I was having a discussion with a ‘progressive’ (yes …one of them!) the other day whose mantra of the day was:
“If Obama and the Democrats have really destroyed the economy and were the small business anti-Christ’s like so many people believe …then someone ought to get that message over to Wall Street because earnings/stock prices etc. have never been higher.”
This he concluded was:
“Because of Obama and the democrats and not in spite of them”.
Have you ever tried to explain something to someone who wasn’t smart enough to know they weren’t very smart? Frustrating isn’t it? Not to say that this sort of arm chair analysis and conclusion are logically flawed, unreasonable, or to the casual observers even counter intuitive. If the market is always right …then times must be good for business since their stock prices are way up…right?
Nope…I wish that were the case…but it’s not. What we are seeing in the equity markets right now has nothing to do with the fundamentals. You see the problem is that when no one (with common sense, that is) can justify why stock prices are going up this far for this long in the face of this much uncertainty, there is a strong chance that they shouldn’t be going up. That isn’t investing, that’s crazy.
Remember that is was just a year ago I wrote:
“We’re not just in a recession; we’re in a negative economic mega cycle and with nothing to support the start of significant growth of any kind… Because there is absolutely nothing positive going on right now and spending by consumers has no dynamic to sustain it”
Think about it:
“Old people have lost their interest income, one out of four mortgages, or more, have had more than 100% of their equity sucked out and spent and as a result are currently upside down, easy mortgage lending is gone for the foreseeable future, and all of the homeowners whose homes were lost to foreclosure will not be able to reenter the market any time soon. The problems we have in front of us are serious, systemic, and terminal. It’s too late for the government to fix…if it wanted to”
Growth driven solely by debt expansion, as encouraged by the Fed in recent years, ultimately is not sustainable; it is temporary, as has become painfully obvious to many in the still-evolving systemic-solvency crisis.
So why are we seeing the run up in stock prices if things are so bad? First off, is the market really going up, or is the dollar going down?
Hold that thought and recognize that there are other explanations that are just as equally persuasive. Does anyone remember 2007/8 ….well the same factors that fueled the run up in housing prices, (a.k.a the “housing bubble”), specifically, the “dollar carry trade”
This term refers to the belief that low borrowing costs around the world are allowing traders to borrow at low rates, gear up and then buy higher yielding assets, or t speculate in the commodities markets . The nature of the recent earnings from the likes of Goldman Sachs and Barclays indicate that banks who are too big to fail, and too well connected to go to jail and who are able to borrow freshly printed US Dollars from the Fed at a rate of .025% in almost limitless quantities that they will borrow it and will use it to generate profits that boggle the mind, or as George Soros (a man who is no stranger to currency carry trades) put it recently:
“The banks are being gifted huge profits by central banks pumping billions into the system, which the banks simply put to work in stocks, emerging market debt, gold etc.”
The problem is that this can’t go on forever and at some point the Fed, ECB and other central banks are going to have to put their foot on the brake and start working on an exit strategy. Whether this means the end of quantitative easing or higher rates in 2012 or maybe even 2013, at some point the dollar carry trade will end. When that happens we are in for some very bad, hyperinflationary times that will be much worse than the hyperinflation in Germany in the 20’s.
Are there any Germans who can remember that back in the early 20’s it cost 21,500,000,000 marks just to mail a letter?”
The U.S. government and the Federal Reserve have committed the system to its ultimate insolvency, through the easy politics of a bottomless pocketbook, the servicing of big-moneyed special interests, gross mismanagement, and a deliberate and ongoing effort to debase the U.S. currency. The worst part of all of this is that as we sit here today …the U.S. has no way of avoiding a financial meltdown that will be extremely difficult, painful and unhappy times for many in the United States.