as the real estate sub-prime market continues to deteriorate. This will undoubtedly be accompanied by larger and more ferocious gyrations in the stock market.
Does “Hans Brinker” Paulson really believe he can stop the flood by sticking his well-burnished finger in the dike?
It's All Uphill from Here on Out
The U.S. economy faces daunting challenges in the near-future; a steadily shrinking manufacturing sector, increasing job losses in housing, a nascent currency crisis, and a real estate market that is in full retreat. Additionally, the “always dependable” American consumer is showing signs of fatigue which is pushing investors towards foreign markets.
This explains why “the SEC said it aims to slash margin requirements for institutions and hedge funds on stocks, options, and futures to as low as 15pc, down from a range of 25pc to 50pc.The ostensible reason is to lure back hedge funds from London, but it is odd policy to license extra leverage just as the Dow hits an all-time high and the VIX 'fear' index nears an all-time low – signaling a worrying level of risk appetite. The normal practice across the world is to tighten margins to cool over-heated asset markets.” (Ambrose Evans-Pritchard, “Monday View: Paulson Reactivates Secretive support team to prevent markets meltdown” UK Telegraph)
This is yet another red flag. The stewards of the system are actively seeking larger infusions of marginal debt just to keep the faltering market on its last legs.
That's not reassuring and it is clearly a step in the wrong direction. It further illustrates the worrisome level of recklessness at the top rungs of the decision-making apparatus.
Converting the PPT into another Safety-net for Private Industry
The original purpose of the Plunge Protection Team was to prevent another 1987-type “Black Monday" stock market crash. This seems like a reasonable way to address the prospect of a major economic collapse following a terrorist attack or a natural disaster. However, the systemic weakness in the market and the great uncertainty surrounding hedge funds and derivatives suggests that the PPL is probably being used to stabilize an over-leveraged and thoroughly-debauched system.
If that's the case, then we need to know whether the PPT really operates in the public interest or if it is just a stopgap for big business to avoid a painful retrenchment?
It's the corporate warlords and banking moguls who have benefited the most from dismantling the regulatory system. The PPT creates an additional “taxpayer-supported” safety net for dubious debt-instruments which are finally beginning to unravel. There's no reason why the market should be manipulated simply to protect private investment. It is a fundamental contradiction to the workings of a free market.
According to Michael Edward: (“The Secrets of the Plunge Protection Team” Rense.com)
“Since 911, there have been at least three major long-term stock market rallies. In all 3 instances, when the markets opened all the indexes began to quickly plunge. In each incidence, by early afternoon the markets were brought back from the brink of collapse to the surprise of everyone, including historical analysts….An event that should have sent markets spiraling downward was the Enron, et al, unprecedented corporate accounting scandals. Yet despite this, an unprecedented across-the-board markets rally began on July 24, 2002. Once again, the European Press called it a ‘PPT rally'". Edward goes on to say that outside the US it's “no secret” that the market is being manipulated. He cites an article in the UK Guardian on 9-16-01 which states, "that a secretive committee... dubbed 'the plunge protection team'... is ready to coordinate intervention by the Federal Reserve on an unprecedented scale. The Fed, supported by the banks, will buy equities from mutual funds and other institutional sellers.”
There are myriad other examples which support Edward's basic theory. As the NY Post's John Crudele said, “Over the next few years, people like me suspected that Heller's plan was indeed in effect. Whenever the stock market was in trouble someone seemed to ride to the rescue.”
Crudele is right; the market is being manipulated.
This may explain why the Federal Reserve mysteriously decided to stop publishing its M-3 report. Since the Fed is the “main resource” for buying averages in the futures market “the money is injected into markets via the New York Fed's Repo desk, which easily showed up in the M-3…. Without the useful resource of M-3”, Robert McHugh, Ph.D.says, “we need to find other tools to monitor when the PPT is likely to intervene, and kill shorts”.
What? So by abolishing the M-3, the Federal Reserve has removed its greasy fingerprints from the smoking gun of market meddling?
It appears so.
Trust in the Free Market is Wavering
Whatever happened to the idea of completing the “market cycle” and allowing markets to self-correct whether that meant belt-tightening or not? And, what about the ethical question of whether government manipulation should be allowed in a “free market”?
Also, by what authority do the government and the privately-owned banks interfere in the futures' markets and shift momentum from the prevailing trend? Is this a free market or a command economy?
The precariousness of our present economic situation has caused these dramatic changes and strengthened the conjugal relationship between the privately-owned Central Bank, major corporations and the state. The market is more vulnerable now than anytime since the late 1920s, a fact that was emphasized in a statement by the IMF just 2 months ago:
“Financial markets have failed to price in the risk that any one of a host of threats to economic security could materialize and deliver a massive shock to the world economy. It is clear that risks are on the downside of a sharper than expected slowdown in house prices that would produce weaker-than-expected growth that would have implications for global growth and financial markets.” (“IMF: Risk of global crash is increasing” UK Independent)
Risk, over-exposure, cheap money, shaky loans, a falling dollar, low reserves and a confidence deficit; these are the crumbling cinder-blocks upon which America's Empire of Debt currently rests. The possibility of a major disruption grows more likely by the day. Consider the world's 8,000 unregulated hedge funds with $1.3trillion at their disposal or the wobbly derivatives market and the effects that a sudden downturn might have. Kenneth J. Gerbino put it like this in his recent article “The Big Sell Off” on kitco.com:
“With a global market panic starting in a low interest rate and, so far, low inflation environment, one has to be wonder about the real reason for (Tuesday's) sell-off. Easy money almost everywhere leads to leverage and speculation. No where is this more prevalent than in the global derivatives market. It is not out of the question that third party defaults and risk aversion designed instruments that collapse and go sour may someday overwhelm the financial markets. Latest figures from the Bank of International Settlements: $8.3 trillion of real money is controlling $313 trillion in derivatives. That's 38 to 1 leverage. These figures are just for the over - the - counter derivatives and do not include the global exchange traded derivatives in currencies, stocks and commodities which are another $75 trillion.”
“$8.3 trillion of real money is controlling $313 trillion in derivatives!”
This illustrates the sheer magnitude of the problem and the economy-busting potential of a miscalculation. That's why Warren Buffett calls derivatives “weapons of mass destruction”. If there's a fire-sale in hedge funds or derivatives, there's nothing the Plunge Protection Team or the Federal Reserve will be able to do to stop a meltdown. The market will crash leaving nothing behind.
We are reaping the rewards of a lawless, deregulated system which has removed all the safeguards for protecting the small investor. There is no government oversight; it's a joke. The stock market is a crap-shoot that serves the sole interests of establishment elites, corporate plutocrats, and banking giants. The small investor is trapped beneath the wheel and getting squeezed more and more every day. He has no way to fix the markets like the big guys and no lobby to promote his interests. He must arrive at his decisions by researching publicly available information and then plunking down his money. That's it. He'd be better off in a casino; the odds are about the same.
By Mike Whitney
Email: fergiewhitney@msn.com
Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.
Mar 05, 2007 - 06:15 PM
By Mike Whitney
The Working Group on Financial Markets, also know as the Plunge Protection Team, was created by Ronald Reagan to prevent a repeat of the Wall Street meltdown of October 1987. Its members include the Secretary of the Treasury, the Chairman of the Federal Reserve, the Chairman of the SEC and the Chairman of the Commodity Futures Trading Commission. Recently, the team has been on high-alert given the increased volatility of the markets and, what Hank Paulson calls, "the systemic risk posed by hedge funds and derivatives.”
Last Tuesday's 416 point drop in the stock market has sent tremors through global system. An 8% freefall on the Chinese stock exchange triggered a massive equities sell-off which continued sporadically throughout the week. The sudden shift in sentiment, from Bull to Bear, has drawn more attention to deeply rooted “systemic” problems in the US economy. US manufacturing is already in recession, the dollar continues to weaken, consumer spending is flat, and the sub-prime market in real estate has begun to nosedive. These have all contributed to the markets' erratic behavior and created the likelihood that the Plunge Protection Team may be stealthily intervening behind the scenes.
According to John Crudele of the New York Post, the Plunge Protection Team's (PPT) modus operandi was revealed by a former member of the Federal Reserve Board, Robert Heller. Heller said that disasters could be mitigated by “buying market averages in the futures market, thus stabilizing the market as a whole.” This appears to be the strategy that has been used.
Former-Clinton advisor, George Stephanopoulos, verified the existence of The Plunge Protection Team (as well as its methods) in an appearance on Good Morning America on Sept 17, 2000. Stephanopoulos said:
“Well, what I wanted to talk about for a few minutes is the various efforts that are going on in public and behind the scenes by the Fed and other government officials to guard against a free-fall in the markets….perhaps the most important the Fed in 1989 created what is called the Plunge Protection Team, which is the Federal Reserve, big major banks, representatives of the New York Stock Exchange and the other exchanges and they have been meeting informally so far, and they have a kind of an informal agreement among major banks to come in and start to buy stock if there appears to be a problem. They have in the past acted more formally… I don't know if you remember but in 1998, there was a crisis called the Long term Capital Crisis. It was a major currency trader and there was a global currency crisis. And they, with the guidance of the Fed, all of the banks got together when it started to collapse and propped up the currency markets. And, they have plans in place to consider that if the markets start to fall.”
Stephanopoulos' comments have never been officially denied. In fact, as Ambrose Evans-Pritchard of the U.K. Telegraph notes, Secretary of the Treasury, Hank Paulson has called for the PPT to meet with greater frequency and set up “a command centre at the US Treasury that will track global markets and serve as an operations base in the next crisis. The top brass will meet every six weeks, combining the heads of Treasury, Federal Reserve, Securities and Exchange Commission (SEC), and key exchanges”.
This suggests that the PPT may have been deeply involved in last Wednesday's “miraculous” stock market rebound from Tuesday's losses. There was no apparent reason for the market to suddenly “go positive” following a ruinous day that shook investor confidence around the world. The editors of the New York Times summarized the feelings of many market-watchers who were baffled by this odd recovery:
“The torrent of bad news on housing is only worsening, with a report yesterday that new home sales for January had their steepest slide in 13 years...Manufacturing has already slipped into a recession, with activity contracting in two of the last three months. How is it then that investors took Mr. Bernanke's words as a “buy” signal?”
How indeed; unless other forces were operating secretly behind the scenes?
Market Rigging
“Gaming” the system may be easier than many people believe. Robert McHugh, Ph.D. has provided a description of how it works which seems consistent with the comments of Robert Heller. McHugh lays it out like this:
“The PPT decides markets need intervention, a decline needs to be stopped, or the risks associated with political events that could be perceived by markets as highly negative and cause a decline; need to be prevented by a rally already in flight. To get that rally, the PPT's key component — the Fed — lends money to surrogates who will take that fresh electronically printed cash and buy markets through some large unknown buyer's account. That buying comes out of the blue at a time when short interest is high. The unexpected rally strikes blood, and fear overcomes those who were betting the market would drop. These shorts need to cover, need to buy the very stocks they had agreed to sell (without owning them) at today's prices in anticipation they could buy them in the future at much lower prices and pocket the difference. Seeing those stocks rally above their committed selling price, the shorts are forced to buy — and buy they do. Thus, those most pessimistic about the equity market end up buying equities like mad, fueling the rally that the PPT started. Bingo, a huge turnaround rally is well underway, and sidelines money from Hedge Funds, Mutual funds and individuals' rushes in to join in the buying madness for several days and weeks as the rally gathers a life of its own.” (Robert McHugh, Ph.D., “The Plunge Protection Team Indicator”)
If a secret team is interfering in the stock market, it presents serious practical and moral issues. For one thing, it disrupts natural “corrections” which are a normal part of the business cycle and which help to maintain a healthy and competitive slate of equities.
More importantly, outside intervention punishes the people who see the weaknesses in the stock market and have invested accordingly. Clearly, these people are being ripped off by the PPT's back-channel manipulations. They deserve to be fairly compensated for the risks they have taken.
Moreover, artificially propping up the market only encourages over-leveraged speculators and smiley-face Pollyanna's who continue to believe that the grossly-inflated market will continue to rise. Rewarding foolishness only stimulates greater speculation.
The tinkering of the PPT is sure to erode confidence in the unimpeded activity of capital markets. It's astonishing to think that, after years of singing the praises of the “free market” as the ultimate expression of God's divine plan; these same conservative ideologues and “market purists” favor a strategy for direct intrusion. The actions of the Plunge Protection Team prove that it's all baloney. The “free market” is merely a public relations myth with no basis in reality. Saving the system will always take precedent over ideology; just as the “invisible hand” will always be overpowered by the manicured and mettlesome fingers of banking elites and Wall Street big wigs. It's their system and they're not going to let it get wiped out by some silly commitment to principle.
The free market system is supposed to be “self cleansing” through cyclical purges of over-inflated equities and over-extended speculators. Do we really want “central planning” from an unelected, Market-Nanny that re-jiggers the system according to its own economic interests?
The Plunge Protection Team may wrap itself in pompous rhetoric, but it operates like a Fiscal Politburo inserting itself into the market in way that promotes the narrow interests of its own constituents. It's an outrage.
Besides, the market is so fragile it trembles every time someone halfway around the world sells a fistful of equities. It needs a good shakedown.
The years of deregulation have taken their toll. The market is resting on a foundation of pure quicksand. Collateralized debt, rickety hedge funds, shaky sub-prime equities, and an ocean of margin debt are just a few examples of deregulation's excesses. These untested debt-instruments are presently bearing down on Wall Street like a laser-guided missile. It'll take more than Hank Paulson and his PPT “plumber's unit” to prevent the implosion.
Wall Street needs to regain its lost credibility with more regulation and stricter laws. The system needs a major face-lift. Still, even as the markets rumble and shake, Paulson rejects any move towards greater government supervision. According to the New York Times:
“Henry Paulson and top financial regulators said the government need not — and should not — provide greater oversight for the $1.4 trillion hedge fund industry, or, by extension, the trillions of dollars more in complex derivative transactions spawned by the industry. That stance is mostly free-market ideology run amok. But it is also based on the unproven assumption that unregulated investing, which dispersed risk and reduced volatility as markets surged, will continue to do so when markets tank.
The upshot is a one-sided bet for investors. They have explicit assurances from regulators and policy makers that almost anything goes when the markets are hot, and implicit assurances — based on past experience — that the Fed would lower interest rates to contain a financial crisis should one erupt. Unfortunately, there is no guarantee that easing up on rates would have the same powerful effect in a future crisis as it had in the past.
The next crisis appears to be building around weakness in the United States, not in Russia or Asia or South America. That means money could flow out of the country if markets were rattled. That would weaken the dollar and require speedy and complex remedial action by the world's central banks — not just a rate cut by the Fed.” (NY Times)
The Times is right, Paulson's “hands off” attitude is a classic example of “free-market ideology run amok”. A meltdown in the Hedge funds industry or the derivatives market would bring the entire economy crashing to earth. Paulson's Plunge Protection Team is a band-aid approach to a much more serious dilemma. It's time for the government to get involved and protect the small investor.
Paulson has shown that he understands the problem; he simply resists the solution. Just a few months ago he opined, “We need to be vigilant and make sure we are thinking through all of the various risks and that we are being very careful here. Do we have enough liquidity in the system"?
No, we don't. And Paulson knows it; that's why there's a plan to fiddle the system and try to “cheat the Reaper”. But it won't work. This is the biggest equity bubble in history. Neither increasing the money supply nor lowering interest rates will fend off the impending catastrophe. We need to address the mushrooming risk that has arisen from lending hundreds of billions in sub-prime loans, and from overexposure in the hedge funds and derivatives markets. These things need to be confronted immediately as they pose a “clear and present danger” which could set off a chain reaction of defaults and bankruptcies.
The world's markets are facing a global liquidity crisis which will become more evident as the real estate sub-prime market continues to deteriorate. This will undoubtedly be accompanied by larger and more ferocious gyrations in the stock market.
Does “Hans Brinker” Paulson really believe he can stop the flood by sticking his well-burnished finger in the dike?
It's All Uphill from Here on Out
The U.S. economy faces daunting challenges in the near-future; a steadily shrinking manufacturing sector, increasing job losses in housing, a nascent currency crisis, and a real estate market that is in full retreat. Additionally, the “always dependable” American consumer is showing signs of fatigue which is pushing investors towards foreign markets.
This explains why “the SEC said it aims to slash margin requirements for institutions and hedge funds on stocks, options, and futures to as low as 15pc, down from a range of 25pc to 50pc.The ostensible reason is to lure back hedge funds from London, but it is odd policy to license extra leverage just as the Dow hits an all-time high and the VIX 'fear' index nears an all-time low – signaling a worrying level of risk appetite. The normal practice across the world is to tighten margins to cool over-heated asset markets.” (Ambrose Evans-Pritchard, “Monday View: Paulson Reactivates Secretive support team to prevent markets meltdown” UK Telegraph)
This is yet another red flag. The stewards of the system are actively seeking larger infusions of marginal debt just to keep the faltering market on its last legs.
That's not reassuring and it is clearly a step in the wrong direction. It further illustrates the worrisome level of recklessness at the top rungs of the decision-making apparatus.
Converting the PPT into another Safety-net for Private Industry
The original purpose of the Plunge Protection Team was to prevent another 1987-type “Black Monday" stock market crash. This seems like a reasonable way to address the prospect of a major economic collapse following a terrorist attack or a natural disaster. However, the systemic weakness in the market and the great uncertainty surrounding hedge funds and derivatives suggests that the PPL is probably being used to stabilize an over-leveraged and thoroughly-debauched system.
If that's the case, then we need to know whether the PPT really operates in the public interest or if it is just a stopgap for big business to avoid a painful retrenchment?
It's the corporate warlords and banking moguls who have benefited the most from dismantling the regulatory system. The PPT creates an additional “taxpayer-supported” safety net for dubious debt-instruments which are finally beginning to unravel. There's no reason why the market should be manipulated simply to protect private investment. It is a fundamental contradiction to the workings of a free market.
According to Michael Edward: (“The Secrets of the Plunge Protection Team” Rense.com)
“Since 911, there have been at least three major long-term stock market rallies. In all 3 instances, when the markets opened all the indexes began to quickly plunge. In each incidence, by early afternoon the markets were brought back from the brink of collapse to the surprise of everyone, including historical analysts….An event that should have sent markets spiraling downward was the Enron, et al, unprecedented corporate accounting scandals. Yet despite this, an unprecedented across-the-board markets rally began on July 24, 2002. Once again, the European Press called it a ‘PPT rally'". Edward goes on to say that outside the US it's “no secret” that the market is being manipulated. He cites an article in the UK Guardian on 9-16-01 which states, "that a secretive committee... dubbed 'the plunge protection team'... is ready to coordinate intervention by the Federal Reserve on an unprecedented scale. The Fed, supported by the banks, will buy equities from mutual funds and other institutional sellers.”
There are myriad other examples which support Edward's basic theory. As the NY Post's John Crudele said, “Over the next few years, people like me suspected that Heller's plan was indeed in effect. Whenever the stock market was in trouble someone seemed to ride to the rescue.”
Crudele is right; the market is being manipulated.
This may explain why the Federal Reserve mysteriously decided to stop publishing its M-3 report. Since the Fed is the “main resource” for buying averages in the futures market “the money is injected into markets via the New York Fed's Repo desk, which easily showed up in the M-3…. Without the useful resource of M-3”, Robert McHugh, Ph.D.says, “we need to find other tools to monitor when the PPT is likely to intervene, and kill shorts”.
What? So by abolishing the M-3, the Federal Reserve has removed its greasy fingerprints from the smoking gun of market meddling?
It appears so.
Trust in the Free Market is Wavering
Whatever happened to the idea of completing the “market cycle” and allowing markets to self-correct whether that meant belt-tightening or not? And, what about the ethical question of whether government manipulation should be allowed in a “free market”?
Also, by what authority do the government and the privately-owned banks interfere in the futures' markets and shift momentum from the prevailing trend? Is this a free market or a command economy?
The precariousness of our present economic situation has caused these dramatic changes and strengthened the conjugal relationship between the privately-owned Central Bank, major corporations and the state. The market is more vulnerable now than anytime since the late 1920s, a fact that was emphasized in a statement by the IMF just 2 months ago:
“Financial markets have failed to price in the risk that any one of a host of threats to economic security could materialize and deliver a massive shock to the world economy. It is clear that risks are on the downside of a sharper than expected slowdown in house prices that would produce weaker-than-expected growth that would have implications for global growth and financial markets.” (“IMF: Risk of global crash is increasing” UK Independent)
Risk, over-exposure, cheap money, shaky loans, a falling dollar, low reserves and a confidence deficit; these are the crumbling cinder-blocks upon which America's Empire of Debt currently rests. The possibility of a major disruption grows more likely by the day. Consider the world's 8,000 unregulated hedge funds with $1.3trillion at their disposal or the wobbly derivatives market and the effects that a sudden downturn might have. Kenneth J. Gerbino put it like this in his recent article “The Big Sell Off” on kitco.com:
“With a global market panic starting in a low interest rate and, so far, low inflation environment, one has to be wonder about the real reason for (Tuesday's) sell-off. Easy money almost everywhere leads to leverage and speculation. No where is this more prevalent than in the global derivatives market. It is not out of the question that third party defaults and risk aversion designed instruments that collapse and go sour may someday overwhelm the financial markets. Latest figures from the Bank of International Settlements: $8.3 trillion of real money is controlling $313 trillion in derivatives. That's 38 to 1 leverage. These figures are just for the over - the - counter derivatives and do not include the global exchange traded derivatives in currencies, stocks and commodities which are another $75 trillion.”
“$8.3 trillion of real money is controlling $313 trillion in derivatives!”
This illustrates the sheer magnitude of the problem and the economy-busting potential of a miscalculation. That's why Warren Buffett calls derivatives “weapons of mass destruction”. If there's a fire-sale in hedge funds or derivatives, there's nothing the Plunge Protection Team or the Federal Reserve will be able to do to stop a meltdown. The market will crash leaving nothing behind.
We are reaping the rewards of a lawless, deregulated system which has removed all the safeguards for protecting the small investor. There is no government oversight; it's a joke. The stock market is a crap-shoot that serves the sole interests of establishment elites, corporate plutocrats, and banking giants. The small investor is trapped beneath the wheel and getting squeezed more and more every day. He has no way to fix the markets like the big guys and no lobby to promote his interests. He must arrive at his decisions by researching publicly available information and then plunking down his money. That's it. He'd be better off in a casino; the odds are about the same.
By Mike Whitney
Email: fergiewhitney@msn.com
Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.
Tuesday, March 6, 2007
How housing ills killed the bull
Who's to blame for the recent stock plunge? Not China. The big cause is a little closer to home.
Latest Market Update
March 06, 2007 -- 16:20 ET
[BRIEFING.COM] One week ago fears that the market was getting ahead of itself, after running virtually unabated since bottoming in July, caught the bulls off guard, resulting in the biggest one-day point decline since the U.S. markets reopened on...
By Bill Fleckenstein
The landscape of Wall Street has changed. Tuesday's shellacking leaves no other conclusion. But how has it been altered, readers will ask, and what might that mean? I've got my opinions, which I'd like to now share.
--MORE--
Latest Market Update
March 06, 2007 -- 16:20 ET
[BRIEFING.COM] One week ago fears that the market was getting ahead of itself, after running virtually unabated since bottoming in July, caught the bulls off guard, resulting in the biggest one-day point decline since the U.S. markets reopened on...
By Bill Fleckenstein
The landscape of Wall Street has changed. Tuesday's shellacking leaves no other conclusion. But how has it been altered, readers will ask, and what might that mean? I've got my opinions, which I'd like to now share.
--MORE--
Friday, March 2, 2007
The Big Meltdown: PAUL KRUGMAN - Financial Crisis
THE COMPLETE ARTICLE
THE NEW YORK TIMES
OP-ED COLUMNIST
THE NEW YORK TIMES
OP-ED COLUMNIST
The Big Meltdown
By PAUL KRUGMANPublished: March 2, 2007
If we’re going to have a financial crisis, here’s how it will play out.
If we’re going to have a financial crisis, here’s how it will play out.
The great market meltdown of 2007 began exactly a year ago, with a 9 percent fall in the Shanghai market, followed by a 416-point slide in the Dow. But as in the previous global financial crisis, which began with the devaluation of Thailand’s currency in the summer of 1997, it took many months before people realized how far the damage would spread.
At the start, all sorts of implausible explanations were offered for the drop in U.S. stock prices. It was, some said, the fault of Alan Greenspan, the former chairman of the Federal Reserve, as if his statement of the obvious — that the housing slump could possibly cause a recession — had been news to anyone. One Republican congressman blamed Representative John Murtha, claiming that his efforts to stop the “surge” in Iraq had somehow unnerved the markets.
Even blaming events in Shanghai for what happened in New York was foolish on its face, except to the extent that the slump in China — whose stock markets had a combined valuation of only about 5 percent of the U.S. markets’ valuation — served as a wake-up call for investors.
The truth is that efforts to pin the stock decline on any particular piece of news are a waste of time.
Wise analysts remember the classic study that Robert Shiller of Yale carried out during the market crash of Oct. 19, 1987. His conclusion?
Thursday, March 1, 2007
Wall Street resumes its plunge
Market Plummets 200 Points In First Minutes
I laughed at all the bounce back hype yesterday. The DOW up 50 points after the previous day's 400 point drop is more like a plop than a bounce.
The trading day isn't over in New York.
Meanwhile have a look at:
Maybe Russell is right: May be good reason to be uneasy about stocks prices
Brimelow, CBS Marketwatch
Editorial: After the Sell-Off
I laughed at all the bounce back hype yesterday. The DOW up 50 points after the previous day's 400 point drop is more like a plop than a bounce.
The trading day isn't over in New York.
Meanwhile have a look at:
Maybe Russell is right: May be good reason to be uneasy about stocks prices
Brimelow, CBS Marketwatch
Editorial: After the Sell-Off
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