The Flimsy House of Cards is Bound to Collapse
by Jeff Davis
Apparently the “recovery” is largely a media hoax, and things are so fragile we could soon experience another stock market crash.
CNBC reports: “In an unprecedented move, the number of investors fearing a catastrophic stock market crash is rising even with the stock market at 2 ½ year highs. The unusual dislocation comes from two distinct reasons: a lack of trust in the U.S. financial markets following the so-called Flash Crash last May and the collapse of Lehman Brothers in 2007. This means the Flash Crash Advisory Commission that met on Friday has a long way to go in restoring confidence to the point that will bring the individual investor back into a market still ruled by high frequency trading, exchange-traded funds and leveraged hedge funds.”
The recent market rise makes very little sense. Real unemployment is still around 20 percent. Most people are worried that they might be laid off, and people, who think like that don’t spend much money. The US economy is 70 percent driven by consumer spending, and that continues to be anemic.
Back to CNBC: “The Yale School of Management since 1989 has asked wealthy individual investors monthly to give the probability of a catastrophic stock market crash in the U.S. in the next six months. In the latest survey in December, almost 75 percent of respondents gave it at least a 10 percent chance of happening. That’s up from 68 percent who gave it a 10 percent probability last April, just before the events of May 6, 2010. In the past, fears of a stock market crash in the Yale survey rose as the market declined because investors lost confidence in the economy and companies as share prices declined, and expected a capitulatory end to a bear market. For example, in March 2009 close to 85 percent of investors gave a crash at least a 10 percent chance of occurring. That record high in distrust and low in confidence marked a 12-½ year low in the S&P 500. The benchmark has doubled since that low, but investors are not worrying about the prospects for individual stocks as much now now. Instead they are worrying about the still-unchanged system set up by Wall Street and regulators in which equities trade. The Flash Crash Commission – containing members of the CFTC and SEC – made a series of recommendations for improving market structure…”
The Wall Street crowd is worried about another crash because all they’re trading now is paper, not shares in any kind of productive enterprise. All of those have been exported to China and India. The economy is now running at 20 percent real unemployment, which means that actual economic productivity in the U.S.A. has virtually ceased, and everyone is simply concentrating on keeping the lifeboat afloat.
This means a lot less private money for investment in the market. Ten years ago, millions of Americans dabbled in online day trading and boasted that they had a “portfolio.” Nowadays many amateur investors have pulled all their money out of the market, and they’re buying canned food to feed their families as well as desperately trying to keep up with their mortgage payments so they don’t end up living under a bridge.
There is new money in the market, namely the hundreds of billions of dollars that Ben Bernanke and Barack Obama have printed under what they call “quantitative easing,” inflated funny money which has lowered the dollar’s worth and is now beginning to create noticeable inflation.
The apparent rise in the stock market over the past two years in terms of share volume and cash traded is due to the fact that there is more printed paper available to trade in the form of both certificates and financial instruments with pretty seals and engraving, and nice fresh green $100 bills, both of which are still wet off the printing press. This was the intention of the money-printing to begin with, to pump up the market and prevent a full crash.
A lot of Americans still deposit a portion of their paychecks into retirement accounts that go into mutual funds (which means a variety of blue chip stocks). The only reason they’re still doing this is because interest rates for savings accounts and bonds have plunged. The moment the Market starts to get shaky, millions of Americans will switch from stocks to bonds, and the Market will see an exodus of investors, which will lead to a major crash (assuming the initial big crash doesn’t happen all in one day).
Maybe this time when the market crashes, we will see some of these yuppies in $5,000 suits jumping off tall buildings just like in the 1929 Crash.
