Monday, August 31, 2009

Proof that this market recovery has been engineered?

Many of you may have probably been questioning my sanity as I rant and rave that the stock market is rigged and the last six months rally in all asset classes has been manipulated and purposefully created. While I don't believe I've found the smoking gun, we can piece together clues that suggest that the FED and other central banks have printed excess money and provided it at zero or low cost loans to ailing financial institutions. Because these banks have not loaned money to borrowers, the banks deposited their excess reserves directly into the commodity and stock markets.

I've mused several times that the FED, US Treasury, and Obama administration (and former Bush administration) desires nothing more than to have the spending habits of consumers return like the good old days of 2003 to 2007. During those times, you were prodded to use your home like an ATM machine and spend, spend, spend! What consumers didn't realize was that credit cards and home equity loans must be repaid and therefore reduce future earnings and limit lifestyle growth. We happily bought into the notion that instant gratification was our right and that the discomfort of tight budgets didn't matter. I can't tell you how many people told me they "needed" a house or new car when their current situation was absolutely fine.

Since the government’s plan is that you to return to those habits, your leadership’s response to this crisis was to immediately begin driving interest rates to artificial lows. They encouraged you to buy houses with tax credits, cars with cash incentives; tempted you to refinance your mortgage, and President Obama even suggested it was a great time to buy stocks! Ultimately Ben Bernanke and the financial elite want you to continue your path into financial bondage and reduce your savings. You are told when you spend, you rescue US firms from the economic slowdown and that will save US jobs. This financial crisis driven by a loss of jobs and a collapse of the real estate bubble has shaken the very principles of that false paradigm.

By pouring liquidity into banks that are insolvent and indirectly juicing the market, our leadership has opted to restore "confidence" in our economy by pumping stock markets. They are attempting to inflate another bubble. Previously I wrote in an article titled SUMMER & FALL OUTLOOK, "If the US federal government can guide us out of the deflationary cycle, we will be fortunate to enter a period of much greater inflation. In fact, this is the direction that the FED prefers now and is attempting with all of their might. Again, if the FED can break the deflationary cycle by prolific "electronic printing of dollars", deficit spending, and debt issuance it will lead to a significant devaluation of the US dollar. A decline of the dollar will usher in increased commodity prices, and future asset bubbles in other sectors.

In the article below, we have an interview with the Chairman of the China Investment Fund, Lou Jiwei.

Mr. Jiwei is charged with investing excess cash for China's sovereign wealth fund. A sovereign wealth fund is essentially a state owned hedge fund. They buy all types of assets including metals, real estate, and stocks. As the interview proceeds, Mr. Jiwei states plainly what I have been saying;

"It will not be too bad this year. Both China and America are addressing bubbles by creating more bubbles and we're just taking advantage of that. So we can't lose," he said.

The one thing we know about bubbles is that they are formed on the backs of herds of investors rushing to buy assets that are overpriced. In addition, bubbles burst leaving accounts and lives wrecked. Unfortunately, the damage doesn't affect those that choose to risk their capital; it entangles folks that seem to have nothing to do with investing at all. Just look at the crisis on Wall Street and see how it has caused layoffs in Middle America. Families suffer when asset bubbles collapse. The concerning thing for me is that these bubbles seem to be increasing in frequency and magnitude. My feeling is that our government leadership should be slowing down these investor led destructive manias rather than supporting and participating in them.

I also highlight Mr. Jiwei's statement that "We can't lose". The arrogance displayed in this statement is exactly what will lead to a "black swan" event that triggers another global financial meltdown. How many Wall Street traders and executives used those very words before this crisis? Think back to the Enron days, do you think that statement would fit well in that environment? Many friends of mine used those words in the late 90's investing in the internet craze. None of them escaped the market's powerful correction.

While it is so tempting to be a buyer in a market that goes up every day, we must remain prudent and watchful for signs that the markets asset bubble is beginning to burst.