Wall Street Choreography

I am finally convinced that even though the Plunge Protection Team is made up of some very clever traders, it must also have a whole back up team of comedians, cartoonists, magicians, advertising wunderkinds and Hollywood script writers. How else can one describe the news headlines and the stock market response on Friday, August 21, 2009?

The market jumped by 156 points following a report that "Existing Home Sales in U.S. Jump to Two-Year High" and Chairman Bernanke advising that the economy is near a recovery but that the pace of the recovery will be slow and the unemployment high. From what I can see the news about the third largest bank failure for 2009 (Guaranty Bank, Texas) was announced after the close of the market.

Dear readers, the stock market has become like a snack packet where the content (i.e. the truth) is being replaced by increasing quantities of air whilst increasing the price to the confused public. That the stock market reacted so positively to bad news is akin to a patient overlooking the loss of an amputated leg simply because it gives him a head start to his weight loss program.

My comments and questions are therefore as follows:

The headline should have been "House prices fall 15% in 12 months". That's right dear readers, median house prices fell from $210,100 in July 2008 to $178,400 in July 2009. Is it any wonder sales picked up? Nobody bothered to read the entire article as they had already tripped over the coffee table getting to the phone to ring their broker.

1. How many of those home owners have lost their homes due to unemployment and how many of the losses are due to loans been given to people who should never have been given a loan?
2. Knowing how little equity most of these property owners had and how many repayments were missed by the time of the eventual sale, the losses for the banks must be horrendous. Where are these losses lurking? When will they be announced?
3. Why is it that the stock markets are celebrating an up-tick in the property market rather than the return of sanity in house prices? This is a painful yet crucial point. When we all accept that most (if not all) of the gains in house prices have been illusory over recent years, only then can we map out a strategy.
4. Why is it that only the share market is forging ahead? They need to look behind to see that the caravan housing the economy has actually not only come off the tow bar but that it is also rolling backwards. If the market is so good at looking forward why is it that it totally missed the meltdown?

It must be plain for every reader to see that whilst the big boys can massage the stock markets, provide tax credits for first home buyers and throw money at the banks, they cannot overcome the sheer magnitude and reality of defaults and eventual foreclosures. Only low unemployment rates can cause real increases in home values.

The stimulated revival of housing is not the pivot upon which the economy will turn, nor will it be the epileptic stimulus spending that will do the trick. The economy will only turn when bank balance sheets acknowledge the truth, depositors and investors (both foreign and local) take their losses and new industries begin to produce real products using local people.

Leaders and communities must understand that it is not the level of GDP that is the driver and indication of growth but rather the quality of GDP. GDP that is funded by borrowings is simply stealing from tomorrow and will have to be paid for with interest on top. GDP that is generated by more car sales is an example of the falsely premised thinking that is driving most responses to the crisis.

Can anyone tell me what happens after the cash for clunkers program is over? More importantly, can anyone tell me what the Administration will do if car sales fall flat again?

If you think that an answer to the above is difficult, then what will this government do if the sum total of all stimulus measures does not resuscitate the economy as a whole? Surely they understand that restoring the heart beat is not enough to make the heart healthy.

Nothing can be valued with any certainty because there is no common measuring stick. Gold and silver are crying out ready to serve mankind but are being ignored and constantly hit over the head. The world and its institutions are in need of being re-capitalised yet the two assets that can do this are relegated to the fringe.

Re-valuing gold and silver is the equivalent of giving them a promotion to the position of independent financial arbiters and this is exactly what the USA fears. Should gold and silver impose their standard, no longer can any nation print without consequence and no longer will US dollars be able to buy oil unless backed by gold and silver. This is where the crux of the matter lies. If the US can no longer buy oil with Monopoly Money (my apologies to Monopoly) then its empire will be threatened and constrained beyond belief. Furthermore, no central bank will be able to indulge in voodoo economics. In fact why have a central bank?

The world has only one numbering system and now needs just one value system which only gold and silver can provide. Can anyone imagine transactions and calculations being conducted using different numbering systems? The lack of uniformity will lead to destruction. One only needs to remember there have been two spacecraft disasters as a result of mixing metric and imperial units of measurement.

At the end of the day, denial about the current level of losses will only lead to more losses. The world's financial system will either become dysfunctional or will melt down. In fact I sometimes wonder if this is what is actually being engineered by some invisible puppeteers who have control over deep pockets and long barrelled weapons.