by Gary North
by Gary North
The article was all over the web within minutes. It was first published on Bloomberg's site on the morning of March 30.
"We cannot see large upside for the S&P 500 above the 825—850 level," Morgan Stanley U.S. equity strategist Jason Todd wrote in a report yesterday. "In the rush to buy a cyclical recovery, it seems earnings or valuation no longer matters. We would be comfortable with this view if the earnings trough was closer, but it is not."
The Dow fell like a stone from the opening bell. It closed down 254: 3.5%. The S&P 500 fell by the same percentage, confirming Morgan Stanley's recommendation.
"Sell the S&P 500!" I recommended this on November 5, 2007. I actually recommended selling it short. Morgan Stanley did not know what hit it in 2008. The firm is no longer an investment bank. Its business model collapsed last October. Over one weekend, its lawyers converted the once independent firm into a bank holding company. Then it accepted $10 billion in bailout money. The story of Morgan Stanley's taxpayer-funded restructuring is here.
I wonder what it must be like for a Morgan Stanley portfolio manager to call his clients, who have lost half the value of their recommended stock market portfolios since October 2007, and who followed his advice to buy more stocks all the way down — dollar-cost averaging — to tell them that the company now recommends that they sell the S&P 500.
The clients have already read the headlines. Maybe they will call their managers. They surely should call them. "Get me out." To read that they should get out in a story on the Web is not the way to find out that the stock market is not the place for your money today. "But that's not what you told me!" That is correct. It's not.
The faith in the loss-producing strategy of "buy a no-load index stock fund and hold" is waning. It has lost money ever since March 2000. Now the stock specialist at a former investment bank says to bail out. This is a man bites dog story.
There are flickers of awareness in the financial media. They do not last for long. They flash like shooting stars and then crash — rather like the stock market.
NEW WORLD DISORDER
The G-20 meeting begins this week in England. Here, political leaders from 20 major nations meet to share ideas on how to solve an international financial crisis that their central banks created, following the lead of Alan Greenspan's FED. They never saw it coming. Not any of them — not the central bankers, not the politicians, not the regulators. They were all caught flat-footed.
Then they assemble at a meeting and send out press releases. These press releases are designed to assure the investing public that they, the creators of this crisis, know what went wrong — they don't — and that by discussing the causes of the crisis, which they don't understand, they will be able to come up with a joint solution that does not involve either (1) mass inflation or (2) a worldwide depression that lasts for years.
It is a song and dance. It is shuck and jive. It is bait and switch. It is Custer's last stand.
These people don't know what to do. If they did, there would be two or three well-defined, fully documented proposals out there, each with national co-sponsors. All of them would have major flaws. They would be mutually exclusive. Economists of various schools of opinion would be mobilizing behind one or another program.
Instead, there are no published plans. There are no working papers. There are only vague promises of joint action. Like what?
There are no detailed plans out of which this team of egomaniac politicians might conceivably hammer into an acceptable plan.
There is no centralized international planning agency.
There is no international enforcement agency. There is no agreement among central bankers.
There is no unanimity to do anything.
There is not going to be, either. The G-20 meeting will issue some sort of bland statement of hope, and everyone will go home.
They refuse to adopt the only system that every brought unity to governments and central banks: an international gold coin standard. The politicians and central bankers could not control the movements of gold out of inflating nations and into non-inflating nations, 1815—1914. They resented the ability of common people to exercise control over domestic monetary policy simply by going down to a bank and demanding payment in gold coins. They all took away this authority in the summer of 1914, when World War I broke out.
These deal-doers, these politicians, these seekers of power don't trust each other. That is the famous bottom line. They do not trust the common people, which means that they do not trust a gold coin standard. But they do not trust each other.
They are trapped by the dollar standard. They have told their voters that their nations can get rich by exporting to the United States. They have not explained that in order to export lots of goods to the United States, their central banks must create fiat money to buy depreciating dollars at a favorable rate of exchange. They have not told the voters that modern mercantilism depends on lending tax money and central bank fiat money to the U.S. government, which will not pay back the loans. Ever.
So, the G-20 nations' politicians will not come to any agreement that can be enforced institutionally. They do not trust the United Nations Organization. They will have to stick with Treasury bills, just as they have ever since 1946. They will conduct business as usual, namely, export-driven mercantilism. In every nation, the national state will command its central bank to debase the national currency in order to buy more Treasury debt. But they will not buy as much as before.
For all this rather predictable grand verbiage, however, there was a profound sense as the G20 finance ministers departed for their respective corners of the globe that the thing was, at heart, a disappointment.
That assessment was accurate. Nothing in the past two weeks has indicated that anything substantive has been accomplished.
The event concluded with a sense of ambition half-thwarted. On the one hand there was no great blow-up between the Europeans, who wanted the focus to be further regulation of financial markets, and the Americans, who wanted more specific targets for government bail-outs of both banks and broader economies.
There you have it. The Europeans, being Europeans, want more government regulation. The Americans, being Americans, want more bailouts. Nobody wants a free market.
Now all hope rests on the prima donnas: the politicians.
As indeed was the hope that the G20 summit would produce a conclusive answer for the final crisis. The lie is that there could be one moment — or indeed one menu of options — that will be either a silver bullet or supreme catalyst for solving this mess. The sooner people realise that this is too much to expect of the G20, and at the London Summit on April 2, the better. This is rather a depressing thought. However, the solace is that, at least, no-one now doubts the scale of the problems before them and, most importantly that the world's biggest economies are still talking to each other.
The scale of the problems is indeed gigantic. The solutions are more of the same. The likelihood of agreement is minimal. The politicians will huff and puff, but none of them will sacrifice his career or his nation's autonomous policies of inflation in order to surrender sovereignty to a new international central bank controlled by no nation. That is what the gold coin standard did, but at the same intolerable price: surrendering national political autonomy.
Nobody in power trusts his peers. He knows how they rose to power. They all did the same untrustworthy things.
THE SYSTEM WILL UNRAVEL MORE
The international banking system is shaky. We are in the early stages of huge corporate losses, huge national deficits, falling trade, and monetary inflation.
The finance ministers suggested no program of reform. The politicians will not come up with any clear-cut coordinated program to increase profits, increase trade, increase output, and stabilize the money supplies of each nation. Investors are looking for hope. It need not be plausible hope — just hope.
Morgan Stanley's spokesman sees that there is no hope over the next two quarters for corporate profits. This barely describes the nature of the threat to prosperity. The American banking system is still undercapitalized and suffering from massive losses due to bad real estate loans and defaulting credit card debtors.
There are no proposed solutions to any of this, other than more bailouts. There are lots of reassurances that there is a solution that will not involve mass inflation or mass depression. None of them explains how.
The investors are easy marks for hype. They don't know why they invested in stocks instead of gold, 2000 to 2008. They don't understand why nobody in authority saw this crisis coming. They don't understand monetary theory. They only understand that corporate profits are falling, but somehow the government has a solution.
Over time, this hope will fade, and with it the Dow Jones Industrial Average and the S&P 500.
Monitor the G-20 meeting. See if there is any program announced by all 20 members. See if it anything more than pious assurances that Something Will Be Done, Real Soon Now.
How much faith should you place in such pronouncements? None.
April 1, 2009
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