Monday, August 3, 2009

Stock Market Review - 7/31/2009

Insanity and Perception Meet

Another week - another record US Treasury issuance. $235 billion this week, to be exact. And no, interest rates are not going up as the 10-year Treasury yield held steady at about 3.5%. Are investors that hungry for bonds? Hardly.

There are several things going on here that are very important. One is that our government has run out of ammunition. The Fed Funds rate is at zero and will likely stay there for a generation or two just like Japan. And now the US descends further and further into debt to keep the 'economic recovery' con game going another week. To continue the debt issuance, the US Treasury needs buyers. When you consider that the Treasury must issue $2 trillion to pay the bills just this year alone, that's a lot of buyers. Only the top seven countries in the world even have a GDP of more than $2 trillion per year (World Bank data, 2008). Who is even capable of buying this much debt? We know our friends in China have now accumulated close to a trillion by themselves and Japan and South Korea continue to support our habit of spending more than we make. Mainly, they support our spending because it is mostly their crap that we are buying and we need credit to continue. Now they are wondering how long the print and borrow game can go on before they are left with a bag of worthless paper with pictures of Americans that would mostly be turning in their graves if they saw what the past few administrations have done. But, they buy. So too does our very own Federal Reserve. But where do they get the money to add a few extra trillion to their balance sheet?

Sure, they make money lending to our Ponzi financial system that we call banks. But I'm talking 'trillions'. As I postulate in my newsletter, it would seem that we could make a few inferences here. The Fed is like a low level drug dealer that smoked the crack they were supposed to sell. They will soon have to face the people that fronted them the drugs and it won't be pretty. Their only recourse is to turn to crime for the cash. Now, we know the Fed deals big time into the credit default swap world of derivatives that now have nominal values north of a quadrillion. We also know that the majority of swaps are interest rate driven and who knows better as to which direction interest rates are going than the Fed? They know how much of the bond offering they are going to buy and they know what time of day they are going to strike. To get a little help, it is possible that they pass this information along to their buddies at the big banks. Follow me here. All the big banks traded themselves into insolvency trading derivatives in 2008 so we know they are all idiots and have no idea what they are doing. During their 'cash crunch' and bailout periods where they were 'raising capital', it is thought that derivative trading dropped by 97%. Now, we learn that these same idiots are earning record profits for the second quarter at the same time that our Fed is buying Treasuries by the hundreds of billions at a time and derivatives trading is back. Suddenly, they are all making gobs of money. Gee, I wonder how?

The other thing that is very important is the Bush administration is closely controlling perception. Uh, I mean the Obama administration. I get the two mixed up. Since they are both identical, why don't we just call Obama 'Bush II'? Anyway, they use the same Nazi-like propaganda tools to continually 'sell' the story that they want us to believe. And that story is 'economic recovery is at hand and we are past the bottom of the recession'. Just listen to our politicians. They are like robots repeating the lines of recovery like they were programmed by whatever source brainwashed them to think Obama was improvement in our political timeline. But here is where sanity meets perception. Sure, it's a nice sentiment to believe that all is well and getting better by the minute and six months of Obama cured all the ills of 20 years of Wall Street stupidity and greed. Second quarter GDP was clocked at minus 1% even though consumer spending (70% of GDP) came in slower than first quarter GDP which was revised to an even slower minus 6.4%. Huh? No, don't even search for logic. Every category of GDP was much worse than minus 1% except for the all important 'government spending'. In other words, any improvement or any slowing of economic deterioration is due to government spending by virtue of debt. In other words, the ultimate economic life support system is the only thing keeping the patient alive.

In contaminating the world with our real estate Ponzi scheme, every country has felt obligated to do the same as us - stimulate, stimulate, stimulate. Of course this means that governments are simply throwing money at economies like frat boys throwing girls in the pool at a keg party. This is insane behavior as Zimbabwe has already proven. Yet, here we are. Now, let's look at the chart below. The two lines are the Shanghai Composite in red and the Dow in blue. I think we would all agree that our two economies are tied together so one cannot prosper without the other and one cannot fail without the other. Likewise, our stock markets have become very similar. In fact, all asset classes are now similar as the governments of the world seek to control the markets to keep our minds off the idea that the banks are relieving us of our gold and real assets. We are stupid and easily fooled. Anyway, you can see that the two indexes are moving in lock step. 2009 is showing a powerful rally from the 2008 lows. Here's the rub. The Chinese government is calling their market a 'bubble' and the US government (the Federal Reserve) is calling theirs a 'recovery'. We are all insane in that we think we can do exactly what Zimbabwe did and expect a different result in the end. No one prints and borrows their way out of an economic abyss. The difference is perception. Look at the chart. One man's 'recovery' is another man's 'bubble'. Who is right? Me personally, I no longer trust anyone that speaks English. All I hear is lies.

5yr monthly - Dow in Blue, Shanghai in Red
Chart courtesy

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