Thursday, April 2, 2009

G20 Provides an Excuse for the Stock Market to Rally While Truly Good News Remains Scarce

Now that the London G20 meeting has ended with filet mignon for lunch in honor of the billions of poor people in this world and the numerous unemployed and newly homeless in the "rich" world, the stock markets have been partying while both the real economy and the financial world continue to deteriorate.  There's no business like the money-printing business! (Unfortunately, it's more addicting than alcohol.)

In the real economy, microscopic month-to-month alleged improvements in business are cheered while massive year-to-year changes are ignored.  For example, while the Labor Department headlined that new orders for manufactured goods in February rose 1.8% from January (seasonally adjusted), it minimized that shipments fell 0.1%  and buried on page 2 that year on year, shipments were down 18.6% and new orders were down 23.1%.  Recalling that manufacturing has been in a downturn for some time, this is not good news and has no predictive value that any upturn is in the offing, and if it is coming, how long and strong it will be.

Regarding the continued dismal new and continuing claims for unemployment, Wall Street is as usual schizophrenic, both loving "slack" in the labor market but wanting more consumption.

In a cravenly concession to Congressional pressure, FASB today relaxed the mark-to-market rules for financial institutions.  The Big Lie here is that the CDOs and other securities that are allegedly "illiquid" were of course designed to be traded- that is their entire raison d'etre.  Big Finance simply does not like the market price, though whenever it can foist these or any other securities off on a buyer- preferably the uninformed public a la 1999, it is a big fan of "free market" pricing.  So a complaisant administration and Congress cow FASB (with what implied penalty?) into changing nothing except appearances.

(Let us recall that because Citi et confreres needed saving, last year FASB delayed its requirement that off-balance sheet items had to come on-balance sheet.  Will that delay be repeated?)

The whole valuation exercise of mark-to-market or mark-to-fantasy is a sham.  The idea that a publicly-0wned company can put its own valuation on any assets is immoral and should be illegal.  An independent third party auditor (or two) should value these assets.  They can use predicted cash flows and market values, and both should be disclosed.  If the financial institution does not like that, it can go private.  More broadly, why should a depository institution that accepts FDIC insurance put complex securities on its books?  Let's bring back Glass-Steagall or its equivalent and let the investment bank, not the depository bank, gamble on that sort of stuff.

Meanwhile, criticisms of the PPIP bail-out continue to surface, in Business Week, out of brokerage houses, in the WSJ, out of academia, etc.; one wonders if this transparent giveaway to Pimco and Blackrock will actually go forward.

We need to go back to the situation that prevailed in the U. S. in the 1950s, when high-quality stocks had high yields, there were dozens of AAA-rated corporations, high-quality government bonds had low yields, Glass-Steagall served us well, bankers followed the 3-6-3 rule (borrow at 3%, lend at 6%, and be on the golf course by 3 PM), the Federal Government's debt's share of GDP shrank dramatically, individuals carried little debt, and once the shooting stopped in Korea, the U. S. stayed away from involvement in foreign wars.

America is being drained just as all prior empires have been, from unproductive but over-influential money-changers, dealmakers and pencil-pushers at home and by military adventures abroad.

This is why despite a massive rally, the stock market remains at least 10% below its 2002/3 low in real dollars (the only kind) and living standards have been stagnant to down for most Americans for years despite the inexorable march of science and medicine forward.

Copyright (C) Long Lake LLC 2009


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