Wednesday, March 4, 2009

The Dog that Failed to Bark

There’s something that just ain’t right going on in America’s financial markets. Worse, as folks are figuring that out, the key to maintaining markets and turning our economy around is being driven off – confidence.

Yesterday the President either betrayed his economic ignorance or furthered his economic agenda by comparing the stock market to flash polls.

"What I'm looking for is not the day-to-day gyrations of the stock market, but the long-term ability for the United States and the entire world economy to regain its footing," Obama said after meeting in the Oval Office with British Prime Minister Gordon Brown. “And, you know, the stock market is sort of like a tracking poll in politics. It bobs up and down day to day, and if you spend all your time worrying about that, then you're probably going to get the long-term strategy wrong."

Oh, my…bobbing up and down is one thing, but there appears to be a market trend established, Mr. President, and it’s clearly downward. Had your polling looked like this, you would not be ignoring it. The Dow Jones Industrial Average has fallen through every floor predicted by the “experts,” 8000, 7000, and now closing in on 6000…from a high of 14,000 with the past 52-weeks, no less. Half the stock market’s previous value, all private wealth, has mostly dissipated. Four trillion dollars of American private wealth has been drained since September from private holdings, including home equity, retirement accounts, education accounts, and charitable foundations.

What strikes me as a watch dog not barking is that while government is busy throwing money it doesn’t have to look reactive to this “crisis,” no one seems much interested in looking behind the “conventional wisdom” that this is all caused by a collapsing housing loan market.

I don’t know much about tranches or credit default swaps, but I do know this: Something isn’t honest in a system that collapses around collateralized debt like this one did. Someone is making money on this mess, because someone always makes money in these panics while the saps, generally the public ignorantly hold the bag as they’re being stuffed into it.

In my view, this has been bi-partisan arson, starting in the Clinton administration. Bill learned from his victory over an incumbent president that even a minor economic downturn, a recession, had huge political impact. And the lesson wasn’t lost on the Bush43 administration, during which the Federal Reserve lowered interest rates to near zero in order to keep the good times rolling. Consumers couldn’t contain themselves as money grew on trees for nearly 16 years, with ever more valuable homes used as ATMs through home equity lines to finance the orgy of buying stuff. The U.S. economy never had a chance to resolve itself or its growing excesses, even in the aftermath of 9/11, when President Bush prescribed shopping and vacationing as an American duty. It became ludicrous as the Bush White House later fell back on technical, backward-looking definitions to deny that a recession was building...the same one we're in right now!

On top of all that was another odd occurrence that remains unexplained behind its conventional wisdom: The sudden rise of oil prices to many multiples of its price. From $20 per barrel in 2000 to $80 in 2007, to its high of $147 on July 11, 2008. If the price of oil, as economists suggest, is subject to major swings particularly tied to the overall business cycle, it seems odd that the price would rise radically into a recession which began in January 2007 if driven by speculators.

What U.S. and British government investigators claim to have found is this: That the market responded to supply-and-demand market forces, not speculation. Huh? Yup, the market price apparently lagged the growing demand amid shrinking supplies. As a result of this market imbalance and low price elasticity, huge price increases resulted as the market explosively attempted to balance itself. Low price elasticity? In a (growing) shortage market? With nearly a doubling of price in months while in a recession? What nonsense is this?

The oddest thing is that, except for briefly selling hybrids at MSRP, the alternative energy community couldn’t sell its claptrap solutions in the most favorable market ever. Even as the Global Warming alarmists, er, Climate Change alarmists were most alarming. In cases such as ethanol, the 21st century perpetual motion hoax was exposed for what it was – as food prices skyrocketed behind government subsidies and the truth about the excessive energy and water inputs to create the energy-deficient stuff became more generally known. Well, several ethanol plants quickly shut down, and others never opened.

Even today, the Obama administration is trying hard to shove this “green agenda” down throats of unwilling-to-buy consumers. Let’s ignore that most are broke, and not in the market for expensive automotive change. But, I digress…

The financial markets seem to have become a con game. One of the first lessons one learns as an investor is to never plow money into things you don’t understand. The ones exposed violating this were the financial geniuses themselves. From AIG to Citi Bank, toss in Bernie Madhoff and a growing list of schemers…plus, the free-market sacrificing Presidents Bush and Obama, and a “stimulating” Congress, and one needn’t wonder why confidence in the honesty of the market – even the value of our currency - is waning, if not drained.

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