Saturday, October 17, 2009

The Big Lie

Life begins fresh every morning as we turn on our television and radios. The past is yesterday's news. The DOW is over 10 000 again. Everybody with money still in stock markets cheer and pat themselves on the back for not selling at the panic low during the big scare. Memories are short. The DOW first breached the 10 000 level over ten years ago. It would be fun to go back and read what the stock market gurus and the legions of financial advisers were advocating in those ebullient years. The self proclaimed experts are loathe to revisit the past because it reveals their lies, deceit, bias, or just plain blind optimism. The short attention span of the mainstream media plays right into their hand. We went from all time highs, to near collapse, and back to huge profits and bonuses for the banking elite all within a year. This is crazy. A well functioning financial system should not be gyrating from one extreme to the next. The economists are convinced the economy is recovering and the compliant media are quick to report it. This only has the veneer of truth. Scratch the surface and you will find little substance. The narcissistic banking elite care not for the truth. For them, the facts are to be twisted and distorted to serve their own selfish interests.

Narcissists are happy until they don't get what they want. Then they huff and puff, create havoc, plead, sulk, and generally make the lives of everyone around them miserable until they get what they want. The wise person knows enough not to give in, otherwise it reinforces the bad behaviour. Money managers who were collecting huge bonuses were slapped back into reality in 2008. Their fantasy of endless profits and stock market gains came crashing down as a direct result of their greed and malfeasance. They pointed the finger elsewhere while they held out the other hand for a bailout. Politicians who are prone to short term thinking and self interest looked the other way, handed them billions of taxpayer dollars, and now the petulant are happy again, gloating even, basking in the pile of fresh money still warm from the printers. The political class are in cahoots with the money men. The problems that nearly led to the collapse of the global financial system appear to have abated. The stimulus and bailouts appear to have worked. The barometers of a healthy economy are suggesting a recovery. Stock markets have bounced back with ferocity posting incredible gains. The GDP numbers have turned positive. The recovery is underway, or is it? Just because a story is stated over and over again, doesn't necessarily make it true.

Stock markets have bounced back. That's a half truth however. After missing the tell tale signs of a looming economic crash, the experts are now smugly chiding everyone with money on the sidelines for not participating in the rebound of the equity markets. The message is clear. Time to reinvest in riskier assets where there is a return on your investment, so they say. Central banks have lowered interest rates to essentially zero. That's great for borrowers but not so good for savers. Everyone with savings who don't want to participate in stocks, takes the loss. What is an investor to do? Agents of the financial industry want our money. They will say anything to resist our urge to take it away from them and put it elsewhere. Contrary to popular belief, equities do not always give you better returns, even in the long term. The returns of all the major stock indices around the world are down over the past ten years. An even more startling fact, that is rarely brought to light, is that the DOW has returned nothing since the mid sixties once it has been adjusted for inflation. The trusting buy and hold equity investor who invested in the biggest of the blue chips has had to endure a lot of stress and risk for almost half a century only to come up even.

The graph that is always trotted out showing the incredible gains is deceiving because it isn't adjusted for inflation. Those gains were only possible because of the loose monetary policies of the government and central banks. Inflate the money supply and the price of everything goes up, including stocks. Coupled with institutional encouragement of private retirement plans, the equity ball got rolling, drawing more and more people into it. Money that should have been put toward paying down large mortgages were redirected into speculative stocks. Even conservatively managed pension plans felt compelled to take on more risk to keep up with it's burgeoning obligations. Seniors in retirement or nearing retirement were encouraged to put a good portion of their nest egg into equities for growth. They were practically forced into it with interest rates so low. The financial industry became very profitable as a result of this new found tolerance of riskier assets. The all pervasive sell job pushed equities higher than they deserved to be. The systemic embrace of equities, coupled with loose monetary policies fuelled the stock market gains over the past couple of decades.

The modern financial system organized itself around the belief that sustained economic growth and the associated stock market gains would continue unabated. Witness the fallout and subsequent reaction of the latest downturn. From celebrating rapid gains in stocks and real estate, the near collapse of the entire system was followed by an unprecedented intervention of governments and central banks globally. Stock markets are not allowed to go down. They have become the barometer of our economic well being. Risk taking and stock market participation has been the elixir to cure all financial problems. As long as they kept going up, everyone was happy. However the dark side to all this pleasantry is that the future financial well being of the population was now directly linked to a fragile, temperamental market that historically has not provided much wealth to it's participants.

The stock market has bounced back. Don't be fooled though. It was orchestrated through secretive complex market machinations. The bankers and politicians needed the stock market to go up and they made it so. The latest rally was not fuelled by organic growth of a recovering economy or by widespread re-investment from the retail investor. Mutual fund flows are going into bond funds, not equity funds. Volume of trading is low. Goldman Sachs and their ilk are the savvy ones with the means to move markets. They were given access to cheap money and they were given a government guarantee that they will not fail. The system is rigged to loot the taxpayer and unwitting investors. The real economy is not healthy. Retail sales are languishing. Businesses are struggling. Unemployment remains very high. Real estate is still bottoming in the US. The banks are still holding toxic assets. The rosy GDP numbers include government spending which has been accelerating. Deficits are ballooning. Price to earnings ratios of stocks are at historical highs. Unless real substantial measures are put into place to reckon with the structural imbalances of the global economy, and the suffocating debts, there will be no lasting recovery. This so called recovery is a fabrication of epic proportions. The people at the helm are narcissistic, pathological liars. They are aided and abetted by a subservient financial press and a generation of trusting stock investors who want to believe that everything is just fine. Remember that those who make a market go up can make it go down. Stock markets have always been fraught with risk and that is more true today than ever.