More Pre-Crash Talk & Behaviour!

16 March 2008

Perhaps it goes without saying this time.

But I'll say it anyway. There is more evidence of pre-crash talk and behaviour on Wall Street and on Main Street this weekend - not to mention in international markets!

On January 18, 2007, Bear Stearns, the fifth largest investment bank on Wall Street, was worth $170.70 per share. As of today's date, Sunday, March 16, 2008, J.P. Morgan Chase has revalued the company at a stunning $2.00 per share. Rounded off, that is a 99% loss in market value for Bear Stearns over a mere 14-month time frame.

Why? I'm sure you can find ample explanation in the news stories. In short, Bear Stearns engaged in a greater degree of irresponsible risk-taking behaviour than did its other investment banking peers by throwing money at (and then selling to its customers) toxic subprime and other now essentially worthless mortgage-based debt obligations.

Or, so we think. Time will tell how irresponsible Bear's compatriots and competitors were.

Question:

Is Bear now actually worth $2.00 per share?

Answer:

I'm not sure. Perhaps not. Its value could certainly be found to be negative when the smoke and dust settle and the mirrors clear.

Financial garbage in - financial garbage out.

I guess J.P. Morgan are buying a name (though now quite a tarnished name - so I'm not really sure what that is worth either).

What is this telling us about the markets as a whole?

I'm sure you can read that message in the behaviour of Asian markets trading Monday morning, while it is still Sunday evening here. The Asian markets are telling us that it's not over yet - the problem is not contained. Gold (up 3% on the news) is also telling us that it's not over.

And Mr. Bernanke has now used up almost half of all of his interest rate ammunition, cutting rates 2.25% form their former 5.25% levels 6 months ago. With 3% left to go, the Federal Reserve Board could expend up to one full additional percentage point of "ammunition" at their Tuesday, March 18, 2008 meeting. That could leave the Federal Funds Rate as low as 2% as of this coming week - or - greater than 60% of all ammunition expended. (Note that Mr. Bernanke has already modestly lowered the overnight rate 25 basis points, to 3.25%, today - Sunday, in a very unusual move!)

If by any chance this proves to be a lengthy recession, further rate cutting by the Fed will mean that there will be little more the Fed can do for as long as the recession lasts.

We know with certainty that the slashing of short-term rates will brutally punish savers and the prudent - but that has been going on for many years, beginning with the term of Allan Greenspan at the Federal Reserve.

Will the rate cuts and funds facilities (read "free" taxpayers' money) work to save the Wall Street system?

Well, Mr. Bernanke is an expert on depressions. He has two theories, which may perhaps eventually prove somewhat confusing to him, as well as to us.

Theory one is that the Fed can target inflation by raising rates when inflation goes up. However, that theory has been abandoned, as the Fed has redefined inflation instead, essentially removing everything that goes up in price from its measures - and ordinary people know that almost everything on which they spend money has been going dramatically up in price for some time now.

Mr. Bernanke's second theory is to keep the money flowing by printing lots more of it while disregarding the inflationary consequences - and that seems to be the course of action that the Fed has actually adopted. And, as any student of economics 101 can tell you, printing more money makes it worth less (and eventually literally worthless), based on the inexorable laws of supply and demand. With the amount of circulating (and concomitantly devaluing) US dollars up from about $4 trillion in the late-1990s to $14 trillion today, there is little reason for optimism for the US dollar - though we should expect the combined Fed and the Bush administration to pull out all the stops in throwing taxpayers' - and citizens' - money at the problem!

(By the way, expect most other international governments to follow suit, with their own brands of irresponsible monetary policy. This is in fact the US dollar's best hope for a bounce back up over the next few months. When every major power is competing to devalue its currency, this race to the bottom offers the strongest thread of hope to the battered - and misused - US dollar.)

Who will be rescued by more Fed rate cuts?

If it works, first of all, the folks on Wall Street who brought you these irresponsible financial practices in the first place.

Who will be punished?

Taxpayers. Savers. Persons on fixed incomes. Those hoping or planning to retire in the near or distant future.

It's going to be tough for US citizens attempting to behave financially responsibly when their own government refuses to do so.

As already discussed, the Fed has fought inflation by redefining it. Let's follow the Fed's lead, and just measure the cost of everything that does not change in price. However, I'm not sure what will be left to measure in the Fed's evolving cost of living index, as Chinese imports, the last bastion of the inflation deniers, are going up too, as the Renminbi gently floats up against the US dollar, and as the wages of Chinese workers gradually rise (the Chinese middle classes have so far quadrupled their incomes, according to Pamela and Mary Anne Aden).

And in any case, don't worry about the Dow crashing - it already has, in gold terms.

All that remains now is for the value of the Dow in US dollars to mirror its performance in gold terms - or, if you will, in terms of the Euro, the Swiss Franc, the Canadian dollar, or any of a multitude of alternative standards to the exploited and now failing US dollar.

The crash is not on its way. It is already here.

Bear in mind, the manipulators who brought you the reformed cost of living index and the notion that the Fed can rescue every irresponsible Wall Street player, will be doing their best to maintain the perceived strength of the investment markets, regardless of what else has to be sacrificed.

Time will tell how long this particular game lasts. Be cautioned, however. There may be a few more rounds left before the market manipulators have played the last of their cards - and the last of their chips.

Unfortunately, the real economic recovery can begin only be when the above-described games of chance and manipulation have come to an end. The financial manipulation that is keeping Bear Stearns alive today is merely serving to delay the inevitable, by bankrolling the irresponsible players to keep them in the game longer.