Fooling Around a Financial Black Hole 13 comments
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Trying to find a politician who thinks the next bailout is a bad idea is like looking for the CEO of a bankrupt company willing to forfeit his fat severance package – they are a rare breed indeed. And this time around that rare breed is someone like Alabama Senator Richard Shelby. In an interview on Bloomberg this week he described the situation, admitting that he is popular on neither side of the aisle. What has made him so unpopular? He refuses to sign on to the $700 billion bank bailout and believes it is a sellout of the American taxpayer.
A credit crisis is never pleasant. It’s kind of like having a national root canal. But having a credit crisis on the eve of an election is dangerous indeed. Why? Politicians on both sides of the fence have agendas that they generally keep to themselves. But throw them into an election and we quickly learn that these agendas serve one purpose and that is to get elected at all costs.
As the world waited for the clowns and jokers on Capital Hill and Wall Street to finally agree on who gets what in the latest $700 billion bailout, one only had to watch the financial news this week as Barney Frank and company did their best to discredit the current administration. They went as far as issuing the implicit threat that if the government delayed, people on Main St. would suffer greater hardship. It was a shameless display of politicking to exploit the situation. Next will come another bailout out for beleaguered homeowners who paid too much for their properties and now 11 million of them have mortgages worth more than the value of their properties. So now the taxpayer must pick up the tab "for the common good"?
The dismal truth is that so far, bailouts have failed to work. Will this one be any different? Undoubtedly, it won’t be the last. But this situation reveals a disturbing trend. In an election year, politicians will stop at nothing to gain public approval even though it means sticking their constituents with the ultimate exorbitant bill for their short-sighted and expensive "fixes."
Such policies do not solve the problem, they only prolong the pain. They are highly inflationary and even if they do temporarily work, result in rapidly eroding buying power as government deficits soar and the value of the dollar plummets. Throughout history, such efforts by government have an abysmal record. Yes, such policies are temporarily popular and win votes from those looking for a quick and painless fix at election time. But the price we all must pay goes up substantially and only serves to prolong the agony.
Banning short sales is a classic example. Until the recent action by Russia, the U.K. and the U.S., the only countries to have banned short selling in recent memory were China and Zimbabwe according to Larry Williams. Are you kidding? So now the U.S. is taking the lead of a communist state and the world's economic basket case with a 19 million percent annual inflation rate (and the most corrupt political leader in Africa)? I wonder how many legislators or regulators have studied history? The answer seems obvious – no one. If they had, would they knowingly push measures that have clearly failed in the past?
Every time short sales have been either banned or restricted, the effect has been the opposite of what was intended – after a temporary lift stocks continued to fall as confidence in markets and the financial system was eroded. We have to go all the way back to 1930 to see when similar action was taken by government in the U.S.
According to Williams, in the wake of the 1929 stock market crash on April 1, 1930, a new exchange rule put curbs in place on short selling that required brokers to first obtain written consent from clients to borrow stock. Markets rallied on the rumor but look what happened to the Dow Jones Industrial Average shortly afterward (see Figure A).
Figure A – Weekly chart of the Dow Jones Industrial Average showing the temporary impact of the last time restrictions were place on short selling following the 1929 correction. Chart by Metastock.com.
These misguided bailouts and bans may seem like a good idea at the time and appear to have gained public support if recent election polls are any indication. But this action does not change the inevitable albeit painful reality.
Recessions are a necessary part of maintaining healthy capital markets long-term. They remove excesses that have been built up over years of easy money and rapidly appreciating asset prices as the inevitable bubbles build. To try to interrupt this cycle makes about as much sense as trying to suspend the law of gravity. The problem is that such action only extends the pain that in its worst form turns into a Japan-style economic recession that lasts decades instead of a year or two.
Stock position: None.
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This article has 13 comments:
The market is much, much bigger and stronger than any government or combinations of of worldwide government. The government might as well issue regualtions that prevent selling on a down-tick.
Japan's 'recession' ended YEARS ago! They had an average GNP growth bigger than the US during the last 5 years. They have the biggest export profits on earth next to the Germans!
Their economy has grown greatly and their international economic power has doubled in the last 5 years. They even have 2.3% inflation this last year!
Japanese WORKERS have suffered hideously. Thanks to the LDP, their wages have been ruthlessly cut and they are unable to buy cars now, for example. But Toyota's car sales have soared due to exports.
The workers suffer in order to keep the yen cheap so Japan can export. This is their problem. NOT some sort of 'depression'.
Few commentators on the economy bother to read Bank of Japan statistics which they publish every quarter. It is a real eye-opener. Repeating mindlessly old propaganda is a sign that this analyst, Mr. Blackman, is ill informed.
Plus, every private and public pension plan is invested in the stock market. As the value of plan assets decline, the ability of the retirement plan to meet its obligations is at risk.
Millions of private and public pensions are thus at risk -- private pensions are covered in part by the PBGC (which is itself underfunded); government pensions are the problem of the state and local governmental units and new taxes would be one way to save them -- or reduced benefits.
I suspect that the government has concluded that trillions of dollars could be lost in the markets and that $700 billion is actually cheaper for it (and the citizenry) than trying to figure out how to deal with the lost tax revenue and indigent retirees.
My fear is that we have so many structural problems with government finances and living off of debt that this is just round 1 in a 15 round match. I hope the fighter survives 15 rounds.
Just take a look at the Nikkei225. On Friday it closed a hair about 12,000, 70% below where is it was trading in 1990. That is a moribund performance not matter what you choose to call it. You are incredibly naive if you rely on "official statistics" from any central bank or government including the BoJ which by the way, has shameless manipulated the yen to keep in artificially low. And as you said it yourself, Japanese workers have suffered "hideously" because real growth has been abysmal even in the face of near zero overnight lending rates for the last 15 or more years. It is also why the carry trade has been so successful as traders effectively shorted the yen to go long currencies like the Icelandic krona or New Zealand dollar.
I'm a trader and its not the recession I follow because by the time a recession is "officially" confirmed, my portfolio is in tatters, its the bear market. My point is that the myriad of bailouts and misguided market impediments (like the short ban) has the potential leave us in a position with a multi-decade bear market like Japans' with moribund economic real performance like Japan. Please spare me the economic lecture. Anyone who thinks that real economic performance in Japan has been impressive over the last two decades is delusional.
LOOK AT THE TRADE STATS. That is what matters. As Japan reams us out, they care only about that matter. Look at the US workers: they are being treated to the same 'depression for workers/expansion for exporters' business. We cannot understand what is happening unless we understand the ultimate goals of free trade: to decimate the earnings of workers in all the first world nations.
So when we look at statistics, we have to differentiate between debt and credit, the value of workers versus profits for export powers, etc. The US is the dying nation since it has a national budget deficit that is worsening, a trade deficit that is nearly a trillion dollars a year and is being rapidly deindustrialized.
Japan is NOT being deindustrialized. The workers there are being demonetarized. They are losing fiscal power. But Japanese manufacturing is growing stronger, not weaker. And of course, it is also expanding across the planet. Toyota, not General Motors, is now the global #1 power in the auto manufacturing fields.
As for central banks lying: why would the Japanese boast about their progress? Eh? They do this happily, AT HOME. I read the Nikkei News every day. When the yen goes up against the dollar, they whine. When it goes down, they celebrate.
This is because profits selling in the US goes up when the yen gets weaker.
You are trying to turn this into your own personal soap box. I'm not sure what your agenda is but it certainly isn't about investing or trading. Take it elsewhere.
This forum is devoted to serious investors, not wannabe economists with some other agenda that quite frankly has little to do with the topic of my article.
Japan has been engaged in a 20 year bear market by definition, and one which is you obviously have little understanding. After seeing value decimated over the last twenty years in Japanese stocks since 1990, the Japanese investor has my deepest sympathies and if we pursue bailout economics in the US, we will see the same pathetic long-term performance.
You have clearly demonstrated that you have little understanding of how markets work and what a bear market is.
Look, Japan has something the US doesn't have: A TRADE SURPLUS. They are not the same as us. We have tremendous debt...held by foreign powers including and especially, Japan! True, their stocks aren't forming huge bubbles like ours.
This is because they don't want YOU in their markets! They want to be the ones shopping, here. And they are now buying up our banks. Some depression, eh?
We are up to our eyeballs in debt and this has been enabled by the Japanese carry trade. But I am not an 'investor' like you...I am an INVESTIGATOR. Heh. Huge difference.
Now ask yourself the question, is this what I want for US markets in the future?
If nothing else, Elaine makes it clear why Japan is a good example of what not to do. Their markets are heavily manipulated, the Japanese government maintains an iron-fisted control over their markets, tariffs are extremely high, banks are inefficient and their markets are burdened with complicated and counterproductive regulation.
In other words, a clear example of how not to run a market.
Contrary to the obtuse comment above that "the value of the yen doesn't matter so long as it is weak, ditto the Nikkei." The value of the yen and Nikkei are ALL that matter for those invested and based on the performance of the Nikkei over the last two decades, it has been the worst place on the planet to have your money whether you are Japanese or not. Japanese getting ready for retirement have my sympathies.
But how the Japanese choose to ruin their markets is their business. My point is that it is not what we should be trying to emulate for North American markets. The last thing we or anyone else needs is a 20 plus year bear market.