Thursday, December 8, 2011

Stocks: Still the Fastest Way to Lose Your Money!

Last week the DOW ran up its largest 1-week gains (over 7 %) since 2009, and in a one day blowout soared more than 490 pts. The word on the Street is that all those who acted pedestrian and parked money in safe (fixed) income havens would be expressing regret at missing all these gains which saw the average 401k shoot up nearly $5,000.

I don't think so!

The fact remains, as I've laid it out in multiple previous blogs, e.g.:

this stock market is bubble-based and only one major financial blowup will see it melt down with losses rivaling what we beheld back in the Fall of 2008. Indeed, author Michael Lewis, author of The Big Short, noted it was all "built on quicksand, and people who invest in stocks are not paying serious attention to the underlying fundamentals. Instead they're being mesmerized by flickering numbers on crawl screens, and carried away by temporarily inflated share prices and think this will net them a hearty retirement nest egg. Hardly, because if this bubble bursts as I believe it will, many will lose even more of their nest eggs - especially 401ks- than they did three years ago.

This isn't being "alarmist" but rather a realist. What bubble aspects are there to look at:

1) The Fed has pumped more than $1.6 trillion (not $7.7. trillion as has been cited in many liberal blogs) of "free money" to the banksters which has essentially helped keep fixed income yields extremely low as its chased the unwise into risky stocks. This was intended, along with the Fed's misguided policy of keeping interest rates at barely 0% through 2013. All this has meant more cheap money pumped into equities, other stocks.

2) Companies have been using the capital they're sitting on (more than $2,.2 trillion) to buy back millions of shares of their own stocks, thereby creating the illusion that share prices are increasing because of enhanced product, services or fundamentals. This is a pure smoke and mirrors ploy.

Of course, to make bubble burst, one also requires fundamental instabilities and they are:

1) The continued overall low aggregate demand environment which prompted one guy, a "senior U.S. policy maker" to write WSJ finance columnist David Wessel ( 'The Perils of Ignoring History', by Daniel Wessel, WSJ, Sept. 29, p. A7 )to tell him:

"Promise me if you write a sequel about the Great Depression of 2012 that you'll note I was one of the guys really trying to head it off".

Wessel earlier pointed to all the failed props of the current economic environment, including: lackluster consumer spending (still laden with debt as they are), lack of housing starts, and the inability of government to break out beyond the austerity mindset that now permeates every facet of the Beltway. It is as if a pill was taken by everyone involved and they've turned into zombies, all parroting the same spending cut line. But therein lies untold disaster, the seeds of which have already been sown with the rejection of Obama's $447b jobs bill - which afforded at least a partial way out of the miasma.

2) Meanwhile, bond pirates everywhere are slobbering over their liver pate after seeing the failure of the ill-conceived "Joint Deficit Reduction Committee" or "supercommittee" because it likely means they'll be able to intervene to hold our nation hostage like they did with Greece and Italy. Not one of them believes that the "automatic spending cuts" will actually kick in, and even if they do, it will likely be too late to address the current problems. Meanwhile, Repugs are adamant they will not allow any tax hikes, period, even as they kill all spending proposals that would ensure a more vibrant economy, and jobs!. They are also howling like stuck pigs that they intend to prevent any automatic cuts to defense, currently the most bloated part of the federal budget, gobbling up 58 cents of every dollar.

3) On top of (1) and (2) , other dastardly culprits lurk which could cause it all to implode. Last Saturday's Wall Street Journal featured a small article on the front of its Markets section ('Careful Day Caps Big Week for Dow') which noted in one paragraph the incipient danger we face:

"The closer you are to the precipice, the more the market rallies when you get good news", said Jonathan Golub, chief U.S. equity strategist at UBS AG.

Golub then went on to say(ibid.):

"There is a relatively large disconnect between the level of strain in the equity markets and the level of strain in the fixed income markets. Normally, you want these things to be in synch with each other."

So why aren't they? Perhaps the killer clue, maybe overlooked by too many, was afforded in a small paragraph tucked away in David Wessel's column of December 1st (WSJ, p. A15):

"Congress has forbidden a repeat of the Treasury's guarantee of money market mutual funds or the Federal Deposit Insurance Corp's bland guarantee of bank non-deposit liabilities. The International Monetary Fund doesn't have nearly enough to rescue Europe".

Let's back up to understand where the explosive lies in all this, and hence what it means. First, money market mutual funds are exactly where cautious investors (who don't wish to lose principal) have flocked since the stock market's gyrations amped up after the debt ceiling crisis fiasco. Trillions are now parked there, and this money supports capital investment, via bonds as well as commercial paper. It is the last "grist" to fuel the sluggish private financial mills.

Second, money market funds now also include commercial paper and bonds from the euro-zone, maybe one euro equivalent for every U.S. dollar invested in commercial paper. But since this isn't entirely "U.S. born and bred" money, the Repuke Congress has felt no obligation to protect it, and hence the attitude "It's Europe's turn now!" (ibid.)

But this is callously short-sighted and misses the point that if the money market funds collapse and the 'buck is broken" (as it was in 2008 at one investment company before the Treasury Dept. stepped in) more than 30 million U.S. citizens, mostly middle class, will be shattered by losses. Worse, most 401ks only allow a single fixed income alternative in the form of money market mutuals. (No Treasurys, etc.) Thus, the Repuke congress has almost certainly ensured massive losses for the 99% while the 1% are still able to write off their stock market losses as "capital gains losses". Along with their average yearly Bush tax cut, equivalent to two new Lexuses, they'll barely feel a blip!

But there's a larger point here: If the money market mutual funds collapse in the sense of all breaking the buck, then the commercial paper investments for business will collapse not only in Europe but here in the U.S. What had formerly been an aggregate demand nightmare, will then become a financial malignancy that will take the whole house of cards down one time. And with no private investment (low or near zero private demand) and little consumer demand, coupled with the prevention of any new government spending....we will have that Great Depression of 2012 as the U.S. official (cited by Wessel) predicted.

THIS is the price the Republicans are willing to pay to make sure Obama doesn't get a 2nd term. The problem is that every manjack in this forlorn nation (who isn't part of the 1%) will also have to pay it......and then some.

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