Guest Post: The Big Squeeze, Part 2: Abused Fundamentals And Fake Markets: How They Play Out
Submitted by Charles Hugh Smith from Of Two Minds
I am pleased to present Part 2 (link to Part 1) of a uniquely clear-sighted three-part series by frequent contributor Zeus Y. on the consequences of our corrupt financial-political Status Quo being exploited by a parasitic Financial Elite.
Part II: Abused Fundamentals and Fake Markets: How They Play Out
So we have a lawless system. What does this mean for citizens and investors? In the near term it means that the fundamentals will not apply. Anything that maintains or augments elite wealth and increases elite options will be supported, and anything that consumes or converts common people’s wealth and labor and restricts their choices will be pursued. Anything that reinforces accountability, rational response, or cause and effect will be actively suppressed. Forget reversion to the mean. One only has to observe where the respective value/wealth of each party resides and where it gets channeled to know what the market will do and where policy will go.
When the stock market should crash, it won’t… until some time frame far longer than even the most generous fundamentals would dictate. I said as much to Charles Hugh Smith in an October 17, 2010 email entitled Stealth Monetization Keeping Market Up With Stock Buybacks, and so far I have been right on the money:
I've seen different parts of this puzzle in various articles, but here is why the stock market will remain artificially boosted until the mortgage fraud mess really gets cranked up. Just like the Fed lends to banks at 0% interest as a way to funnel money back to purchasing low-interest T-bonds, creating an artificial demand (and guaranteed profit), and goosing the market there (and staunching the exodus of foreign money), so too can money be funneled through banks from the Fed to corporations who use it to buy their own stock, effecting the same scenario. I believe this is happening now, and will likely happen more if there is a QE2.
Corporations will love it, because CEOs know that stock increases, no matter how you get them, mean big bonuses. [T]hey will, if anything attempt to hyper-accelerate low-interest money flow into their books and on to the stock sales block. How long that charade can persist is anyone's guess, but if you can have insolvent, zombie banks making "profits," and handing out, what, $144 billion, just in bonuses...
The more extreme the hubris, the more ridiculous the momentum, and the more spectacular the crash. These guys think they can defy gravity, and so far they have [been able to] with a lot of help. When the natural laws of finance kick in is anyone's guess, but I see (the Dow Index) as I originally predicted, to be 11,000 to 12,000 (un)til at least March (2011), a shakeup, and some panicked back door bailout to obscure the fundamentals again until September/October (of 2011).
These guys are too arrogant, too insulated, and too single-minded to do anything other than attempt to force the world into their boxes. At a certain point it will quit, but that only happens when things get very unmasked. The mortgage fraud cases are the key, but those will be stonewalled. These guys are tenacious because they are hanging by a thread of testosterone. Tick, tock.
Analyses that try to predict near term market moves based on Laffer curves, Elliot Waves, and historical cycles will almost definitely fail. We don’t have a “new era”, but we definitely have unprecedented coordinated global intervention dedicated almost solely to the fortunes of the top 1%. That is the new rule that will govern until there is a serious breakdown. Warren Buffet got this insight after the financial crash in 2008. He knew the government was going to step in to save and subsidize the big banks so he swooped up their stocks, garnering himself a hefty tax break in the process.
In the near term, independent shorters will be routinely and consistently routed through market manipulation and collusion between large corporations and their government policy clerks. JP Morgan allegedly manipulates the silver market for its own profit, but also does so to keep fiat currencies stronger. Feeling they benefit, major world governments will refuse to prosecute and, indeed, actively collude for reasons of “monetary security.” However, if you happen to be JP Morgan, holding massive short positions on silver, and you get challenged by a coordinated democratic effort to “crash JP Morgan, buy silver”, then you simply offload your short positions into unregulated institutions and buy up the copper market.
Here are some of my predictions in line with this rich-get-richer-and-the-rest-of-us-pay near to medium-term trend:
- The stock market will remain artificially high, between 11,000 and 12,000 with possible dips (7,000 - 9,000) and spikes into the 14,000 - 16,000 range, before running into serious trouble in September/October 2011 (lower probability and acuteness) and/or September/October 2012 (much higher probability and acuteness)
- Wages will remain flat or decline, unemployment and underemployment will remain high, and the power of labor will erode further as unions continue to throw their younger members under the bus to fund entitlements and benefits of their older members. Worldwide labor will be cheaper, providing a near term boost to corporate profits (counteracted eventually by buyer revolt).
- Sales numbers will disappoint indefinitely, making stocks of retail stores a very bad buy. Even the Wal-Marts will take a hit. People simply don’t have the money even for cheap luxuries. Dollar stores on the other hand will continue to do very well because the provide soap, paper, spices, etc. for a very cheap price. In economics, it’s called “substitution.” To the middle class and working classes it’s called “survival.” This will not stop the GDP numbers from rising, being recalculated, and being manipulated with debt-fueled government spending.
- The middle class will continue to stay away from the housing and stock markets in droves through a combination of low income, lack of trust, and just plain angry refusal. This, in addition to baby boomer liquidation for retirement will put serious pressure on the Dow. This will be mitigated somewhat by those same baby boomers accepting that they will be working at least part-time until they die.
- Middle class purchasing power will continue to be eroded as costs of necessities (food, water, fuel, health care, etc.) rise by several factors above inflation, and durable middle class assets (housing, savings) deflate in value. The material American Dream will become a distant ideal.
- Scandals and finger pointing will erupt around the management of public pensions as it is discovered that pension managers have colluded with states and corporations to hide losses and true value of assets. CALPERS, the 200 billion dollar California public pension will be ruled effectively bankrupt, due to a combination of extravagant liabilities and collapsed high-return junk assets. Investment rating systems will, as a result, come under renewed scrutiny to no effect.
- Metal markets will continue to be suppressed, even as countries and wealthy individuals and organizations buy them up as a hedge. Monetizations of debt, currency devaluations, will continue unimpeded. Other commodities, like rice, will experience huge volatility leading to huge price swings and escalating social unrest and resentment as investor parasites try to accentuate these swings for their own profits.
- There will be serious talk of and moves toward a world currency and global accounting standards to establish a level “playing field” and keep nations from trying to undercut each other’s currency through trade policies and cooking their books. This will be treated with a combination of alarm (by libertarians) and derision (by progressives) as observers will joke that now governments are trying to “be consistent in the way they break the law and steal from their people.”
The Role of Savings
Why is savings so important? In short, savings are the holy grail. On the opportunism side, savings represent hundreds of trillions of dollars of stored wealth, just ripe for the plundering. On the supervisory side, savings are the last reality hedge. Savings provide the annoying anchor for financial sanity and fundamentals, and serve as a barrier to exploitation, outright debt peonage, and monetary tyranny.
I’m defining savings as any stored real, productive value: money in a savings account, paid-down house, gold, land, a business, etc. Savings have utility. Savings can be exchanged or used to purchase material needs and wants or make room for the non-material, experiential elements of the good life—time, leisure, education, travel. In order to make a financial coup complete, savings have to be rounded up and led to the slaughterhouse.
Meaningful, value-backed savings means autonomy and choice, and autonomy/choice represents power, ability resist, to “choose other” than what some financial power wants from you, your money, and your productivity. Restricting consumer choice is absolutely essential to maximizing corporate profit, since low quality and high prices improve profits short-term but deter consumption medium-term for uncaptured market players. Without personal savings that can be maintained, stored, and accessed a person has no leverage in their own finances nor in their ability to “vote” as an economic citizen. One is merely a debt slave.
It appears prevailing powers will go to any length to prostitute themselves against any true price discovery that would reward savers. Reversion to the mean, trading volume, velocity of money, margin, etc. all mean nothing when you can simply pour in an infinite amount of counterfeit currency. Along with this, it becomes almost impossible to assess and determine what is counterfeit because the official numbers, formulas, and information upon which accountability rests have been so distorted and obscured as to make value determination impossible (see calculation trends in employment numbers, inflation base line, etc.). Political pressures and decisions have simply caused a regauging of “undesirable” numbers to make it look like there is no problem.
Profit used to be an engine of savings and investment, the oil of small business, entrepreneurialism, and a growing economy. In the current global situation most profit has turned cancerous. It has simply come to mean parasitic wealth extraction. If I can profit by debasing your savings or forcing my debts on to your books, and you accept it as necessary to keep the system you’ve invested in from collapsing, I can control you and your future opportunities.
In short, I now possess your power as a citizen. This is why Thomas Jefferson was so clear about everyone owning property. One’s own means of support is necessary if a corrupt government emerges. One must be capable of refusing to participate, to exercise civil disobedience, and to be supported in a community significantly immune to upper-level manipulation.
Historical economics are premised on observations of human behavior converted into “natural” laws and forces, given certain conditions. Those conditions are being actively and systematically subverted. We are now seeing human institutions and behavior operating as purely synthetic phenomena. There is no Adam Smith’s “hidden hand,” no collective rational self-interest, but rather devolution to leveraged control and power.
We have the worst of neo-liberal state welfare, mixed with neo-conservative corporate welfare—a state for the corporation, and the corporation for itself. Citizens are being treated simply as productivity and investment batteries, like some twisted adaptation of The Matrix. With no protection from law or market fundamentals canny rational responses can be checkmated.
By Zeus Yiamouyiannis, Ph.D., copyright January, 2011
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