Here’s the long answer to a question regarding Phil’s thoughts on which way the market is going. – Ilene
Market direction – Interesting that this is what’s on your minds as it’s what’s on my mind too. What is real and what is not? Keep in mind that when the market was down 50% in March, that was not real either. You can go back and read all my posts back then, but the gist of my arguement was, short of annihilating a good portion of the global population, the global GDP is very unlikely to fall below $40Tn (down 20%) so anything beyond that is, by definition, an overreaction.
On the other hand, the run up to S&P 1,500 was itself overdone as we can’t just keep expanding insanely forever (outside of inflationary expansion). There’s an interesting article in Scientific American this week asking if current economic assumptions inherently violate the laws of physics, something I used to rant about back in ‘07 but got bored with as the market went up and up anyway – despite my efforts to talk sense to it… Oddly the chairman at Utah State is feeling my pain already, saying: ""Of course I’m trying to send a message - I just don’t expect there’s anyone out there to receive it."
So we have a low that was too low coming off a high that was too high. We have MASSIVE government stimulus and I not only don’t use the word MASSIVE lightly but MASSIVE is wholly inadequate to describe the level of stimulus in comparison to anything that has ever happened in the history of the world. We have a runaway global money supply, the worst global unemployment since the great depression (and that didn’t end in 12 months you know) and pretend shortages of commodities, which is usually something that ENDS expansion, not kicks it off. We have a dellusional population where 60% of the people surveyed believe their home prices have appreciated over the past 12 months while anyone who read this week’s housing reports can see that there is virtually not a single zip code in the united states that hasn’t lost 10%…
To say the media is uncritical is like saying my mom doesn’t think I suck. This is not surprising when you consider that the Media, as foretold by Mr. Beatty over 30 years ago, is controlled by the same corporations that require you to be a happy little consumer to buy their stuff. Do you know there is a show on TV where Frasier is a CEO who lost his company and now has to live in a small town in Virginia with "regular" people? He’s such a warm lovable guy and it’s not his fault that his shareholders were wiped out and hasn’t he suffered enough by losing his maid? Insert brain – wash, rinse, repeat. By the way, whoever does the laugh track on this show needs to die.
Speaking of the MSM. Check out this clip from Letterman (1987) where the guest tries to say something negative about GE (starts about 6 min in). They cut him off by playing music over him. The show is taped now so this can never happen again.
Anyway, where was I? Oh yes, the economy. So the media shouldn’t have anything to do with the economy but it sure does because they are, in large part, driving the economy by keeping consumer attitudes from getting depressed. There is good economic logic to avoiding a depression – as I said, the economy really can’t fall more than 20%, anything else is just attitude adjustments. But the economy CAN fall 20% and pretty much has and failing to grasp the reality of that situation is dangerous.
In a normal correction, food, energy and housing costs would come down to the point where people earning 10% less money can afford them but that is not what’s happening. By pretending everything is great and getting better, we pump up the commodity prices and people go 10% further in debt to support those prices as they aren’t being supported out of rising wages. That is physics – 300M people had $100 last year and they spent $42 on Housing, $15 on Food and $5 on gas and another $13 on Transportation and $6 on Health Care.
That’s $81 out of every $100 GONE before the consumer even gets to make a decision on whether or not to get a new pair of sneakers or an IPod. Another 2% goes on Communications, that’s kind of mandatory and 4% goes on education, also kind of mandatory, and 2% goes to Cable and Home Electronics, which I think you’d have a pretty hard time telling most Americans isn’t mandatory. So now we’re up to $89 out of every $100 out the door on non-discretionary spending.
It’s easy for us (the investor class) to forget how limited the choices of average people are because, for a person earning $50,000 a year and taking home about $35,000, that 11% of their income that they get to "choose" to spend is just $3,850 over 52 weeks or just over $74 a week. That’s why it’s ridiculous to pretend that it doesn’t matter if health care goes up $400 a year or a tank of gas goes from $30 back to $60 – These people are being boxed into their homes with no ability to go out and no ability to do anything other than sit in front of those TVs and decide WHICH food they will spend 15% of their income on and WHICH car to buy.
I pointed out this week that consumer spending on food was down 5% – that right there is a sign of how close to the bottom people are scraping as it’s the only place they can really cut (outside of giving up cable). THAT’s the American economy at the moment and just because GE/CNBC and DIS/ABC and Bilderburg Billionaires like Murdoch (Fox) and Redstone (CBS) tell us that everything is great and it’s OK to go to the mall and sign up for a new washing machine or whatever – doesn’t mean it is.
YOU are CUSTOMERS – Corporations, including media corporations and including GS and the Gang of 12 have meetings every day thinking of ways to advertise to you and issue press releases and go on media junkets — whatever it takes to get you to BUYBUYBUY what they are selling and the most powerful companies in this world right now: GS, JPM, MS, BLK, CS, DB, BCS…. They are in the business of selling you stocks. They don’t give a rat’s ass whether the stocks go up or down because, as Eddie Murphy pointed out in Trading Places, those guys are just bookies. They make money every time you get in and every time you get out. What they make on their own manipulative trading is just a bonus.
Wonderland Market Part II: Whodunit?
We have to put on our deerstalker caps and do a little deducing and see who has motive, means and opportunity to commit the crime of market manipulation. I think, in the end, this is going to read more like a Christie novel than a Doyle one as Holmes usually had one guilty suspect while I think our current situation is more like "Murder on the Orient Express," where they all did it! Suspects are:
Our beloved government:
- Motive – They are broke, the people are revolting, they need money, they want to stay in power.
- Means – They write bad checks to buy stuff to cheer the people up. They print money to pretend they have some and the sugar-coat the data, also to placate the people. They do favors for the powerful people who do favors for them, passing laws to protect their friends and punish their enemies.
- Opportunity – They own the printing process, have an open checking account backed on promises, they make the laws and control the statistics.
The Gang of 12:
- Motive – Greed (they want more money). Fear of retribution for past actions (no need to list I hope). Power (keeps them from being prosecuted) and the cover up (they may be broke through derivatives but can pretend they are not as long as the government lets them). They own a significant amount of stocks and commodities.
- Means – They interpret the data for the government and the media (like Royal Astrologers). They have insinuated themselves throughout government. Extortion (they threaten the destruction of all financial life on Earth if their terms are not met). They control the computers that control the markets. They control 80% of the flow of capital that goes into the Markets. Their advice is followed by the masses. They spend Billions on lobbying and contributions.
- Opportunity – They have the ear of the king. They have the ear of the media. They control light and dark pools of capital and they employ virtually every person on Earth who actually understands how the system works which allows them to both rig the system AND make sure there is no one smart enough on the other side to blow the whistle on them. They own a significant share of companies and sit on the boards of most of the fortune 500 – this allows 12 men to synchronize the reporting and guidance of the entire S&P.
I don’t want to go off on a tangent re. Goldman but here’s a great article by Bruce Wiseman on the subject as well as this cool graphic (click to open):
So suffice to say Goldman Sachs controls the world and they are just one of the Gang of 12 so you can imagine how deeply filled in these spaces are. Obama already has 4GS people in cabinet in his first year and 2 at Treasury. They are at the IMF deciding which countries win and lose funding (so they control 90% of the World’s governments through purse-strings) and they run the Wold Bank just to make sure there are no alternatives to the IMF. GS people run the MER, NYSE, AIG, the NY Fed, WB and the CTFC – talk about the fox guarding the hen-house!
Is it a conspiracy? Perhaps no more of a conspiracy than pointing out how many Harvard MBA’s are business leaders – that’s kind of the point of Harvard or GS – they teach their people to be the best and the best people end up in the best positions but, even if it’s not a conspiracy – why do you think Harvard’s endowment did so well? Not "insider" trading per se but enough inside information around the country from a very loyal alumni base that they just "knew" what was going to happen. What killed their fund was Jack Meyer, who ran the fund since 1990 and took it from $5 to $35Bn, used to work the phones and all the well-placed alumni would pick up the phone and tell him stuff they wouldn’t tell Mohamed El-Erian, who lasted a year or Jane Mendillo, who took over last year as the fund contracted 25%.
You can’t live up to the legacy of Jack Meyer because it’s a legacy of insider trading, although it’s not fair to Jack to call it that as he pretty much just gathered good information from well-placed sources in a way that, this year, would probably get someone arrested but, at the time, was considered good, solid fund management.
So that, more or less, sums up the motive, means and opportunity of most funds:
Funds in general:
- Motive: They need investors in the game to make money. They want to make money. They want to keep their jobs.
- Means: They can plant rumors, create "news," which they feed to a media machine that hasn’t checked a fact since it became fun to say Al Gore said he invented the internet.
- Opportunity: The famous Jim Cramer video sums it all up nicely. Cramer is talking about what anyone can do with $5-10M to stocks like RIMM, AMZN and AAPL.
Any one fund (and there are over 4,000) can pump a stock when they need to or take it down but what happens when the vast majority wants to see the market go up? It’s not a conspiracy but a series of regulations written by Congress or coming through the GS-controlled CTFC or pushed by Obama’s 4 GS advisers (and again, there are also guys from JPM, MS, CS, BSC… who’s interests are clearly aligned most of the time anyway) make it MORE beneficial for the thousands of smaller funds to push the markets up than down.
The need the market up to attract investors (there are very few short funds and short funds have been murdered this year). Short selling regulations make down difficult and up easy and selective enforcement aimed at "getting" people who dare to take a stock down but allowing the up movers to get away with murder is another way to get all the cheaters on the same side of the fence.
So funds are a business and their business is to get you to give them your money to trade or to trade through them for a fee. They have a business plan and the business plan is how do they get you to give them your money. They do that by looking smart – so they make sure they make predictions that come true. They do that by creating an exciting investing climate so you feel like you are missing out if you put your money in bonds or cash or real estate. They market to you by releasing non-stop news that tells you that if you don’t act NOW, you will miss your opportunity.
The same psychology being used to sell you a slap-chop is being used to sell you on buying into the market. It will make your life better, it’s on sale, any idiot can do it, it’s safe, it’s easy act now and they will throw in a Santa Clause rally. Jamming up the high-profile names like AAPL, AMZN, GOOG etc creates a media frenzy that pulls in more customers and more customers = more fees. That’s some pretty major motive!
More after breakfast…