Anyone who’s ever skied in the mountains has some appreciation for the dangers of avalanche. Everyone knows that one little snowball can sometimes release an avalanche of pent-up energy whose magnitude can be sudden, astonishing and dangerous.
The same kind of “snowball effect” can take place in human affairs when single, seemingly insignificant event precipitates an almost astonishing result. The past week’s news has been dominated by the spectacular rise in the stock market precipitated by a seemingly insignificant event. For example, the New York Times reported on March 10th:
“Dow ends up nearly 380 on Citigroup profit news
“Wall Street snapped out of its stupor and posted its best performance of the year Tuesday, finding a badly needed glimmer of optimism in the most unlikely of places: Citigroup is actually managing to turn a profit. The 379-point gain for the Dow Jones industrials, a rally of almost 6 percent, was a welcome break from almost uninterrupted selling. . . . .Citigroup Chief Executive Vikram Pandit said in a letter to employees that the bank had operated at a profit for the first two months of this year and was on track, based on historical trends, to make $8.3 billion for the quarter. Pandit said the bank has had its best performance since the third quarter of 2007, the last time it booked a quarterly profit. . . . .Late last month, in its third attempt to rescue the bank from collapse, the Treasury Department took a 36 percent stake in Citi. The bank has already received $45 billion in bailout money.”
Note that a mere “letter” to some Citigroup employees announced that Citigroup—after having received at least $45 billion in bailout money”—looked likely to post an $8 billion profit for the first quarter of this year. Frankly, I’m not too impressed. If someone gave me $45 billion, I’ll bet that I could also make an $8 billion profit over the next quarter. Nevertheless, the Citigroup letter seemingly caused the DJIA to jump almost 380 points on Tuesday and precipitated a rally that lasted the rest of the week.
What does this really tell us other than the markets are extremely volatile? When one letter from one corporate executive causes the whole stock market to jump by 10%, that market has to be extraordinarily vulnerable. That rally must be fueled primarily by emotion rather than fact.
On the same day, Bloomberg reported that this emotion was not confined to the United States:
“Stocks Post Best Rally of 2009 on Improving Citigroup Outlook
“Stocks around the world staged the biggest rally of the year after Citigroup Inc. said it was having its best quarter since 2007, spurring speculation the worst of the banking crisis is over. Treasuries and gold fell.”
Thus, one CEO’s letter (“snowball”) not only precipitated a U.S. stock rally—it precipitated a global stock rally. The March 12th New York Times agreed:
“Investors See a Glimmer and Shares Soar Worldwide
“A few clues that the economy’s downward spiral might be slowing galvanized Wall Street on Thursday and sent the stock market soaring for the second time this week. Investors . . . found wisps of hope in developments that, not many months ago, would have been regarded as alarming. The news, by and large, was bad — just not quite as bad as feared.
“General Electric, the blue-chip corporation, was stripped of its triple-A credit rating, an emblem of business prowess it proudly held since 1956. But its rating fell just one notch, less than some analysts predicted. Shares of G.E. soared 13 percent. The Commerce Department reported that retail sales fell slightly in February — again, less than forecast. . . .
“Less bad was good enough. The Dow Jones industrial average jumped 239.66 points, or 3.46 percent, to 7,170.06. . . . Since Monday, when the market fell to its lowest point in 12 years, indexes have soared roughly 10 percent, their best run since November.”
Note that GE shares “soared 13 percent” based on its credit rating falling by “one notch”. Does this make sense to you? The credit rate falls and the stock soars??
Clearly, the Citigroup CEO’s letter had a “snowball effect” that, in terms of sudden magnitude, might be unmatched in human history. The financial world moved and moved dramatically based on a single letter.
However, no matter how elated investors may feel at the end of this past week, the fact that the “herd” could be so easily “stampeded” into a 10% rise in U.S. stock markets does not inspire confidence. The fact that the market can move so dramatically in any direction should inspire fear. After all, what goes suddenly up (especially for little or no reason) can also go suddenly down (for little or no reason).
And when you look, there is reason (rather than mere emotion) for the market to move up or down. We can therefore “reasonably” expect that the highly emotional/volatile market may soon move dramatically in the direction of reason.
What might that reason be? Headlines over the past week or two offer an answer. New York Times, March 10th:
“Wholesale inventories fall again in January
“Businesses slashed inventories at the wholesale level for a fifth straight month in January, . . . a warning signal that companies are likely to keep cutting production as they cope with the deepening downturn. . . . That can have severe consequences for the economy because less stockpiling usually leads to cutbacks in production and layoffs. The current recession — which began in December 2007— so far has eliminated 4.4 million jobs. The government said the unemployment rate rose to 8.1 percent in February, the highest level in more than 25 years, with a net total of another 651,000 jobs lost.”
On March 6th Reuters amplified:
“Next shoe to drop for U.S. job seekers: lower wages
“With ‘no end in sight’ for U.S. job losses amid a recession that could stretch into 2010, American workers will soon have to contend with another blow to their confidence: stagnant, or even falling wages . . . once they land a new job . . . because the current downturn shows no signs of turning around anytime soon. Lower wages, in turn, could further erode the outlook for the U.S. economy by hurting consumers’ spending power.”
As consumers’ wages fall, so will their consumption. Result? Businesses will cut back further causing more layoffs and even lower wages.
Lost wages will not only affect American workers. The March 11th New York Times reported in “China’s Big Recycling Market Is Sagging” that China—“the world’s largest garbage importer”—has lost its appetite for American garbage because “the multibillion-dollar recycling industry has gone into a nosedive because of the global economic crisis and a concomitant fall in commodity prices. Even trash has become worthless.”
What an extraordinary statement, hmm? “Even trash has become worthless”? If China is refusing to take our worthless trash, how long before they also refuse to take our worthless bonds and Federal Reserve Notes? If our paper bonds can’t be paid, aren’t they just trash? Who will finance the federal gov-co’s deficits if China refuses to buy our bonds? If the gov-co can’t run a deficit, how can it continue to “stimulate” the economy?
On March 9th, Bloomberg reported:
“Global Financial Assets Lost $50 Trillion Last Year
“According to an Asian Development Bank report, ‘The value of global financial assets including stocks, bonds and currencies probably fell by more than $50 trillion in 2008, equivalent to a year of world gross domestic product.’ Claudio Loser, a former IMF director said, ‘The loss of financial wealth is enormous, and the consequences for the economies of the world will be unfortunately commensurate. . . . The previous sense of strength and invulnerability is now gone.’ . . . The World Bank said the global economy is likely to shrink for the first time since World War II, and trade will decline by the most in 80 years. . . . Former IMF Managing Director Michel Camdessus said, ‘This crisis is the first truly universal one in the history of humanity. No country escapes from it.’”
It seems more than strange that Bloomberg’s March 9th report on $50 trillion in global financial losses was ignored, while the Citigroup CEO’s letter of the same date concerning an $8 billion profit caused the March 10th DJIA to jump 380 points and continue in a week-long rally that gained 10% in stock value.
Does that make sense to you? The globe lost $50 trillion; but Citigroup gained $8 billion (after receiving a $45 billion bailout) and the market jumped 10%?
It does not make sense to me. The global economy is falling dramatically and for the “first time since WWII”—but the stock market is rising because Citigroup wrote a letter about how it’s managed to turn a $45 billion “bailout” into an $8 billion profit? We might debate whether this week’s rise in the stock market was based on emotion or manipulation—but it’s hard to argue that that rise was based on objective reason.
In fact, we should probably admit that the recent stock market rise was without reason and irrational. Assuming we live in a rational world (and note that’s only an assumption), reason (objective truth) should ultimately prevail over emotion (mistakes) and even manipulation (lies). If so, this last week’s 10% rise in the stock market must be illusory, ephemeral and temporary. Ohh, this rise might even be sustained for a couple of months. But sooner or later, the world will have to recognize the fact that the recent rise is without the support of objective reason and must therefore fall back down.
Another nail in the stock market’s coffin is seen in the Reuters report of March 11th:
“45 percent of world’s wealth destroyed: Blackstone CEO
“Private equity company Blackstone Group LP CEO Stephen Schwarzman said: ‘Between 40 and 45 percent of the world’s wealth has been destroyed in little less than a year and a half. This is absolutely unprecedented in our lifetime.’”
I’ve guesstimated since last July, that at least 80% (and probably 90%) of the existing debt can’t be paid and therefore won’t be paid. I’ve explained that in today’s debt-based monetary system, one man’s debt is another man’s “asset”. Thus, the crux of the current financial problem is the fact that if a debt can’t be paid, then the correlative “asset” necessarily becomes worthless.
Blackstone CEO Schwarzman’s lament that “40 to 45% of the world’s wealth has been destroyed” simply reflects a truth I’ve tried to convey for eight months: 40 to 45% of the world’s debt instruments have already been recognized as unpayable, are now described as “toxic,” and have, as consequence, “destroyed” 40 to 45% of the world’s paper “wealth”. (I.e., because one man’s asset is another man’s debt, when the debt instrument becomes “toxic,” the “asset” ceases to exist.) Schwarzman’s estimate is verified by the stock market which has already lost almost 50% of it paper value since its 14,000 peak.
I’ve predicted that paper losses would go to at least 80 and probably 90%. CEO Schwarzman’s statements essentially confirm that we’ve already reached about half of my predicted losses. Six months ago, my predictions seemed crazy—even to me. Today, my predictions seem almost obvious.
Will we see 90% of the world’s paper wealth wiped out? Not necessarily. Maybe I over-guesstimated. Maybe we’ll see paper losses of “only” 60 to 70%. But so what? How can a debt-based monetary system and economy survive if just 50% of the paper debts-cum-assets are destroyed? So, whether we lose 60% or 90% of our paper wealth is almost irrelevant. The difference is no more than that between being shot once in the head or being shot once in the head and once in the heart. Either way, baby, you be dead.
No amount of letters from CEOs celebrating a corporation’s ability to turn a $45 billion bailout into an $8 billion profit will permanently change or impede objective reality. No number of letters or similar “happy talk” can do much more than temporarily calm the kiddies while their home burns to the ground.
So, whaddaya do? Take the Munchkins’ advice and “Follow, follow, follow, follow, follow the yellow brick road!” I.e., SELL PAPER, BUY GOLD. Don’t be deceived by paper—not by stocks, bonds, pension funds and paper dollars—not even paper letters written by corporate CEO’s.
Don’t be fooled by the snowball effect.
SELL PAPER; BUY GOLD.
2 Comments
March 16, 2009 at 1:00 PM
But where did they find the money to send the markets rallying so quickly after such a steep year long decline?
March 16, 2009 at 3:58 PM
Walter Burien (http://cafr1.com) has studied the Comprehensive Annual Financial Reports (CAFRs) that must be entered by law for every State, county, district, etc. Walter concludes from these CAFRs that enormous funds composed of retirement contribution, fines, taxes, etc., exist that could run into hundreds of billions and probably trillions of dollars. Walter believes these funds are primarily invested in stocks and that, as a result, the federal, state and local government collectively own over half of all publicly traded U.S. stocks. If Walter is correct, by buying or selling in concert, government CAFR funds can cause individual stocks, individual industries and even the entire stock market to move in one direction or another. The gov-co’s control over the stock market is not absolute or unlimited, but it is significant.
If Walter’s correct (and I believe he is), that might explain the sudden surge in the stock market.
Alternatively, foreign investors more distrusting of their own governments than of ours, may be moving funds from foreign investments into American stocks.
Given the recent dramatic fall in the markets, it was probably ready for a recovery. Some stocks are at historically low prices and U.S. investors may have suddenly decided they’d seen the “bottom” and suddenly started buying as fast as they could.
Finally, there’s the Federal Reserve printing dollars as fast as it can chop down trees to make paper. That might also have helped to account for the sudden influx of cash into the stock markets.
Any or all of those reasons might explain where the money came from to cause the market to spike.
But the fact remains that there appears to be little objective reason to justify the spike; that the spike is primarily due to emotion or manipulation (lies).
How long can a stock price spike be sustained based on emotion or manipulation? Days? Weeks? Months? Maybe. But not years. Sooner or later objective reality must intrude. If that happens, stock prices are likely to lose much or all of their recent gains.