Why the Stock Market Should Crash

[TuTu Monroe]

Good points to ponder.


by: Charles Smith November 16, 2009 * about: DIA / QQQQ / SPY

Charles Hugh Smith





I'm not saying the stock market will crash, only that if it had any relation to the real U.S. economy that it should crash, and soon.


The current politics of experience is so warped by misleading statistics and orchestrated propaganda that it feels strange to state the obvious and find it is "that which cannot be spoken" -- the credit-dependent, consumer-dependent U.S. economy is going down, and going down hard, and the trillions of dollars borrowed and spent by the U.S. government and Federal Reserve to crank up a recovery have failed completely, utterly and totally.


The basic idea of Keynesian policy is simple: when the wheels fall off the private, quasi-free enterprise economy the government borrows and spreads mountains of money around like fertilizer which will stimulate "green shoots" of recovery.
The forgotten key to successful Keynesian policy is a government which has not been borrowing and spending trillions of dollars even during an era of so-called "prosperity." When a government like that of the U.S. has been propping up "prosperity" with trillions in borrowed money for a decade, then doubling or tripling the "stimulus" in the hopes that the green shoots will be enduring is truly farcical.


If the economy needed several trillion dollars in deficit spending to eke out the meager jobless growth of 2001-2007, then why does anyone think that doubling or tripling that deficit spending will create an enduring boom?


The truth is the U.S. economy has been dependent on Federal stimulus for years, both the indirect stimulus of artificially low interest rates and unlimited liquidity, and the direct spending of hundreds of billions of borrowed dollars.


Even before the financial crisis, the Federal government was borrowing and spending $400 billion a year to prop up "prosperity." All that spending simply papered over the rot at the core of the economy:


1. The primary support of the U.S. economy is consumer spending which is ultimately based on household income and assets.
Earned income has been flat to down for most Americans for years. The median income has been skewed upward by the top 10% whose earnings have risen significantly. According to the Bureau of Economic Analysis, real disposable personal income-- income adjusted for inflation and taxes--declined 3.4% in the third quarter after increasing 3.8% in the second quarter.


In an economy dependent on consumer spending for 70% of GDP, how can GDP rise by 3.5% while personal income plummeted by 3.4%? Assuming that boost in GDP is real and not just statistical legerdemain, then where did it come from? From borrowed money, of course-- the Federal government borrowed and spent over $1.4 trillion in fiscal 2009.
In the good old days of 2002-2007, households would have borrowed and spent hundreds of billions as well. But the consumer, beset by declining assets ($13 trillion lost in the past two years), declining income (see above), falling housing values and worrisome employment trends (17% unemployment/underemployment, broadly measured), is actually cutting back on borrowing. (Revolving Consumer Credit Drops 13.1% in August.)


Consumer credit decreased at an annual rate of 5-3/4% in August 2009. Revolving credit (credit cards) decreased at an annual rate of 13%, and nonrevolving credit decreased at an annual rate of 1-1/2% --the longest decline in consumer debt since 1991.


So while households are still burdened with almost $2.5 trillion in credit card and nonrevolving debt (auto loans, etc.), they are paying debt down, not adding more.


And let's not forget that homeowners pulled out about $5 trillion in home equity in 2001-2007, and the home equity ATM is closed for good. That brings us to:


2. The primary asset in most U.S. households is a home, and home values are still dropping, foreclosures are still rising and the only force keeping the market from falling faster is the Federal government's de facto nationalization of the entire U.S. mortgage market.

Of the $1.5 trillion mortgage securities issued in 2009, a mere 1% ($15 billion) have been issued by banks; 99% are backed by the government. The government owns over half the nation's $10 trillion in mortgages via its de facto ownership of Fannie Mae (FNM) and Freddie Mac (FRE), and it has guaranteed virtually all the mortgages originated in the past year via FHA or VA.


The residential mortgage market is now effectively owned lock, stock and barrel by the Federal government and its private "central bank," the Federal Reserve.
Should the Fed and Treasury reduce their subsidies (that wonderful $8,000 giveaway tax credit to new home buyers or anyone claiming to be one), guarantees and outright purchases of mortgages ($1.2 trillion this year alone), then the mortgage market would instantly freeze up or start pricing in the very real risk that housing is not "recovering" and that anyone holding a mortgage could suffer huge losses if real estate continues declining in value.


Here are a few charts to ponder:






3. So how have companies "surprised" with higher profits? By slashing payrolls, R&D and various accounting tricks. Actual revenue growth is missing in action. So how do you keep "surprising to the upside" after you've slashed headcount, burned R&D and turned every accounting trick in the book?

You don't. A stock market rising on the hopes of an actual, real, tangible recovery in household income, home equity and creditworthiness is seeing mirages and hallucinating that the lake just ahead is deep and wonderful and stretches to the horizon.


Only we never reach the "lake," do we? "Stabilization" is a chimera; the reality is the government is propping up the economy via unprecedented borrowing and spending, and there is absolutely no evidence that private capital, credit or spending are rising from the "stabilization."


We are walking through the desert, kept alive by the sugar-water drip of Federal stimulus, guarantees and subsidies. The "so near, yet so far" mirage of "recovery" has been propping up the stock market for nine months, and when a slight breeze blows away the thermal illusion, then the market will crash back to the March lows, or perhaps even lower. That crash will simply reflect the state of the real economy.


Click here

[Onceler]

It's interesting that people can't seem to make the connection that a stock market crash costs money.

The U.S. economy lost more money between October & February than all of the bailouts & stimulus combined. Absent outside spending, the following cycle could have continued indefinitely:

1) Market goes down
2) Businesses lose confidence, and lay off workers
3) Consumer spending drops, because people either lost their jobs or are afraid of losing them
4) Businesses lose more confidence, and revenues because of less spending, and lay off more workers
5) Market goes down more

And so on.

[Topspin]

This is what makes markets, dissagreements on prices. For someone to buy someone has to sell.
Some of that date is outdated and questionable at best.

Sure it may crash, and it may go up 50%. Cost this tool nothing to write the article.
I'm betting no crash, no double dip. And he's the clinching fact for those of you like TUTU (I'm guessing here) that are not rich. Pray for a crash, those that buy during and after crashes are much more likely to be rich.

[Topspin]

take a look at the home price chart where it's been going up since july.
Also pull a chart of the billions of dollars into the bond market in the last couple years that will drive stocks as investors start chasing the rising market. It's all good stuff but dated and incomplete to say the least.

[Onceler]

I wonder if Tutu will be able to offer her own thoughts on some of the responses here, or if she'll either ignore them, or cut & paste an irrelevant paragraph or 2 from some conservative business site...

[Topspin]

I wonder if Tutu will be able to offer her own thoughts on some of the responses here, or if she'll either ignore them, or cut & paste an irrelevant paragraph or 2 from some conservative business site...

I Do think all of her points have merit, like I said it takes two to make a market. The richest poeple in the world can't predict the market moves, but I know warren likes to keep powder dry for the bad times, it takes balls but even the smallest investor can do the same.
Remember, most of the stimulus is not out yet. I've held all along they could have spent it. But Obama is smarter than most give him credit for, he want's that jolt to GDP to be fresh in peoples wallets come re-election time.

[Blackwater Lunchbreak]

It's interesting that people can't seem to make the connection that a stock market crash costs money.

That's "fake value" being lost. It's called a correction. They're necessary to keep markets honest and effective.

The U.S. economy lost more money between October & February than all of the bailouts & stimulus combined. Absent outside spending, the following cycle could have continued indefinitely:

1) Market goes down
2) Businesses lose confidence, and lay off workers
3) Consumer spending drops, because people either lost their jobs or are afraid of losing them
4) Businesses lose more confidence, and revenues because of less spending, and lay off more workers
5) Market goes down more

And so on.

But now it will just all go down but with bigger deficits. Good idea numb nut.

What we need is a redefinition of innovation and leadership. Innovation is not deciding to allow slave labor goods into the international labor pool. Leadership is not just deciding to do business with fascism.

[Chapdog]

the legs are a little weak on the recovery but one has to remember how far the market crashed.. Just because we are up 50% this year doesn't mean we are in another bubble. we are prob just where we should have been to begin with. Im betting no double dip.. In fact I think the next tech bubble will be coming within 2-5years with cloud. For those of you not in on networking I can only tell you its like going from having cars to having cars and interstate systems.

[leaningright]

the legs are a little weak on the recovery but one has to remember how far the market crashed.. Just because we are up 50% this year doesn't mean we are in another bubble. we are prob just where we should have been to begin with. Im betting no double dip.. In fact I think the next tech bubble will be coming within 2-5years with cloud. For those of you not in on networking I can only tell you its like going from having cars to having cars and interstate systems.

Kind of like Belichek was betting on getting that first down Sunday night, huh? Sorry, couldn't resist. I've been looking for a reason to bring this up. I don't really have anything to add to the thread.

[Chapdog]

Kind of like Belichek was betting on getting that first down Sunday night, huh? Sorry, couldn't resist. I've been looking for a reason to bring this up. I don't really have anything to add to the thread.

nice you got a smile out of me. Im fine with the outcome and honestly totaly sick of hearing about it. Bottom line is patriots showed the can beat them. Id be alot more disheartened if the colts had complete dominance the whole game. look for epic whooping this week on the jets then the following week ending the saints winning streak. I think pats will beat the colts in the playoffs where every they are.

[Damocles]

the legs are a little weak on the recovery but one has to remember how far the market crashed.. Just because we are up 50% this year doesn't mean we are in another bubble. we are prob just where we should have been to begin with. Im betting no double dip.. In fact I think the next tech bubble will be coming within 2-5years with cloud. For those of you not in on networking I can only tell you its like going from having cars to having cars and interstate systems.

I can only hope.

[leaningright]

nice you got a smile out of me. Im fine with the outcome and honestly totaly sick of hearing about it. Bottom line is patriots showed the can beat them. Id be alot more disheartened if the colts had complete dominance the whole game. look for epic whooping this week on the jets then the following week ending the saints winning streak. I think pats will beat the colts in the playoffs where every they are.

Since I caused this veer off track I'll add my 2 cents. I am hopeful for the Colts but don't in any way think they are going undefeated (like some dopey sports guy the NFL channel...starts with an "M") or are going to win the Super-Bowl. But any time P. Manning can come out on top of Brady I love it...kind of like when Holyfield whipped Tyson. I don't think the way the game ended bodes well for the Colts if they have to meet in the AFC championship game.

[Topspin]

there's cloud and there's green engineering jobs.
Don't look for last decades champs, there will be plenty of good new companies energe.

[Chapdog]

Since I caused this veer off track I'll add my 2 cents. I am hopeful for the Colts but don't in any way think they are going undefeated (like some dopey sports guy the NFL channel...starts with an "M") or are going to win the Super-Bowl. But any time P. Manning can come out on top of Brady I love it...kind of like when Holyfield whipped Tyson. I don't think the way the game ended bodes well for the Colts if they have to meet in the AFC championship game.

will come down to who has more injuries in the playoffs. Manning and Brady are basically 1a and 1b in the NFL. which order depends on what stats u care about. The whole dome debate is obsolete now. Sure pats prob have advantage at home still if bad weather but as of late the team plays just as good in domes with moss, welker, and endlemen. Next they meet the pats will have fred tayler and sammy morris back as well so no dealing with dancy maroney.

[TuTu Monroe]

This is what makes markets, dissagreements on prices. For someone to buy someone has to sell.
Some of that date is outdated and questionable at best.

Sure it may crash, and it may go up 50%. Cost this tool nothing to write the article.
I'm betting no crash, no double dip. And he's the clinching fact for those of you like TUTU (I'm guessing here) that are not rich. Pray for a crash, those that buy during and after crashes are much more likely to be rich.

Your guesses are quite humorous, but you keep thinking that, it makes me smile