STAFF NEWS & ANALYSIS
The Myth of the Modern Stock Market
By Staff News & Analysis - November 04, 2010

Stock Markets end at multi-month highs after Fed plan … U.S. stocks ended a volatile session modestly higher on Wednesday after the Federal Reserve detailed a plan to breathe new life into the struggling economy. Both the Dow and Nasdaq closed at levels not seen since 2008 while the S&P ended at a six-month high. The gains were preceded by an erratic session in which equities zigzagged up and down as the Fed announced a plan to buy $600 billion in Treasuries. The size of the plan was greater than had been anticipated but less than many hoped. – Reuters

Dominant Social Theme: Happy days are here again.

Free-Market Analysis: The stock market is "up." The Dow is over 11,000. We wonder how much of this is accounted for by inflation. But even if it represents solid equity achievement, what is it telling us? We remember in the late 1990s reading a spate of articles explaining how brand name, global corporations were good as gold. These stocks need to be passed down from generation to generation, like family heirlooms, we were told on more than occasion. A few years later the NASDAQ collapsed and lost half its value.

Are US corporate stocks good as gold? We don't think so. But how does one account for the current market action? Here's the way we see it. The US, as we have pointed out previously, is something like US$200 trillion in debt, if you project the trends correctly. This is an impossible number to pay.

The US is technically bankrupt. It is fighting two, three or four wars, mostly unsuccessfully, and maintaining something like 1,000 bases overseas. It is threatening to unleash kill squads in Yemen, to penetrate Pakistan with helicopters and troops and to start a new war by bombing Iran.

Domestically, spending continues to outstrip revenues, the "real" unemployment rate hovers between 20 and 30 percent, 40 million children and adults are on food stamps; foreclosures are at an all time high; famous cities like Detroit are literally being bulldozed to remove squalor; the entire "red" interior of America is dilapidated, filled with empty factories and crumbling infrastructure. The dollar itself, once the world's proud reserve currency is worth about a penny of what it was a century ago, and eroding still further every time Bernanke launches another quantitative easing – prints another trillion in phony money to "stimulate" the economy.

And what does the American stock market do? It goes UP. How exactly is this possible? Who is "investing" in America? What exactly are they buying? Excuse us if we don't see it. All we notice, for the most part, is a dysfunctional political culture, a country that has been bleeding jobs and manufacturing for at least 50 years, and a nation that is facing bailouts of some of its largest states – California and New York come to mind.

We don't mean to be negative, but it used to be that "buying a share in America" meant something. But what exactly do you get for your money these days? America just socialized a sixth of its economy when Congress passed recent health care legislation. Via TARP and other programs, the federal government has lent close to a trillion to America's biggest (dysfunctional) banks and thrown in a couple of car companies besides.

Fed Chairman Ben Bernanke has dumped somewhere between US$2 trillion and US12$trillion in the larger economy to prop up a global system which, still to some degree, is an Anglo-American mechanism. It is, in fact, a product of the millions killed in World War II and the subsequent inability of the rest of the world to resist the pax American that was imposed after hostilities ceased. But now the entire system is degrading.

The BRIC countries resist the competitive (de facto) devaluation of the dollar. China says all the right things, but the yuan still remains at a discount to the dollar. And the American economy itself remains mired in weakness and confusion. No one, that we can tell, will borrow or lend until the bad loans are removed from the books and people can tell a solvent company from an insolvent one.

And what does the Fed do? It starts another program to PROVIDE MORE MONEY to private financial interests, thus providing yet more moral hazard, illustrating clearly that there are two standards of business in the US. We are two years into this Greater Recession and the end is still not in sight.

And where is the stock market in all this? It went down initially in 2008, but now it has surged powerfully. This is proof positive in our view that the market is ultimately a response mechanism for the Federal Reserve itself. It is like a vast, equity echo chamber, responding to whatever the Fed does.

Once the Big Fish has made its moves and the stock market has responded, the pilot fish (researchers and analysts) will swarm the media, blowing bubbles about bargains and values and hidden treasures that are bound to go up longer term. Fishy as they are, they will be hailed respectfully as soothsayers, but in fact it's not so hard to make these statements when the economy is being stuffed with money like a salted cod. Here's a MSNBC article explaining how the economy works and why notorious stock-tout Jim Cramer emphatically believes in what Bernanke is doing:

In Praise of 'By Any Means Necessary' Bernanke … Jim Cramer on Wednesday endorsed the Federal Reserve's latest move prop up the stock market and the economy … The Fed announced it would keep interest rates at low for an extended period while also buying $600 billion in government bonds, the latter an attempt to shrink borrowing costs for consumers and businesses still suffering in the aftermath of the worst recession since the Great Depression.

Cramer called the decision part of Fed Chairman Ben Bernanke's "by any means necessary" approach to tackling the US's economic problems. While Bernanke can't boost housing prices or create jobs, he can create the conditions under which businesses, and in turn the markets, can start to rebound.

Bernanke can flood the market with dollars, devaluing the currency and therefore boosting the profits earned by American companies overseas. The resultant success of these firms entices investors back to the market. At the same time, Bernanke makes Treasury's and certificates of deposit virtually worthless investments by keeping interest rates so low. That, too, makes stocks more attractive.

All of these actions generate the confidence investors need to leave the sidelines and reenter the market. And as share prices climb, it creates a wealth effect that reverberates out to different parts of the economy. Consumers become willing to spend, retailers as a result see their sales totals rise, those growing sales translate into higher earnings, which further catalyzes the market, and so on. This is outcome that Bernanke is trying to effect, Cramer said, and "he will succeed."

Let's translate this. The Fed is keeping interest rates low, virtually bankrupting a pool of senior savers who have invested their earnings for their old age in fixed income instruments. At the same time, the Fed is making this hard-earned money worth much less by printing so much new money out of thin air so that the insidious hidden "inflationary" tax circulates with reckless abandon and eventually creates price inflation.

But those Masters of the Universe who have concocted these schemes don't care. They are worried about only one thing: Keeping the system going while they make their last desperate attempts to build global government. To do this they will do ANYTHING to galvanize the animal spirits of the American (and European) economy.

As we have pointed out innumerable times, the money that central banks pour into the market (when the banks aren't lending) ends up in the pockets of the biggest companies. These companies do well and their share price begins to move up. Gradually investors return to the market out of desperation or greed. The wealth effect is gradually generated and the economy slow begins to gain strength.

The trouble with this scenario is that it presupposes the economy is self-cleansing. But the entire fiat-money system virtually collapsed in 2008 and the overhang of ruin and chaos has never been dealt with. Because of this, the Fed's plans can boost the stock market without boosting the larger economy. The Fed, through its unrestrained money printing has finally done what hard-money advocates have long predicted: It has decoupled the stock market from the larger economy.

It's not all doom and gloom. There are certain profit plays in such a situation. Stocks, large and small, will continue to climb in some cases as the unraveling of the Western fiat-money dollar-based economy continues. But make no mistake: It is continuing to unravel. There is nothing in our view that Bernanke can do that will resuscitate it. All he is buying is time. Best case, he and other Western central bankers manage, with the help of the mainstream media, to make it look as if the economy is recovering.

Actually, the problems are merely shoved a little ways farther down the road. But please, dear reader, we want to remind you of the larger issues inherent in this program. What right, in fact, does Bernanke have to bankrupt pensioners and make the remaining years of US senior citizens a nightmare of eating cat food and sleeping without heat, shivering and starving in the dark? What right does he have to distort business and make it impossible for investors to tell a healthy company from a bad one? What right does he have to give some companies millions and billions while other, smaller companies are left at a competitive disadvantage as they receive no funding at all?

Jim Cramer has done us a service in explaining in the mainstream media how the world – and Western stocks markets – works (as excerpted above). The market has little to do with the Invisible Hand anymore and everything to do with metaphorical helicopters that Bernanke is constantly dispatching across the nation to drop money on designated friends and colleagues.

After Thoughts

This is not the competitive capitalism of the marketplace but a kind of crony capitalism – mercantilism – that has been refined for decades and even centuries. But its longevity does nothing to recommend it. It is a disastrous system that rewards a handful while ruining tens and even hundreds of millions. The sooner it is done away with the better. It seems to be failing on its own.

You don’t have to play by the rules of the corrupt politicians, manipulative media, and brainwashed peers.

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