Facing the Inevitable Market Adjustment

Oh what a tangled web we weave when first we practice to deceive

(Sir Walter Scott ( Marmion),

The times were dismal. We stood at the edge and looked into the hole and we declared that any action that would save us would be acceptable.

A long time ago, the market tanked. Do you remember? It is said that it takes sixteen years for us to forget the lessons learned by the gyrations of our economy and our markets. I think we have become fast learners.

Allow me to refresh your recollection:

(from the Dept. of the Treasury April 2012)

The problems that we faced were a myriad of poor decisions by legislators and regulators. Banks had become “too big to fail” Barney Frank and other do-gooders had pushed for a home for every family. Laws were drafted to assure that loans would be made to make that dream a reality.

Soon, banks were making loans that any prudent banker would never make. To cover their butts, they “packaged” them, that is, they put them into a package of loans, buried the bad ones with some good ones, and sold them off. These loans were the “hot potato” and every bank who made them wanted to offload them before they, inevitably,  went sour. It was a game of musical chairs and there were few chairs remaining in the circle.

What made this much worse was that many banks were making these toxic loans, so the “good” ones in the “package” were often just some other guy’s bad ones. The packages were than packaged into bigger bundles of loans in an attempt to dilute the “bad” loans. The problem was that there were too many “bad” loans and not nearly enough “good” loans to float the package. Default was imminent.

Not to worry, there were “mortgage guarantees”, companies like AIG insured these loans against default. They were driven by falsified loan valuations, fabricated bank financials, fabricated real estate valuations, etc. You get the idea. It was a money fest and everyone was getting rich and, of course, it was never going to end. But, end, it did. The insurers hadn’t the asset base needed to insure the losses realized.

The response was one that had been anticipated. Ben Bernanke had held this plan just in case, and here was his chance to use it!

T.A.R.P. was set into motion  ( ‘Troubled Asset Relief Program  A group of programs created and run by the U.S. Treasury to stabilize the country’s financial system, restore economic growth and prevent foreclosures in the wake of the 2008 financial crisis through purchasing troubled companies’ assets and equity.  www.investopedia.com

Anything needed was acceptable and much was needed. The response was the buttressing of the financial system. Much was said about the “greedy” banks and the “greedy” investors. Little was ever said about the regulation that drove the crisis, the poor administration of our economy, nor the complete loss of oversight.

Barney Frank even lined up the bankers and berated them for making the loans that he required them to make.

(from the Dept. of the Treasury April 2012)

Filling the hole in our economy proved very expensive. To rough it out – around twelve trillion dollars. Much of this was money that we simply printed. The net result of all of this, of course, is the devaluation of the dollar. Inflation was a great concern in the minds of economists. The reason that money can be “printed” willy nilly in such an instance is that we have no “basis” for our currency. It is no longer tied to precious metals or any other thing. It floats.

The only value of our currency, then, is the value that we collectively assign it. Now, I am betting that you have savings. This money in your savings “floats”, too. “But I have a portfolio of stocks” let me explain what stocks are.

No doubt you have been told that stock is “ownership in a company” and that you are buying a part of that company whenever you buy a stock certificate. That is a lie. The stock was sold and the money was paid long ago. What you have is a worthless piece of paper that is exchanged on a market after the I.P.O. Unless you can en mass enough of these certificates, you can’t even have a say in the decisions of the underlying company. Stocks, like currency, “float”, taking on the value that the community assigns to them. You can see this when a company has a bad quarter and the “value” of their stock plummets. There is no change in the underlying assets or the value of the company, only the “perception of value”.

Here we are in 2015. The economy has recovered. Our problems are behind us. NO. They are not. Each of the faults that allowed the failure still exist today. Some, like bank size, are worse than they were. Collateralization is improved, but availability of the kinds of loans that drive our economy is poor. We have falsely buoyed a treacherous economy, and the piper shall be paid.

The economy is in the dumps . 2% growth is disgusting and it is NOT the new normal. It is a failure. The economy is a very complex problem to understand. The variables are numerous and changing. We have spent our ammunition and there is no magic bullet.

As is always the case, we must weather the storm. This false market will take the hit that we so aptly put off. The economy will crash again. It must.

The stock market never recovered. It was manipulated by a devalued currency and a Fed. that wants to insulate our economy from the pain that is coming. The stock market will find, again, its real value in time. It will be a painful transition.

Scott Cahill