What happened? That's the question everyone has been asking since the stock swoon of May 6. I don't know if 'swoon' is the right word but the Dow dropped almost 1,000 points in less than an hour and 600 points in about five minutes. The Dow quickly gained about 640 points back in about an hour. So what happened? Was it a mistake? Sure, it had to be. Anytime the stock market drops, it has to be a mistake. There have been all kinds of ridiculous explanations tossed out and everyone's opinion is about as valid as the next. Oddly, the Dow's subsequent 600 point one-hour rally was not even mentioned as a mistake. So here is my theory.
On Monday, May 10, the Dow opened up 400 points higher based on a trillion dollar ECB (European Central Bank) bailout of European banks. All this was for Greece. Remember that I said weeks ago that the original $30 billion dollar Greece debt was not the point. The point was the derivatives tied to the debt. Remember the debate before May 10. Greece needed $30 billion. Then it was $50 billion. $80 billion tops. $125 billion would more than cover it. After chatting with bailout Barrack over the weekend, the ECB decided to supply a cool trillion. Boom! The markets of the world rallied. Don't get excited people who were bullish. Even Spain rallied. So where did the ECB get the trillion?
My guess is this was all a coordinated banker scam. The ECB needed to unload a ton of stock to build cash. So, they probably coordinated the selling on May 6 so the Fed and their cabal of JP Morgan and BofA would stand ready to buy the market back up raking up profits for all. Don't you love a free 'market'?
So, after the euphoria wore off, everyone realized that Europe was still broke and the bailout would only help the banks. The same held true in the US with TARP. Oddly, Monday's gains were the best since March of '09. Gee, what happened back then? Oh yeah, the Fed dumped a trillion on the banker's doorstep. But trillions don't grow on trees. The money has to come from somewhere.
But here is the deal. If we make $100 dollars a week, we will spend a hundred dollars a week at the store. If someone (a bank) were to loan us an extra five dollars, we would spend that too. That makes it look like the store gained sales amounting to 5% and consumer spending was rising. That's good for the economy and the stock market likes it. But, since we only make $100 dollars per week, we can't pay back the $5 dollar loan from the bank. So, to keep the game going, the banker cabal has to either eat the loan loss, foreclose us, or give us another loan. The first two actions restrict the money supply and ultimately the profits of the cabal. The third solution is the only one that keeps the game going. The conditions placed on Greece for the ECB trillion dollar line of credit are akin to cutting spending and contracting GDP. Ultimately, every country in the world will have to do this because we have all spent more than we have made. The markets realized this and the rest of the week was disaster.
Curiously, the world is now looking to China to save us. Yes, China is supposedly growing at a rapid pace but the Shanghai Composite is now officially in a bear market. I thought for this week, I would include a chart of the Chinese index on top of the Dow for the past 15 months. As you can see, China has been declining while the Dow has been rising. This relationship cannot continue. One of the two must change direction. This week, investors decided it was the Dow that needed a change. The bankers can print all the money they want to print and they can create the biggest credit bubble in history. But the fact of the matter is simple. We can't repay any of the loans and we can't maintain our spending habits. This could be the crack in the dam that leads to the flood in the valley. But don't fear. Since the Dow was down on Friday, I would expect another trillion dollar rescue package to be announced first thing Monday morning by Ben Bernanke. Or, maybe it is Brazil's turn to announce a trillion dollar bailout. China? The moral hazard of what the Fed did has now become pure stupidity. Now that I think about it, it was pure stupidity from the start.
One last thing. Austerity is going to be imposed on Greece. They are going to have to cut back. One thing they have to cut out is their government run health care program. They will have to privatize it. Is anybody listening? Are all the idiots in Washington deaf? We already know they are all profoundly stupid. It is indeed apparent that socialism works until you run out of other people's money.
Chart courtesy StockCharts.com