Whatever It Takes
Not so very long ago the markets served as barometers
for financial conditions. One could get a read on where the
economy was headed based on the stock market which
discounted the present and looked ahead to forecast the
future. Gold was watched closely as a barometer for
inflation. Those were the days when the „powers that be‰
had slightly more integrity (very slightly) than they do
today and believed in „free markets.‰
There was also a time when Americans bought homes
and looked forward to the day when they‚d be paid off,
owned „free and clear.‰ Debt and credit were used
judiciously to help make ends meet. Credit cards were
used for the sake of convenience.
But the 90s changed all that. Unprecedented numbers of
Americans bought stocks as the great bull market
promised eternal gains and riches for all. The credit
industry exploded. All manner of new stocks and new
forms of debt were foisted upon the public. Americans
lived in an unprecedented age of seeming prosperity,
emboldened to spend by easy stock market gains and
even easier financing terms. And still today it is estimated
that nearly 2/3 of American families are involved in the
stock market in one form or another.
Paper assets are still the big thing nowadays.
Manufacturing and the production of goods has given way
to the manipulation of numbers and financial vehicles.
U.S. automakers make their fattest profits come by
financing cars, not making them! We‚re flooded with credit
solicitations at every turn.
None of this has gone without notice of the powers that
be, those wise and wonderful folks in government who
make it their business to make life better for all of us
through legislation and taxation. When the 90s economic
miracle ended the Fed began to worry that the „wealth
effect‰ engendered by big and easy stock market gains
would cease working its magic. What would happen to
American spending habits when the big Wall Street slot
machine stopped spewing forth silver dollars?
The 1990s created a new paradigm for American life. The
Fed created terms like „wealth effect‰ to describe the
financial behavior of Americans enriched by the „stock
market miracle.‰ We became financially dependent upon
asset inflation and when the bubble burst, the Fed
promptly took action: Interest rates were slashed to rock
bottom, catalyzing a housing bubble which mitigated the
impact of stock market losses by „enriching‰ Americans
with a new form of „wealth‰: housing price inflation.
As a result, we have become what Stephen Roach of
Morgan Stanley calls an „asset economy.‰ In his words:
„The income-driven impetus of yesteryear has
increasingly given way to asset-driven wealth effects.‰ We
no longer strive to earn more, to save, to purchase what
we need and pay off our homes. We now depend on asset
inflation to feel wealthy so that we can borrow more
money in order to finance lifestyles above and beyond
what we can reasonably afford. As long as we can make
the monthly payment, we‚ll keep shopping. Who cares
whether or not we ever pay anything off?
Were we taking on more debt as a function of real
increases in income, perhaps more debt wouldn‚t be much
of an issue. But today our debt is „financed‰ by the wealth
effect. Housing prices inflate and we borrow against
NUMBERS on paper, not real wealth, not real income, not
real value. We get more deeply into debt because we feel
more wealthy. Unfortunately, feelings don‚t pay the bills in
the long run.
If 2/3 of GDP is the result of consumer spending, then
arguably, today‚s economy is being driven by expectations
of increasing asset inflation. In the 90s it was stocks.
Today it‚s housing. Both bubbles and as stocks have
proven, neither can go on indefinitely. The powers that be,
aware that Americans can be lured into spending via the
wealth effect, are doing all that they can to ensure that we
continue to feel wealthy. Our economy, in the absence of
genuine recovery and real growth, depends on it.
To that end, I believe that the powers that be are now
operating within a new market paradigm. I call it „whatever
it takes.‰ Understand that this nation is basically bankrupt.
Total debt, public, private, government, now exceeds $40
trillion dollars. It cannot and will not be paid off. What is
keeping us afloat is further debt expansion. Consumers
are urged to borrow more so they can spend more, thus
transferring money from one segment of the economy to
another and keeping the game going for as long as
possible. To keep the game going, the wealth effect must
not be threatened.
(Of course, none of this comes without a price. And that
price is being extracted via the declining dollar.)
I believe that today the government and central bankers
will do whatever it takes to try to prop up the markets, to
keep the asset bubbles inflated. Following the1987 crash,
the Working Group on Financial Markets was formed to
prevent future market debacles. Nowadays it‚s rather
obvious that their efforts are directed at not simply
preventing crashes but to keep the market from falling
much at all.
Evidence provided by GATA suggests that the gold
market has been manipulated for years. Why? Because
gold is the ultimate barometer for the health of the fiat
currency system. The powers that be simply can‚t afford
for the world to know that the dollar‚s value has been
eroded by more than 95% since the Fed‚s inception in
1913 and that inflation is considerably higher than the
reported figures.
Today the media is all abuzz with talk about an impending
series of rate hikes. I submit to you that we are not
embarking upon any major series of rate hikes because
we can‚t afford it. Of course, if things get out of hand, the
markets will force the Fed‚s hand. Hence all the Fed‚s
„jawboning‰ in an attempt to appease the markets and
avoid that scenario. Whatever it takes. Lie, if need be.
The fine folks of the Fed have been jawboning to an
unprecedented degree this year, fully aware that they are
trapped between a rock and hard place. Having run out of
options, they‚ve resorted to psychologically manipulating
market participants. The rock is rising interest rates that
would crush indebted consumers and decidedly prick the
housing bubble. The hard place is inflation engendered by
the Fed‚s ultra-easy money policies. Higher rates are
necessary to stall inflationary pressures. Yet higher rates
will crush the underpinning of this false sense of recovery!
The stock market is overpriced and has been so for some
time. But we‚ve seen a 50% rally in the S&P 500, the
result of clever financial engineering that encouraged
speculation and left investors with no alternatives for
investment. Whatever it takes to make the public feel rich!
Housing is severely overpriced in many regions due to
speculation engendered by that same lack of investment
alternatives, as well as absurdly low interest rates that
make overpriced homes „affordable.‰ Whatever it takes to
make the public feel rich!
Today we stand somewhere much closer to the peak of
the housing bubble and arguably beyond the peak of the
stock market „echo-bubble‰. Rate cut and tax break
stimuli have run their course and the so-called economic
recovery is proving to have been a temporary blip. Yet
the consumer thinks he‚s doing ok because housing
prices continue to rise. And the stock market is at least
not crashing.
But we aren‚t really richer; we‚ve only been made to feel
richer. (In fact, real income has been falling for years.)
And that right there is the Fed‚s strategy to keep the
economy from sliding back into negative territory. It is my
contention that they will do whatever it takes, continue
doing whatever it takes, to keep the asset bubbles alive.
Today the Fed uses the markets as tools to influence
sentiment and boost the wealth effect, the feeling of being
richer. To that end, they simply cannot afford to let the
markets fall. We don‚t have a self-sustaining recovery in
the works. What has kept us out of negative territory is
consumer borrowing, housing and stock market inflation.
Those bubbles cannot be allowed to deflate or the
„recovery‰ game is over!
How will it all play out? I don‚t know, but I doubt that it will
be pretty. No one is bigger than the market. Not the
government, not the Fed, nobody. Stocks have reached
their „echo-bubble‰ limits. The dollar remains in decline.
Our twin deficits are soaring to new records. Crude oil
prices set new lifetime records seemingly every day.
We‚re tying up billions of dollars in an unwinnable,
perpetual war on an enemy that we can‚t even locate. The
powers that be are up against forces they can‚t beat, but
they will do „whatever it takes‰ to try. For investors, the
result will be volatility and instability. The days of „buy
and hold‰ are long gone. Prepare to travel a very rocky
road...
Mark M. Rostenko
Editor
The Sovereign Strategist |
