³We'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 wealth².
Original source URL:
http://www.informationclearinghouse.info/article17627.htm
NEWS YOU WON'T FIND ON CNN
Post Mortem for the Stock Market
By Mike Whitney
"There¹s class warfare, all right, but it¹s my class that¹s winning." Investment
tycoon, Warren Buffett
05/01/07 "ICH" -- -- -The real estate market is crashing faster than anyone had
anticipated. Housing prices have fallen in 17 of 20 of the nation¹s 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 ³hot markets² 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 isn¹t your typical 1980s-type ³correction²; it¹s a full-blown
real estate cyclone smashing everything in its path.
Tremors from the real estate earthquake won¹t 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 won¹t last. Wall Street¹s credit bubble is even bigger than the housing
bubble---a monstrous, lumbering dirigible that¹s headed for the cliff. The Dow
is like a drunk atop a 13,000 ft cliff; inebriated on the Fed¹s cheap
³low-interest² liquor. One wrong step and he¹ll plunge headlong into the ether.
The stock market cheerleaders are ooooing and ahhing the Dow¹s climb to 13,000,
but it¹s all a sham. Wall Street is just enjoying the last wisps of Greenspan¹s
helium swirling into the largest credit bubble in history. But there¹s 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 haven¹t 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, that¹s 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 Bank¹s Chuck Butler explains the process in
Thursday¹s Daily Pfennig:
³The 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.²
Ah-ha! So the Fed gooses the money supply, stocks shoot up, and everyone¹s
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. (³11.8%² to be precise)
Of course inflation doesn¹t affect the investor class or their fellow-scoundrels
at the Fed---the more money floating around the markets the better for them.
It¹s 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 that¹s 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. It¹s so simple we won¹t
dignify it by calling it a ³conspiracy². It¹s just a swindle, pure and simple.
But it never fails.
Every time the Fed prints up another batch of crisp $100 bills; they¹re
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.
That¹s the truth about inflation; it is taxation without representation, but you
won¹t find that in the government¹s statistics. In fact, the Consumer Price
Index (CPI) deliberately factors out food and energy so the working guy can¹t
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. That¹s 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. That¹s when
there¹ll be a stampede for the exits like we¹ve never seen before‹with each of
the world¹s central banks tossing their worthless greenbacks into the jet-stream
like New Years¹ confetti. According to Monday¹s Washington Post that moment may
have already arrived. As the Post¹s Martin Crutsinger says, ³Consumer 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 housing².
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 Bush¹s unfunded tax
cuts, unsustainable trade deficits, and the Fed¹s 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 ³Argentina-type meltdown²
so they can privatize state owned assets and usher in the North American
Union--the future ³one state² alliance of Canada, Mexico and US--along with the
new regional currency, the Amero.
We¹ll see.
Nevertheless, monetary policy is not the only reason the stock market is headed
for a fall. There¹s also the jumble of scams and swindles which have been
legalized under the rubric of ³deregulation². New rules allow Wall Street to
take personal liabilities and corporate debt and repackage them as precious
gemstones for public auction. It¹s 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 ³assets² are nothing more than shaky subprime loans from struggling
homeowners who have no chance of meeting their payments. In other words, another
man¹s 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. That¹s why the face value of the market¹s equities far exceeds the
world¹s aggregate GDP. It¹s all one, big debt-Zeppelin and it¹s 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? They¹re not thinking about capital investment,
productivity or infrastructure. They¹re not building an economy that serves the
basic needs of society. They¹re looking for the next big mega-merger where two
monolithic, maxed-out corporations join in conjugal bliss and create a mountain
of new credit. That¹s 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 Street¹s 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: ³We'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 wealth².
Noland is right. The market is ³a pyramid scheme of revolving credit rackets and
percentage spread plays² and no one really knows what to expect the flow of
liquidity slows down or ³reverses².
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 Group¹s managing director William Conway Jr. Conway
confirms that the rise in the stock market is related to ³the availability of
enormous amounts of cheap debt². He adds that:
³This cheap debt has been available for almost all maturities, most industries,
infrastructure, real estate and at all levels of the capital structure.² (But)
³this liquidity environment cannot go on forever. The longer it lasts, the worse
it will be when it endsŠŠ.Of course when ends, the buying opportunity will be
once in a lifetime."
Ah, yes; another wonderful ³buying opportunity²!?!
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; they¹ll be
plenty of smiley faces preparing for the feast.
It¹s 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, ³It cannot go on
forever².
We¹d might as well select the funereal dirge and the pall-bearers now while we
still can. No since waiting Œtil the last minute.
In accordance with Title 17 U.S.C. Section 107, this material is distributed
without profit to those who have expressed a prior interest in receiving the
included information for research and educational purposes. Information Clearing
House has no affiliation whatsoever with the originator of this article nor is
Information ClearingHouse endorsed or sponsored by the originator.)
--
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