Saved By Accounting
I have included a one-month chart of the Dow ending on Friday, April 3, 2009. We have been in rally mode since the tenth and maybe we will continue. Why?
We all know the economic data is terrible. This week we learned that auto sales were down 40% but that wasn't as bad as it could have been. Unemployment was up to 8.5% but that wasn't as bad as it could have been. We lost a bit less than a three-quarters of million jobs but that wasn't as bad as it could have been. House values plunged the most on record but that wasn't as bad as it could have been. You name it, and it wasn't as bad as it could have been. So the glass is half full and about to be filled up with magic dollars from the Fed's printing press. All is well. Even if it weren't, we could fix it with a few little accounting adjustments.
The FASB bowed to Congress and a relentless recession and ruled to discontinue the so-called 'mark to market' rules that made financials in particular value their 'assets' at fair value. Turns our 'fair value' was something like zero and that put a damper on lending. See, the financials have a bunch of garbage that they pretend is capital from which they base their lending practices. If the garbage can be counted as whatever they need it counted as, everything is copacetic. Bring back NINJA loans. Bring back subprime activity. Fog up the mirrors and let's get the world even more indebted than they already are. What's the problem? This activity makes the stock market go up. Fine. I'll play.
Since the Fed runs the market anyway, I think they need and want to push the Dow above 9000. This will take out the last lower high and give credence to a new bull market as opposed to a bear market rally. As the market closed Friday, you could see the troops massing for a charge north of the 8000 market scheduled to start on Monday. Can the market move higher on horrible economic data? Of course. Look at Zimbabwe. When does data have anything to do with a hocus-pocus stock market? All the market needs is money and buyers. It has one in the same in the Fed right now. Don't fight it.
Buy bank stocks. A week ago they were garbage holding garbage. Schazaam! A quick change in the accounting rules and they are gold holding gold. This is the new era. Perception is all that matters. It used to be that accounting was steeped in two columns. Debits and Credits. Assets and Liabilities. When 'assets' became 'illiquid', they became 'liabilities'. They were disposed of by moving them to the 'Debit' column as losses. Then along came derivatives and leverage to the moon and such a process vaporizes the stock market in one swift accounting adjustment. One minute a financial institution is solvent and highly capitalized and the next minute they are neither. Poof! Since this furthers the decline of the stock market, we must now change the accounting back to the way it was in allowing the formation of the credit bubble that now threatens the financial structure of the world. We can't fix it so we are just going to allow it to bubble on. Beautiful! Change? I don't see any change!
The G-20 meeting concluded the way most people thought it would. There were a lot of politicians high-stylin' and profilin' but in the end, all they did was pledge to throw yet another trillion at the worlds' economic problems. But here's the problem.
Over the past fifteen years, GDP of the world has been boosted by debt spending. We spenders have not acquired assets. We have acquired liabilities. We cannot pay for our current liabilities much less afford to take on more. Thus, we are defaulting. So as not to imperil the beloved and worshiped bankers that stoked the fires of indebtedness in the first place resulting in higher stock prices, our governments have elected to both print money and steal money from all of us poor indebted people and give it to the banks. This gets their capital ratios back in line so they can continue to indebt us. Again, the accounting rules have now been rolled back to bubblicious times and the financial institutions can write numbers on pieces of paper to match whatever they need it to match. The problem is we can't take anymore debt. Our 'Liability' column greatly exceeds our 'Asset' column. Our 'Debit' column has exceeded our 'Credit' column. We are done. There won't be any resounding economic recovery until workers can make more money and even up the two columns in their personal accounting quagmire. And, sadly, the opposite is happening. Paychecks are shrinking and liabilities are rising. The only way to prosperity is good jobs and good pay. You can run the presses all day and stash the doe to the ceiling in every vault of every bank on the planet. All that does is reinforce the same pattern.
Years ago, money had some value. Therefore, lenders loaned money and actually wanted the money to be repaid at some point. Now, after years of Federal Reserve monetary value destruction, the money is worthless and the bank knows it. They don't actually want it back. They want your house or your car or your jewelry. Think about it. If the bank loans $100,000 for 30 years, the lender will pay them back with highly depreciated currency. If Bernanke serves the Fed long enough, the Federal Reserve Notes repaid to the bank won't even be worth the envelope in which they are returned. What we are experiencing right now is an asset grab engineered by the Central Bank. They want our gold and they are collecting it by inflation, deflation, and ignorance.
Luckily for them, the populace is profoundly ignorant. Look at the people that the populace votes for in elections. Even sadder, the populace is convinced that printing money and giving it to the financial institutions is the right thing to do. This process inflated the price of assets and the central bank conspired to keep interest rates low to allow the populace to front the money to produce such assets into the economy. Finally, the credit bubble burst and the populace was drowned in their own stupid debt forced to surrender the assets back to the lenders having their salaries and lifestyles deflated. The lenders have started the process of confiscating assets at deeply discounted prices leaving the populace broke and profoundly ignorant of their role that they played in the initial financing of the lenders' property in the first place. Incredibly, the blame for the current Ponzi scheme is laid at the doorstep of former President Bush while the current President carries out exactly the same strategies in the name of change. Just how stupid have humans really become? If the strategy of printing money didn't work before, why does anyone think it will work now? Isn't this what Bush tried to do? God help us!
The Dow one month from 3/9/09
Stock charts courtesy of StockCharts.com