Why the Stock Market Should Crash 137 comments
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I'm not saying the stock market will crash, only that if it had any relation to the real U.S. economy that it should crash, and soon. The current politics of experience is so warped by misleading statistics and orchestrated propaganda that it feels strange to state the obvious and find it is "that which cannot be spoken" -- the credit-dependent, consumer-dependent U.S. economy is going down, and going down hard, and the trillions of dollars borrowed and spent by the U.S. government and Federal Reserve to crank up a recovery have failed completely, utterly and totally. The basic idea of Keynesian policy is simple: when the wheels fall off the private, quasi-free enterprise economy the government borrows and spreads mountains of money around like fertilizer which will stimulate "green shoots" of recovery. The forgotten key to successful Keynesian policy is a government which has not been borrowing and spending trillions of dollars even during an era of so-called "prosperity." When a government like that of the U.S. has been propping up "prosperity" with trillions in borrowed money for a decade, then doubling or tripling the "stimulus" in the hopes that the green shoots will be enduring is truly farcical. If the economy needed several trillion dollars in deficit spending to eke out the meager jobless growth of 2001-2007, then why does anyone think that doubling or tripling that deficit spending will create an enduring boom? The truth is the U.S. economy has been dependent on Federal stimulus for years, both the indirect stimulus of artificially low interest rates and unlimited liquidity, and the direct spending of hundreds of billions of borrowed dollars. Even before the financial crisis, the Federal government was borrowing and spending $400 billion a year to prop up "prosperity." All that spending simply papered over the rot at the core of the economy: 1. The primary support of the U.S. economy is consumer spending which is ultimately based on household income and assets. Earned income has been flat to down for most Americans for years. The median income has been skewed upward by the top 10% whose earnings have risen significantly. According to the Bureau of Economic Analysis, real disposable personal income-- income adjusted for inflation and taxes--declined 3.4% in the third quarter after increasing 3.8% in the second quarter. In an economy dependent on consumer spending for 70% of GDP, how can GDP rise by 3.5% while personal income plummeted by 3.4%? Assuming that boost in GDP is real and not just statistical legerdemain, then where did it come from? From borrowed money, of course-- the Federal government borrowed and spent over $1.4 trillion in fiscal 2009. In the good old days of 2002-2007, households would have borrowed and spent hundreds of billions as well. But the consumer, beset by declining assets ($13 trillion lost in the past two years), declining income (see above), falling housing values and worrisome employment trends (17% unemployment/underemployment, broadly measured), is actually cutting back on borrowing. (Revolving Consumer Credit Drops 13.1% in August.) Consumer credit decreased at an annual rate of 5-3/4% in August 2009. Revolving credit (credit cards) decreased at an annual rate of 13%, and nonrevolving credit decreased at an annual rate of 1-1/2% --the longest decline in consumer debt since 1991. So while households are still burdened with almost $2.5 trillion in credit card and nonrevolving debt (auto loans, etc.), they are paying debt down, not adding more. And let's not forget that homeowners pulled out about $5 trillion in home equity in 2001-2007, and the home equity ATM is closed for good. That brings us to: 2. The primary asset in most U.S. households is a home, and home values are still dropping, foreclosures are still rising and the only force keeping the market from falling faster is the Federal government's de facto nationalization of the entire U.S. mortgage market. Of the $1.5 trillion mortgage securities issued in 2009, a mere 1% ($15 billion) have been issued by banks; 99% are backed by the government. The government owns over half the nation's $10 trillion in mortgages via its de facto ownership of Fannie Mae (FNM) and Freddie Mac (FRE), and it has guaranteed virtually all the mortgages originated in the past year via FHA or VA. The residential mortgage market is now effectively owned lock, stock and barrel by the Federal government and its private "central bank," the Federal Reserve. Should the Fed and Treasury reduce their subsidies (that wonderful $8,000 giveaway tax credit to new home buyers or anyone claiming to be one), guarantees and outright purchases of mortgages ($1.2 trillion this year alone), then the mortgage market would instantly freeze up or start pricing in the very real risk that housing is not "recovering" and that anyone holding a mortgage could suffer huge losses if real estate continues declining in value. Here are a few charts to ponder: 3. So how have companies "surprised" with higher profits? By slashing payrolls, R&D and various accounting tricks. Actual revenue growth is missing in action. So how do you keep "surprising to the upside" after you've slashed headcount, burned R&D and turned every accounting trick in the book? You don't. A stock market rising on the hopes of an actual, real, tangible recovery in household income, home equity and creditworthiness is seeing mirages and hallucinating that the lake just ahead is deep and wonderful and stretches to the horizon. Only we never reach the "lake," do we? "Stabilization" is a chimera; the reality is the government is propping up the economy via unprecedented borrowing and spending, and there is absolutely no evidence that private capital, credit or spending are rising from the "stabilization." We are walking through the desert, kept alive by the sugar-water drip of Federal stimulus, guarantees and subsidies. The "so near, yet so far" mirage of "recovery" has been propping up the stock market for nine months, and when a slight breeze blows away the thermal illusion, then the market will crash back to the March lows, or perhaps even lower. That crash will simply reflect the state of the real economy.
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Unfortunately, the tragic part of this, as with most inflated prices that fall back to a long term trend line, the price tends to over shoot and bottom below the long term trend line, taking that much longer to return to normal. This is but one nail in the markets coffin. It will crash.
On Nov 16 01:00 PM bricki wrote:
> I'm tired of articles from perma-bears and shorts in denial. These
> viewpoints are completely useless when it comes to determining how
> to invest. They are just as wrong as the pollyannas who were predicting
> Dow 40,000 just before the tech implosion in 2000.
When has the housing market ever not been skewed by government involvement? Ever hear of the Community Reinvestment Act? People need to grow up and realize we have never had a perfectly competitive, government free economy.
"Patterns repeat themselves, until they don't". - somebody
On Nov 16 01:46 PM CoverIsBetter wrote:
> "bricki" is right.. These death forecasts are useless if you cannot
> say when.
>
> When has the housing market ever not been skewed by government involvement?
> Ever hear of the Community Reinvestment Act? People need to grow
> up and realize we have never had a perfectly competitive, government
> free economy.
>
> "Patterns repeat themselves, until they don't". - somebody
The utility of the "death forecast" is writ large in you own challenge: At the largest turns, it there is tremendous pressure to capitulate, and join the dying trend. Those who can see the underlying reality, and call upon us to look past the convenient but deceptive barometer of current social mood that recent stock performance represents, do us a serious service.
Good article.
The reality is that high-unemployment has always been good for the market since it puts downward pressure upon the cost of labor providing cheaper goods and services and higher profits for shareholders.
What I see is a slower trend and narrower swings as our economy readjusts to tighter money at higher costs, the efficient companies doing much better than the market average while the less-efficient ones decline or disappear.Isn't that part of the cycle? The remaining companies will be more efficient and profitable substaining the market and more growth.
On Nov 16 01:55 PM dhjoe wrote:
> Question is "do you want to be right or do you want to make money?"
> - I chose the latter.
Might one not say that, while Mr. Smith’s article is too pessimistic and doesn’t capture the other balancing factors in the currently very complex economic situation, the factors to which he refers may well become the basis for a correction, not necessarily a sharp one, towards the middle or end of the first quarter of 2010 if the more positive factors (to which he does not refer in the article) do not become more pronounced by then?
In other words, while the current upward bias in the economy and in stock and commodity markets will continue for a short while longer, it will run out if not re-enforced soon?
On Nov 16 01:00 PM bricki wrote:
> I'm tired of articles from perma-bears and shorts in denial. These
> viewpoints are completely useless when it comes to determining how
> to invest. They are just as wrong as the pollyannas who were predicting
> Dow 40,000 just before the tech implosion in 2000.
I am bearish for all of these reasons combined. If conditions change (ie, stock prices fall, unemployment falls, earnings rise, etc), I am apt to become more bullish in opinion. Labeling someone a "permabear" simply because they are bearish at the moment (and for good reasons I will add) is nothing more than a weak attempt at belittlement. Name-calling while simultaneously providing substantial contrary data is not going to enhance the dialog.
The Dow currently is reflecting only greed and not accurate at all.
Things are getting worse in all aspects and the Dow has to collapse
to a 7,000 level before things begin to get better in my opinion.
In the New york areas, many stores are empty, the remaining store owners are suffering financially. People are asking for credit in stores, and in Manhattan,Brooklyn, and Queens areas, you can witness first hand how citizens are now taking food out of the garbage, after people discard what they have just finished eating for Breakfast, or lunch, or Diner. I have experienced an onslaught of individuals stopping in my place of business looking for work.
People come in crying that they may loose their homes, or be put out of their apartments lately. They say the Recession is over, but I have stated for the past 6 months that we are in a DEPRESSION.
To be ahead of the curve, the only way of complete recovery, for all Americans, and our Country, is a very obvious result.
One that will take years, however the outcome won't be pretty at all. And Charles the answer is on the Wall. It is 'WAR'.
LIKE YOU SAID IN THE BEGINNING, OF YOUR ARTICLE,
MAYBE NOT TODAY, OR EVEN NEXT YEAR, BUT WITHIN 4 YEARS, THIS IS THE ONLY SOLUTION TO THE BIGGEST
PROBLEM OUR COUNTRY FACES SINCE 1929!
GOD HELP US!
I haven't balanced my check book in 30 years, I don't worry about it, the bank will warn me if I overdraft, then I will have to drag the rabbit out of the hat. Martin Kudrak, Chechoslovokian, son of Borman, warned me in '98 that the Euro was going to be worth more than the dollar and we would become a service society, typical Okie that I am I argued, bullshit. He built the first remote controlled lawn mower I ever saw and the computer I bought from him had autocad of the space shuttle, which I deleted, slowed the computer. Long story short, he was right, he gave me a formula to cut an 18 inch radius with a 6 inch flycutter, ain't possible yet it is. This recession will approximate a depression appearances are deceiving, cat in the hat, don't look back, look up.
Agreed ... The capital markets have never been a good proxy for reality so while the US economy has been going to hell the stock-markets have stayed positive because big chunks of the world are doing much better than in the past. The differential between main street reality ... a very serious decline in US standard of living and quality of life ... and paper wealth on the various "markets" will, at some point collide. This will not be a pretty sight!
Peter