Investors Hope For 'Correction' Cure - But It Won't Prevent the Ultimate Debt Crash

The Wall Street Journal yesterday featured a front page article, 'Stock Retreat Has Its Fans', which piqued the interest of many.  Quoting from the first two paragraphs:

"Many investors and analysts fear a postelection rally that has driven the S&P 500 up roughly 10 percent has cleaved share prices from the underlying fundamentals that tend to drive gains over time, such as interest rates and corporate earnings.

What's due now, some investors say, is a correction: a 10 % pullback from the indexes' March 1 high. They contend such a retreat would tamp down speculation, defray pockets of froth in popular investments and provide buying opportunities for those still on the sidelines."

The article goes on to state that such declines serve an important function in a market economy basically letting some of the excess 'gas' out of the balloon - which might otherwise blow up, i.e. resulting in a major crash. In this regard, the stock market is already well into bubble territory. Thus, long periods without the healthy corrections lead to market pathology and "unruly trading" - inflating the bubble further until it bursts.

Some may console themselves that a 10 percent correction or maybe even 12 percent, will ease their insecurities but alas, the crash is still on its way. What I would call a "sovereign debt crash" because it will ultimately be the recognition that most national debts can't be repaid that will be the tipping point to one of the largest crashes on record.

First, let's understand the nature of a sovereign debt crisis.,  Sovereign debt is not the same as the mortgage crisis which nearly brought down the global finance system in 2008. The latter was predicated upon the unwise purchase (mainly by banks but also by some insurers like AIG) of esoteric derivatives called “credit default swaps”. These basically represented bets on packaged mortgage securities called collateralized debt obligations.

In the case of the sovereign debt crisis, nations – not banks- are on the verge of default and are seeing their national bond ratings plummet because their debts are too high in relation to their gross domestic product (GDP).  In my March 22 post, I already noted Barbados as being deep in the maw of a sovereign debt crisis.  This followed yet another Moody's bond downgrade, down to Caaa3+, and Barbados now being on the verge of currency devaluation.

The Moody's report on the reasons for the downgrade included:

The government debt burden reached 111% of GDP at end-2016, and the authorities have accumulated a large stock of arrears to the private sector and the National Insurance Scheme,, estimated at a further 11% of GDP at end-FY2015/16. 

The National Insurance scheme is similar to Social Security in the U.S. and what the Moody's report indicates is that this program is over extended with the gov't already in arrears in what it owes (fro borrowing from the NIS) by 11 percent of GDP. In other words, the Barbados government is printing millions of dollars a month to try to keep seniors receiving their pensions.

Some may believe Barbados is an exception, but it isn't. Around the world governments are buried in debt - sovereign debt. It is this debt bomb - building up - that will ultimately roil the markets, along with serious missteps by the Trumpites in handling any future financial crises.  

But back to the sovereign debt crisis, not only is the U.S. in up to its eyeballs, with the Trumpites set to blow the debt wide open, i.e.


That is, the federal debt as a percentage of GDP would explode through the roof - exceeding the size of the entire U.S. economy within ten years. of Trump and the GOP get their tax policy plans rammed through.

Meanwhile, Europe is printing euros like there's no tomorrow, and debt - especially in nations like Spain, Portugal and Greece, piling up to unprecedented levels.  Then there is the Bank of Japan which has printed over 13.3  trillion yen   The Fed in the U.S. has done its own form of printing money by way of "quantitative easing", purchasing over $4 trillion in the bond market.

All of these signals in tandem show the instability of the global debt crisis and no one who looks into these can remain complacent. Barbados, of course, is near and dear to my heart  - so I pay special attention to what goes on there, like I do here in the U.S. But other nations' debt issues can't be overlooked because they also impact our own financial-economic conditions. As their own sovereign debt crises have manifested the oncoming 'train wreck'  is difficult to avoid. Expect to see default after default.

What's my main worry looking at Barbados and other nations? Well, that none of their debts will ever be repaid. Those debts, including unfunded liabilities into the future (e.g. pensions to be paid) are simply too huge for repayment even in instalment. The credit agencies Standard and Poor's and Moody''s already seem to recognize the writing is on the wall in the case of Barbados, which is why the loan conditions now are so draconian there's no way the debt will be covered.

It is no 'biggie' then to foresee that the debt collapse now drowning Barbados will very soon hit Europe, then spread to Japan - and the U.S. by the end of the year.   That end point will be accompanied by falling oil prices, failure to raise the debt ceiling after a brutal partisan showdown (and Trump -GOP bravado), and then cratering bond prices.

Obviously, borrowing more money for any sovereign debt nation isn't the answer. It hasn't been for Barbados, and has only pushed it into a debt hole. The same is true for Greece, Spain, Portugal, Japan and others.  Borrowing is especially useless as the loan terms are degraded - less money on offer, accompanied by more demanding loan condition. Ask Barbados' Central Bank.

Yes, a correction will likely help in the immediate future to stabilize stocks, but not in the longer term, and Trump's own actions may precipitate whatever crash is in the works to happen much sooner.

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!

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.:

http://brane-space.blogspot.com/2011/09/investors-losing-faith-in-stocks-what.html

http://brane-space.blogspot.com/2011/10/zombie-stocks-messing-up-mutual-funds.html

http://brane-space.blogspot.com/2011/02/stampeding-dow-or-smoke-and-mirrors.html

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.