Stressed Out

It's hard to keep up with the news flow these days. Stories that would have normally been headline and analyzed to death by the popular media are being glossed over as though they they have little importance. Financial observers whose job it is sort this stuff out are stunned. The natural reaction when immersed in a chaotic environment is to focus on what we can handle, what we know. People are attempting to latch onto some sort of explanation. Humans crave order and predictability. Irrational, random events need to be explained and put into a framework. The mind will do incredible leaps to rationalize the absurd. Contradictory data is ignored. This environment is prime for charlatans, dressed up in suits of respectability, to spread soothing thoughts to the masses in hopes of personal gain. At the fringe are conspiracy theorists who speak of a covert master plan designed to establish a new world order. Stock market crashes, planes exploding into buildings, wars, currency destruction, all figure into the equation. On the other end of the spectrum are the main stream press owned and controlled by corporate interests. The news is reactionary, superficial, and border on propaganda. The news flow has had a pronounced shift of sentiment lately. The recent converts to doom and gloom have had their fill and now green shoots of optimism are the rage. The worst financial crisis in memory apparently has been solved in less than a year. Let the good times roll.

The long awaited stress tests of the largest US banks are out at last. Some need to raise a few more billion of new capital as a buffer to meet the worst case scenario but overall the banks are healthy. They are making money again. The real estate market is bottoming. Consumer sentiment is on the rise. Stock markets have had a robust 30 percent gain. Unemployment rates are abating. The stimulus is in the pipeline stoking economic growth going forward. Time to invest! This is the drum beat heard in the press. For many people whose lives haven't been dramatically changed due to a job loss, looming bankruptcy, and foreclosure, the crisis probably doesn't seem real. People still wake up in the morning and have their cup of coffee and go about their business. The nest egg that is meant to finance retirement is smaller but that is a long term investment so no problem. Investments always go up over the long term. Everyone says so. The system is working. Order is established.

Or perhaps the positive spin of the stress tests was just the latest example of market manipulation that a Cartel of private international banks are orchestrating to further their grip on the global financial system. The very design of the fractional reserve system ensures that the money supply must inflate to pay off the interest on the existing debt. The Federal Reserve, a privately owned cartel acting under the auspices of a government agency, earns interest on every dollar it creates from nothing. It is in it's best interest to inflate the money supply. Debt begats more debt, causing the value of the dollar to shrink, until the interest on the debt eventually outstrips the ability of the economy to service it. The financial system strains under the pressure until it must eventually buckle. We are close to that point. The Fed-led cartel knowingly created the conditions to ignite such a crisis to further their end game, which is global domination. How else to explain why the actions taken by the central banks and paid off politicians seem so counter intuitive? They must surely know that quantitative easing never works. It is a road to hell. They are openly and covertly manipulating the markets and the economic data to obfuscate the true nature of the dire situation that is unfolding. The intent is to prolong the illusion of growing wealth and prosperity, while sucking the last drop of wealth from the masses, until the day of reckoning is put into play. The result will be the inevitable destruction of the dollar and from the ashes a new global currency will be created and controlled by the Cartel. Order is established.

The stress tests that caused so much stir and anxiety are a sham. The tests were supposed to put the banks through a rigorous set of assumptions of a worst case scenario so the regulators can shore up any weak spots to prevent another meltdown. This on it's own is disturbing. This should be ongoing both internally and through the regulatory agencies as part of normal operations. Clearly it was not. Executives hoarded millions while making some of the worst decisions possible, after all taking down the global financial system isn't an easy task. That takes a lot of talent. These are smart individuals. They had to know the risk models were faulty. It is more plausible that they were designed to rationalize their bloated incomes while the regulators turned the other way. They will get their piece down the road. Greed ran amok and fortunes were made.

History repeats in the short sighted news cycle of the day. The same people have developed new risk models. The assumptions used for the stress tests were not rigorous. Insiders with the banks refer to them as a feather test. They were designed to promote false confidence in the public to prop up equity values of the financial sector. The political climate is no longer ripe to blatantly fund more bailouts to insolvent banks since credit still isn't flowing to Main Street, which was the point of the whole exercise. The public overwhelmingly didn't want the first TARP. A second isn't politically palatable at the moment. The CEOs of the major banks had a big pow wow with Obama at the White House and they all emerged with smiles and calm reassurances that everything is just fine. Announcements of bank profits followed, triggering the latest rally. The campaign to restore confidence has been evident. The news flow has dramatically changed as even obvious bad news is spun in a positive light. Last December there was a consensus that bankruptcy for the automakers was not an option. They were bailed out which bought time. Now they are going into bankruptcy and the same people who passionately argued it would be devastating are rather sanguine about it.

Trillions of bail out money and government guarantees have been handed out to the banks, and yet to this day we are still questioning their solvency. The true extent of their losses has been cloaked by accounting gimmicks. The toxic waste that was clogging the system, it's still there. Accounting rules simply changed overnight that allows the banks to value foreclosed homes at whatever price they feel is right, as opposed to what they are actually worth if sold on the market. No more problems. Stocks of the banks, that were poised to become worthless, have bounced off the bottom. Bearish investors got the short squeeze, forcing them to cover, pushing prices even higher. Then fund managers who have had their portfolios hammered and have been desperate to hold onto remaining investors, and their job, see the market push higher so they pile in so as not to miss the rally. The headlines in the business news speak of recovery and green shoots. The bottom is in. It all becomes self propelling once this dynamic establishes itself. Now the banks can go to the market and raise new capital, with the blessing of the positive stress tests. The system is working.

What I struggle with when trying to find an explanation to the seemingly irrational markets is figuring out what the top economists with the levers of the monetary system in their hands actually believe. Do they believe in what is being sold to the public? Are they so egotistical and sure of themselves that they don't harbour any doubts about the course they have chosen? Or do they privately know the financial framework is rotten and doomed to failure and the best they are hoping for is to mitigate the fall, so it does not unravel in a catastrophic way. So they buy time, float trial balloons, leak stories, test theories in an ad hoc fashion, let Lehman Brothers and Chrysler fail, watch the outcome, learn, adapt, prepare for the big battles. The fundamentals are awful. Smaller banks are regularly going bankrupt. The FDIC, the agency that guarantees deposits in the banks, just recently requested more funds. If a big bank goes down they will insure as much as AIG did. There isn't enough money in the pot because the models don't allow for systematic failure. We are already at the worst case scenario thresholds that the stress tests allowed for. If it gets worse, the irrational exuberance of the new bull market will rapidly deteriorate into chaos again. Our minds don't want to go there. Order has been established. Rally on.