What Cost Stability?
By Nick Sorrentino, 8-2-2009
As many of the regular readers of the LER know I used to be an investment advisor for a bank before the world imploded last fall. So I watch the markets with a special interest. And I must say that I am particularly interested in the 40% rally we have been witness to in the American markets.
It doesn’t seem to make any sense. On the whole earnings for the most recent season were poor. Jobless claims are still building, and in large numbers. The revised GDP numbers from last week were twice as bad as originally thought. Yet how does the market react? It rallies.
One of the first lessons any investment professional learns in his career is that the market is way smarter than he is. A good trader might have flashes of brilliance, but one knows to “never fight the tape.” A rally is a rally no matter how dubious he thinks its underpinnings are.
Now, I do believe this rally smells bad. I do fear that we are in the midst of a second Great Depression and that sooner or later we will see a big move down in equity markets. But it got me thinking about what we have traded for this period of positive market returns.
I believe that the current rally is largely due to the massive piles of cash the Fed has dumped on Wall Street in various forms. Money has been given to the investment banks, courtesy of you, the economic participant, at almost no interest. They’ve got to do something with it, and so some goes into equity markets.
There is more money from Washington waiting in the wings as well. So who knows where the rally will stop. I pray for this nation that it will be soon. But a rally is a rally even if it is being fed by increasingly devalued money.
But let’s take a moment to think about how this country has changed since the bottom fell out of the markets last fall.
GM is Government Motors now. Chrysler is another division. AIG, the world’s largest insurer is now government run. Fannie Mae and Freddie Mac are now explicitly government entities, and back more than half of the mortgages in this country. The American tax payer is now on the hook for what looks like as much as 23.7 trillion in TARP liabilities according to Neil Barofsky, the Troubled Asset Relief Program’s own special inspector general. That is 23.7 TRILLION. 750 billion seems like a bargain in comparison.
So we the taxpayer loan money through the Fed, at 0% interest, to the banks that took hugely unwise bets, and raised interest on our credit cards whenever given the chance, and basically shattered the economic foundation of this country (with the encouragement of the government and the Fed of course.) Now we’ve saved these guys so that these same entities can do it all again only now with even more help from the politicians. We are subsidizing institutions that do not care one lick about you and me. Our children will pay for Goldman Sach’s raid on the treasury for their entire lives. That is just wrong. But I’m getting ahead of myself.
So let’s get a little perspective on the numbers.
I was recently reading an old article in Foreign Affairs discussing the potential oil reserves in former Soviet central Asia. In the article the author writes that over 30 years it was estimated that the Caspian region would produce about 100 billion dollars worth of crude. The author made the case that it was vital that America sure up its interests in the region because if it didn’t there could be a war (with Russia) over the geological spoils.
This article was written right before September 11th and things have changed to be sure, but the fact that the international affairs community was concerned enough to highlight the concern it had over a “mere” 100 billion dollars worth of wealth illustrates how insane things have gotten since then. If 100 billion dollars worth of fuel wealth was potentially a trigger for World War III what in the hell are we doing authorizing 750 billion in a couple of days to save Goldman Sachs and JP Morgan? And, as sited above 750 billion is likely less than 5% of the total bill to the American public.
It’s basically a giant game of chicken. The Fed is doing what it wants and furthers its interests at the cost of most Americans because the American people don’t do anything. The public look to Gietner, Paulson, Bernanke and company and see a coven of financial magicians. Many Americans figure that since they can’t balance their checking accounts these guys should be in control. The magicians clearly know more than the rest of America right? Why would they be in the positions they are in if they didn’t. What many Americans don’t realize is that these guys haven’t balanced a budget, household or otherwise, in their life.
So the Fed and the feds just continue to run roughshod.
But there might be a peasant revolt at hand. Ron Paul’s bill to audit the Federal Reserve has over 270 cosponsors in the House of Representatives. It has a fair amount of support in the Senate.
But Congressional leadership won’t let the bill come up for a vote. The Fed knows that if the books are opened there is going to be a lot of splainin’ to do. In fact when the American people see how the Fed has played Congress and the American people for fools there might be hell to pay.
But the Fed isn’t going to let this happen if they can help it. It recently hired Enron’s old lobbyist to try to kill support in the House. When that didn’t work they engaged in a very quiet game of extortion.
2 weeks ago the Fed made it clear that if the Fed’s independence was compromised (read if the Fed’s books were opened so the American people could see what it was doing with its money) the Fed would have no choice but to raise interest rates. The Fed basically threatened to crash the economy if a light was shined on it.
That brings me back to the rally. If the Obama administration, the Treasury, the Fed, and Goldman Sachs (which handles about 50% of all the trades on the NYSE) all have an interest in perpetuating the highly centralized financial order why should I trust this rally?
I don’t, but again, a rally is a rally.
The question is how far is the establishment willing to go to keep this order. My hope is that the humanity of the people in the Obama administration, the Treasury, the Fed, and even Goldman Sachs would shine through and they would stop before completely tossing the Constitution and the concept of constitutional democracy out explicitly if a choice was forced. But I don’t really know.
People who use apocalyptic hyperbole irritate me, but I do think it is entirely appropriate to ask- How far will these guys go if pushed?
So the market keeps on going up, but this country as we knew it fades deeper into the rear view. Not that the previous order was great, but at least it still had the vestiges of liberty.
The truth is individual liberty is a liability for the powerful. Why should people think for themselves? It’s a quaint idea, but come on, most people are little more than molecules in the great social order. Their lives mean nothing in the grand scheme. Plus liberty is so inefficient. If we can get folks to walk in lock step so much more can be done! Plan, plan, plan.
Sounds familiar.
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