|October 7th, 2010, 01:41 PM||#1 (permalink)|
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In the 1987 film “House Of Games”, written and directed by David Mamet, Lindsey Crouse 1/2questions-1/2 states to Joe Mantegna “a sucker is born every minute”, to which Mantegna replies, “and two to take him.” This exchange sets the stage for what is arguably one of the best films ever made about con men and deception, and also one of the most compelling movies about the unpredictability of human nature.
Drawn into Mantegna’s game, Crouse and the movie's viewers, become unwitting victims of Mantegna's deceit and deception, all the while thinking they are in on the game, only to find that inside every con is another one. What the viewer soon realizes, is there is an eternal gulf between the shark and the mark, between the con man and his victim. And there is a code to protect the secrets.
Not unlike the characters and viewers of Mamet’s movie, the American people have been victims of a very complex shell game perpetrated and perpetuated by the the banking system for many years. The chief ruse of this confidence game was convincing us to mis-allocate and over- leverage the majority of our personal wealth into homes we could not afford. They convinced us home prices never went down and always went up. And that the equity we "built up" in our homes would always provide us with a ready source of capital, and a long term retirement asset.
Unfortunately house prices like other assets in their giant Ponzi scheme, were artificially inflated as a result of the Fed keeping interest rates artificially low. The Fed continues to keeps interest rates artificially low by rigging the credit market. Continuing to rig the credit market without destroying stock prices means the Fed now has to artificially inflate stock prices by funding the primary dealers with money created "ex nihilo" to buy government and mortgage backed debt, so the primary dealers can buy large cap-high beta tech stocks and stock index ETFs. This unfortunately devalues our currency and raises the fear of inflation, so they manipulate the currency and precious metals markets in the Fed's own version of three-card Monte.
The barely perceptible uptick in the economy created by the economic stimulus, quantitative easing, and inventory restocking has all but disappeared. However, the Obama administration continues to try to con the American people with rhetoric about job creation and business activity. In reality unemployment remains stubbornly high and the problem is becoming structural in nature. Consumer credit continues to contract while small companies find it difficult to access new bank lines of credit. Housing activity is falling, and home values are poised for further declines as foreclosures increase. The trade balance has taken an ominous turn, with exports stagnating and imports surging.
The Fed and the Obama administration continue to apply Keynesian solutions to problems caused by Keynesian policies, failing to acknowledge that government controlled interest rates are the real cause of the boom bust cycles that have plagued our economy. Continuing to "bait and switch" the public by rigging the price of money is a solution that has failed miserably, but has made transparent Obama's real motive of replacing the free market system in favor of one controlled by the government.
Central to Mamet's theme but ignored by Obama and Bernanke,is that human nature is complex and human beings are not passive non-adaptive subjects.When money is too cheap or too available, you cannot count on individuals to invest wisely or frugally. And when confronted with the extreme trauma of the near total destruction of one’s wealth, you cannot count on individuals to re-inflate the economy with continued deficit spending.
Admittedly, Obama and Bernanke did not cause the problem that is before us today. However, they continue to "do the same thing over and over again expecting different results." As Albert Einstein said, this is the definition of insanity and the primary reason why the market is headed lower and the economy is going to continue to deteriorate for the unforeseeable future.
TEN MORE REASONS THE MARKET AND ECONOMY WILL CONTINUE TO DETERIORATE...
10) Continued Credit Squeeze- 2 years after the 2008 bailout, the economy continues to struggle with a lack of credit. Credit (or debt) is issued by banks and is the source of virtually all money today. When credit is not available, there is insufficient money to buy goods or pay salaries, so workers get laid off and businesses shut down, in a vicious spiral of debt and depression.
Even though liquidity was added to the banking system with QE1, banks did not provide loans, choosing instead to take advantage of a steep yield curve and play the carry trade. They continue to avoid risk and perpetuate this practice to date.
The central banks’ “central bank”, the BIS, recently raised Tier 1 capital requirements for commercial banks. The banks most affected by this decision are the banks that lend to small businesses thereby stifling bank lending and credit creation even more.
A majority of banks have been essentially marked to solvency through creative accounting. If they are ever "marked-to-market", they have the potential to be a catalyst for another crisis.
9) Lack of Consumer Spending/ Housing Market / Destruction of Wealth - 66% of Americans own their own home. But for +90% of them, their house is also their largest financial asset. House prices therefore drive a lot of the majority of Americans’ “wealth effect’ – the portion of their spending that is driven by how well-off they feel rather than how much they make.
It is estimated that there is 2 year inventory build up of homes indicating that home prices have further to fall.
401ks and pension plans have been decimated contributing to the additional destruction of personal wealth.
8)Slowdown in Industrial Activity- Key indicators (differences between indexes of new orders and inventories in various surveys, including the ISM’s) point to a significant deceleration in the near term.
7)Structural Unemployment/Labor Weakness- In past recessions employment bounced back rather quickly, signaling a recovery. This recession is glaringly different due to a structural change in the kind of worker. There is a shortage of skilled workers and a glut of unskilled workers, which will seriously inhibit recovery.
6) Inflation-Deflation Hybrid or Disinflation/Deflation- Not a threat? How come the Fed keeps printing money and the money supply isn’t growing and the velocity of money isn’t picking up? One possible reason is the gradual disintegration of the shadow banking system which was at one time larger than than traditional bank liabilities. It is collapsing at a rate of $4 trillion a year annualized rate.
The amount of leverage used and the opacity of the various transactions involved in this unregulated industry, surely contributed to the financial crisis, but also provided a source of liquidity that is obviously missing today.
5) Secular Bear Cycle - The markets and the economy are still in a secular bear market that began in 2000. Secular bear markets can last up to 15 years and we have neither seen a sufficient capitulation statistically nor in sentiment that would indicate a secular bottom.
4) Polarized Government- We are experiencing a period in history where the two major political parties have never been more polarized, preventing the passage of effective economic legislation.
The President's top economic advisers have been leaving the White House one by one as they fail to find a consensus solution to the nation's economic woes, nevertheless one that works.
3) Regulatory/Taxation Overhang- Business owners don’t know how much Obamacare will cost them, and along with financial services regulatory reform, CEOs don’t know what the future holds for their ability to access capital and what their labor cost structures will be like.
Higher income taxes for the wealth impaired, debt riddled consumer, would further restrict consumer spending.
2) Global Problem: Industrialized and Emerging Economies Offer No Help China’s private sector debt is as bad as ours. Housing in China has become unaffordable which may be leading to a bubble of their own.
While Beijing is implementing additional structural changes to reorient its economy toward domestic consumption, the pace remains measured; and will do little to help sustainably rebalance the global economy.
A protectionist administration may legislate a trade war with China.
Debt solvency in some eurozone countries (Greece, Ireland, Portugal and Spain) remain high.
1) Debt /Deficit Spending - The balance sheets of Americans, states, municipalities, federal government, much of the euro zone, corporate defined- benefit pension plans, et.al. are in various stages of near insolvency.
Total U.S debt is now $13.6 trillion with publicly traded debt running at $8.5 trillion, but estimated to grow to $14 trillion by 2015. Interest on this debt would be app. $1 trillion. Revenues in 2009 were app. $2.1 trillion. If they were to grow by 50% to $3 trillion by 2015 then, the interest payment on the 2015 debt would be 30% of 2015 revenues.