Stock Market Diving? You Haven’t Seen Anything Yet

I had to laugh yesterday as Rebecca Jarvis, would -be financial guru on ABC News, said that even though the stock market dropped 353 pts yesterday, people with 401ks were still “10 percent ahead”. I want to see what she says next week when they’re 10 percent behind, with bigger drops every day. Even Jarvis had to remark on the irony of it, since in effect, the economic news was good: lower unemployment (6.5%), higher growth (3.5% ) and lower deficits. But, of course, this good news meant the basis for Ben Bernanke’s quantitative easing was no longer justified.

So what spooked the markets the past couple days? Seeing growth ramping up, as well as inflation now at nearly 2%, Bernanke was forced to adcknowledge quantitative easing via bond buying wasn’t needed any longer. But note Bernanke didn’t even say it would end when he spoke Wednesday, only that the bond-buying program would be “slowed later this year” and end next year if the economy continues to improve. These bond purchases have kept long term interest rates at record lows forcing conservative savers to pinch pennies even as they earn only pennies (literally) on their passbook or even money market accounts. But now with higher interest rates on the horizon, thanks to Ben’s stated plans, it will be time for the savers to smile as the speculators pout, cry and whine with the sinking of the DOW.

“BWWAAAHAH! Ben took our crack away! WAAAH!”


“Crack” being cheap money, of course, which – let’s not fool ourselves – has been fueling the stock market surge and effectively turning it into a bubble.


Ben assured the Wall Street green- eyeshade types that his reductions would occur in “measured steps” with all bond purchases ending by the middle of next year. By that time interest rates ought to be near or about one percent at least, maybe more. Bernanke also likened the reduction in the Fed’s $85b a month bond buying to a driver easing up on the gas pedal, as opposed to applying the brakes. Didn’t matter, as the Street and its resident speculators – so addicted to the Fed’s  stream of cheap money -  saw it as braking and they reacted in kind with a 353 points- plus sell off for the DOW.

Think that was it? Not by a long shot! The thing is that stock speculators are like spoiled brats- especially after being handed freebies like Bernanke doled out for years-  and when they don’t get their way they pitch hissy fits reflected in volatility of the markets and in this case, huge sell offs. This was directly incepted by the speculators anticipating higher interest rates which of course will mean their gambling chits (shares) will cost more, since also corporations’ costs of doing business will rise even as there are higher rates on home mortgages.


Today you likely will see at least a 250- point drop continuing on from the market’s reaction yesterday. Even if not, any uptick will indicate volatility and a rough ride next week. Personally, if I were still invested in stocks or mutual funds I’d take this as a sign to get out, while I’m still maybe 10 percent ahead of the game – to cite Jarvis on ABCNews. Waiting until next week, you may find yourselves 10 percent down. Another week maybe fifteen percent down. Thus, rather than one dramatic blowout for stocks, I see a slow erosion as the markets try to adjust to Bernanke’s new bitter medicine. Perhaps by mid-July the DOW will return to where it should be, around 13,500 and out of its current bubble territory.


Meanwhile, Maul Street’s traders and firms are increasingly worried Ben’s new medicine along with the higher interest rates it’s likely to produce will chase small fry investors out of stocks and stock mutual funds and into higher yielding bonds. Others fear that the economy might not be ready to absorb higher rates and consumers and businesses will pull back on borrowing, I call this lot the “nervous Nellies” who really can’t seem to get a handle on reality. The fact it, consumers are likely to continue spending no matter what the rates, and if they want that new car or Notepad, dammit they will buy it. Even home mortgage interest rates won’t shoot up all at once, rather more steadily, The problems in the latter are more connected to lenders still being tight- fisted and wary of prospective buyers' credit scores, than anything to do with interest rates.


As for corporations, hell, they don’t need to borrow any money! They’ve been sitting on nearly $2 trillion for the past four years. Why should they borrow more? The problem with the corporations isn’t borrowing but their failure to plow their existing money back into the economy to create more jobs. Bear in mind that 122,000 new jobs a month just barely meets population replacement level. I.e. covers the number of new workers entering the labor force.


Those who are sad to have seen the DOW drop 560 points the past two days need to wake up and smell the coffee. Bernanke’s cheap money crack has sent the stock market up 141% over the past four years (Denver Post Business, June 19, p. 11A) Recall Arch-forecaster Nate Silver, in his book, 'The Signal and the Noise- Why So Many Predictions Fail But Some Don’t ' noted the danger signals for a crash (p. 347):


"Of the eight times in which the S&P 500 has increased at a rate much faster than its historical average over a 5-year period , five cases were followed by a severe and notorious crash, such as the Great Depression and the Black Monday crash of 1987."


Given the historical average for stocks is about 7 percent return per year and the last four years indicate a 141%/ 4 = 35% / year or more, we are clearly flirting with crash territory. So, better to have a slower progressive erosion of returns now rather than a major crash (i.e. 1500 pts.)  happening in one day! Maybe it’s finally time for people to grow up and realize that money doesn’t grow on trees nor does it come endlessly “free” via stock returns because a Fed Chairman likes to prime an artificial pump.

Excited About the Roaring DOW? Better Take a Chill Pill!

The DOW broke all records since 1989 yesterday, and everyone is stoked! Their 401ks are replenishing and things are looking terrific. DOW 14,000 and over here we come!


The DOW ramp up was only mildly curbed on Friday after the Commerce Department reported the nation’s sales of new homes fell by 7.3% in December. (Shares in the home building sector traded higher, however).

Meanwhile, large institutional investors and others are looking at growth in emerging markets as a way to sustain gains. As one observer put it (‘Stocks Continue Winning Streak- May Draw in Investors’, Denver Post, Jan. 22, p. 13K): “Emerging markets should be a positive factor for many U.S. multinationals.”

The observer then went on to warn:

“That said, I think the market is a little ahead of itself, and I would like to see it go sideways in coming weeks to take some of the adrenaline out of the market.”

Bingo! Does this maven know something the stock-owning jocks and DOW groupies don’t? I believe he does and it’s spelled: B-U-B-B-L-E.

Combine Bernanke’s free money to banks policy (with effective interest rates near zero), with a speculative culture embedded in the markets and indeed, engrained in institutions across the country and you have an ominous formula.  Former Wall Street player Greg Smith already sounded the warning two months ago in an excellent essay, ‘How Wall Street Is Still Rigging the Game’ (TIME, Nov. 5, 2012). As he observes:

“There is a misconception that Wall Street is composed of rich people gambling with other rich people’s money. This couldn’t be further from the truth. The secret that Wall Street doesn’t want anyone to know is that hedge funds comprise less than 5% of assets in the stock market. The real big players in the stock market are individual households and the pension funds, mutual funds, endowments, charities and foundations that are entrusted with your savings, donations, retirement funds and 401ks- trillions and trillions of dollars that are invested with Wall Street banks.”

In other words, Wall Street has the country by the proverbial balls, and has subverted “Main Street” by getting it to sell its assets or “invest” them in phantom money vehicles - many of them too complex to comprehend even for most financial advisors. It has thereby effectively converted a productive economy into a speculator economy. This was also predicted in the book ‘ ‘The End of Economic Man: An Introduction to Humanistic Economics’  by George P. Brockway.


Brockway noted that before about thirty years ago one had a 'productive' economy and a 'speculative' economy (based in Wall Street). There was more or less a balance between them, and the nation as whole benefited as a result. Real productivity kept growing because real investment was made in hands-on materials, plant, research and labor. Most everyone benefited, including workers - via real (defined benefits) pensions (not '401ks') as well as higher wages, and companies that produced REAL goods.

Sometime after Reagan was canonized, in the 1980s, the speculative economy - which up until then had been kept in the background- began to take control. A number of steps instituted by Reagan led to the Michael Milkens, Ivan Boeskys and that lot. This also probably laid the fertile soil for our own WorldComs, Enrons, and Arthur Andersen- type funny accounting.


One step was the Bank Holding (De-regulation) Act of 1984, which sped the way to speculative excesses resulting in travesties such as the S&L scandal in the late '80s.  One would have seriously thought the legislative infrastructure would have learned from that - but oh no, they didn't. In 1995, congress repealed the right of investors, shareholders to sue companies. That essentially removed the last private solution that would've kept the criminal speculators (like those who peddled credit default swaps to cause the 2008 credit meltdown) at bay. Too much big money from the corporate campaign contributors iced it.

Just as their money has been desperately trying to cook up a perfidy of a bankruptcy law- and has left a corporate "reform" law that isn't worth much more than the paper it's printed on. (Since it excluded independent audit provisions, and refused to count stock options for CEOs as expenses). This point was driven home in a  2009 London Financial Times article (‘A Metaphorical Proposal’, Mar. 13, p. 11A) by Michael Skapinker. He cited remarks by Joseph Berardino – chief exec of Arthur Andersen- who noted how the existing reporting system “fails to communicate essential information about the real risks facing companies” to the small investor.  If you don't KNOW what you're getting into, how the hell can you have any confidence that you will get anything back? You can't!

Skapinker quoted Berardino as noting how accountants could only issue ‘pass’ or ‘fail’ judgments on companies – but not disclose the red ink being bled by a company that’s been passed. (What's referred to as a “bleeding edge” company wherein auditors are actually resigning). As the author notes, to do so would precipitate a collapse in share prices.

Before all this, there was the  October,1987 Market crash,when  the speculative economy had sucked nearly $1 trillion from people who had invested, and could least afford to lose money. However, they were constantly besieged with the 'buy and hold' mantra to ready them for the next plucking. Meanwhile, a host of ancillary political-economic policy factors contributed to the ongoing speculative frenzy (culminating in the 2008 crash and the loss of over $8 trillion) and fed it such as:- the passage of the 401k as a substitute 'pension' plan which would replace defined benefits (in real money) that had been received until then.

Workers were now expected to place their savings - whatever they could muster given wage stagnation since 1973 - at the mercy of a market that was anything but merciful. Basing future retirements on 'phantom money' and the shenanigans of shysters on Wall Street (see e.g. 'License to Steal: The Secret World of Wall Street Brokers and the Systematic Plundering of the American Investor', 1999).


Then add to this morass the constant shrinkage of bank (pass book) interest rates, as well as CDs - forcing vulnerable people to chase yield in risky vehicles for which they were never prepared. These items drove millions of average Janes and Joes into the 'market' who otherwise may never have ventured there. Just as, before 1929, millions of ordinary folk were driven into the infamous 'investment trusts' that caused them to lose everything.  (These 'investment trusts' were the forerunners of today's mutual funds) and then - as now - touted as "the little guy's way to enter the stock market".)

The more recentt piling into the market with 401ks, IRAs, etc, resulted in a never-before -seen phenomenon. What mass speculation did was to drive P/E ratios (the price to earnings of stocks, and averaged out, for mutual funds) to incredible overpriced magnitudes. Some stocks and funds were trading at over 30 times earnings just before the '87 crash, and all during the 90s the average was at 45 times earnings. This was nuts, disclosing grossly overvalued stocks- and (as we now know) a speculative bubble..

“Bubble” economics therefore has a nasty past history. So why do people forget it so readily? Well, because hope springs eternal in the human breast and most brains are infected by a persistent false optimism. They inherently believe things will get better, their 401ks will get back to where they were, and their homes’ values will be what they were before the credit meltdown in 2008.

Or as Greg Smith puts it so bluntly:

“In effect YOU are the big player in the market, and when a bank overcharges a teacher’s retirement fund or a charity or a complex product, or misprices a Facebook IPO – causing billions of dollars of wealth destruction, or rigs interest rates affecting trillions of dollars of loans, it comes out of your pocket. “


So how does Wall Street make so much money while so many small fry lose theirs? Smith attributes this to “asymmetrical information”.  Basically, because Wall Street expedites business for all players (hedge funds, mutual funds, pension funds etc.) :

“It knows who is on every side of a trade.”

Therefore, Wall Street can always bet smarter with its own money. Add in fractional value trades (where the Street denotes the whole number values of stocks, mutual funds, but keeps the fractions in any and all transactions) and its money, money, money. We win, you lose! Worse, as Smith observes, given the lax regulation “there is maximum temptation to try to exploit unsophisticated investors or conflicts of interest.”

It brings to mind the banking creeps during World War II, who – according to Clive Ponting’s book ‘Armageddon’ were on each side of every loan, whether to the Third Reich or the Allies, and hence could not lose money. What they lost with the Germans, they gained via much higher loan interest rates with the Allies.

The bottom line: This chasing of phantom gains by speculation in the stock market - in fact – has caused the underfunding, under-investment in the REAL economy. This is why labor is in a precarious position now, as are all those who seek to earn money through hard work, as opposed to easy money by betting in the market. The whole Wall Street edifice has so captured most Americans’ brains that if the meme is challenged people look at you as if you are mad if you challenge them on where they keep their money.

But as long as people are hostage to the speculator culture of Maul Street they will be accomplices in the undermining of any real productive economy and contributing to higher and higher structural unemployment – or cutting the noses of their offspring trying to find decent remunerative work on leaving college.

Enjoy the DOW while you can, just bear in mind who is really prospering and who won’t lose even if there’s another stock market crash. (The 'Street' collects commissions and fees from both winners and losers.) Meanwhile, good luck if that 401k you need for retirement is stuffed with your hard earned money. You just better hope the GOP and wussified Dems don't cut your future benefits too!