The Fed Has Wrecked the Stock Market

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America is
finished, washed up, kaput. Foreign investors and central banks
around the world have lost confidence in US markets and are headed
for the exits. The dollar is sinking, the country is insolvent,
and its leaders are barking mad. Investors are voting with their
feet. They’ve had enough. Capital is flowing to China and the Far
East in a torrent. It’s “sayonara” downtown Manhattan and “Hello”
Tiananmen Square.

The dollar
fell another 2 per cent last night, gold soared to $840 per ounce,
oil topped $98 per barrel, General Motors reported a $39 billion
loss after the market closed on Tuesday, the real estate market
continued its downward slide, and the major investment banks are
marching in lock-step towards bankruptcy.

The news is
all bad. The nation’s economic foundation is in shambles. US credibility
is shot. Bush and Greenspan have put us on the road to ruin. Now
their work is done. We’re flat broke.

The catalogue
of fiscal ailments now facing the country is too long to list. We’d
need a ledger the size of a small encyclopedia. There’s been a stampede
away from the dollar even though it’s already lost over 60 per cent
of its value since Bush took office and even though central banks
around the world will lose their shirts if it collapses. They don’t
care. They’re getting out while they can.

Cheng Siwei,
the vice chairman of China’s National People’s Congress, announced
yesterday that China would continue to diversify its $1.4 trillion
reserves away from the dollar to “stronger currencies” like the
euro. “Strong currencies”; isn’t that Paulson’s line? Siwei’s comments
ignited a firestorm in the currency markets triggering a big blow-off
of the greenback. The poor dollar has no place to go now but down,
and it’s on a greased pole to the bottom. With consumer spending
paralyzed by the decline in home equity and frozen wages, and the
banks “stuffed to the gills” with over a trillion dollars of mortgage-backed
sludge; the prognosis for the hobbled dollar is looking grimmer
by the day. The bulging trade deficits and dwindling foreign inflows
haven’t helped either. The greenback has suddenly become the global
pariah; all it needs is a leper’s rattle and a tin cup.

The news is
no better in the real estate industry either, where the nation’s
biggest builders are reporting record losses and inventory is backed
up 11 months. Sales are off 22 per cent in one year alone. Foreclosures
are skyrocketing, jumbo loans (over $417,000) are impossible to
get regardless of one’s credit history, 40 per cent of all mortgages
(subprime, Alt-A, piggyback, reverse amortization, interest-only)
have been eliminated, and entire projects in Florida, Arizona, Las
Vegas, and California’s Central Valley have stopped building altogether.
Tens of thousands of unoccupied homes across the Southwest have
been reduced to ghost towns. Nothing is selling. The building boom,
that began when Alan Greenspan ginned-up the Fed’s printing presses
in 2002, has turned into the biggest housing bust in American history.

On top of that,
the banks are tightening lending standards and shunning potential
buyers just when the economy needs a boost in demand. Loan originations
are down and bankers are spooked by the gathering storm in the credit
markets. That means that home sales will continue to be sluggish,
prices will correct more quickly, and the anticipated “soft landing”
will turn into a full-blown crash.

New home construction
has accounted for 2 out of every 5 new jobs created in the last
5 years. Most of those workers are either delivering pizzas, cleaning
bed pans or are lining up at the soup kitchen. The BLS’s numbers
on employment are bogus. It’s just more government bunkum. They’re
predicated on a “birth-death” model that creates millions of fictitious
jobs out of whole cloth. In truth, unemployment is soaring and the
most vulnerable and impoverished among us are taking a beating from
the housing debacle.

According to
the Mortgage Bankers Association of Washington, the total of mortgage
loans outstanding in 2006 was $10.9 trillion; $6 trillion of which
were transformed into securities (CDOs, MBSs) About $1.5 trillion
of those securities are subprime; another $1 trillion Alt-A (nearly
as risky) and at least another $1.5 trillion in adjustable rate
mortgages (ARMs). At least 20 per cent of these shaky liabilities/securities
will default, and yet, no one really knows who is holding them on
their books. All of the major financial institutions – the
insurance companies, foreign banks, hedge funds, investment banks
— have purchased these CDO “roadside bombs” and mixed them in with
their other performing loans and hard assets. The projected explosions
have already begun to take their toll on the financial giants —
Citigroup and Merrill Lynch are just the latest victims; others
will follow. The problem can’t be fixed with Bernanke’s low interest
rates. The bad debts are everywhere and must accounted for and written
down. That puts us on the threshold of a jarring market-downturn
triggered by an unprecedented number of defaults that will rumble
through the entire system. Bankruptcies will pop up everywhere at
random. It is a blueprint for economic chaos. And it is unavoidable.

The global
markets have never seen a financial typhoon of this magnitude before.
Mortgage lenders, homeowners, banks, hedge funds, bond insurers,
etc. will all either go under or feel the sting of a slumping market.

Many of the
major investment banks are already broke; it’s clear from their
own reporting. Charles Hugh Smith sums it up like this in his recent
article “Empire of Debt: The Great Unraveling”:

their bad bets were marked to market, Citicorp and Merrill Lynch
would be declared insolvent. Why? Because they are insolvent — right
now. The meaning of insolvency is straightforward: their losses
exceed their capital. Recall that these firms list assets of $100
billion (or whatever) but their actual net capital is on the order
of 2.5 per cent to 5 per cent — a mere sliver of their stated assets.
In other words: a 5 per cent loss of their stated assets wipes them
out. The game is now over, and the players shuffling losses can
only last a few more days or weeks.”

Up to this
point, the banks have been able to place a sizeable portion of their
“hard-to-value” assets in a Level-3 grab bag, which allowed company
accountants to assign a value to those assets according to their
own judgment. No more. The new FASB 157 regulation will force the
banks to use “market prices” to determine the true value of their
holdings. Some analysts believe that these new disclosure rules
may result in $200 billion write-downs on assets and require the
over-leveraged banks to increase their capital reserves. That will
slow down lending and put a wrinkle in the banks’ bottom line. In
any event, once the law is enacted; we’ll see who’s “faking” the
value of their assets or as Warren Buffett says, “Who’s swimming
with their clothes off.

Professor Nouriel
Roubinisummed it up like this:

“The amount
of losses that financial institutions have already recognized
— $20 billion — is just the very tip of the iceberg of much larger
losses that will end up in the hundreds of billions of dollars.
Calling this crisis a sub-prime meltdown is ludicrous as by now
the contagion has seriously spread to near prime and prime mortgages.
And it is spreading to every corner of the securitized financial
system that is either frozen or on the way to freeze. The reality
is that most financial institutions have barely started to recognize
the lower “fair value” of their impaired securities. The credit
crunch is getting worse and its financial and real fallout will
be severe.” (Nouriel Roubini blog.)

The constant
drumbeat of bad news is having a numbing affect on Wall Street.
Traders’ are tight-lipped and downcast. Spirits are sagging. No
one likes losing money, and yet, the credit storm shows no signs
of letting up anytime soon. Yesterday, the Dow Jones Industrial’s
took another 360-point pounding before the bell rang. Another day,
another bloodbath. The subprime virus has now infected the broader
markets leaving the once-brawny financial giants bruised and reeling
like Joe Frazier in the Thrilla in Manila. A few more down-days
like yesterday and they’ll be carrying out hedge funds feet first.

The stock market
is looking more and more like a glass pitcher propped up on the
edge of a bookshelf. One little bump, and down she goes.

10, 2007

Mike Whitney’s
[send him mail] “stock-n-trade”
is landscaping. He never even sat down at a computer keyboard until
Bush gave his “axis of evil” speech. Then, he figured it was time
to get to work.

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