Stock Ideas 
News Letter Reviews The Currency Cavalry Rides Again
News Letter Reviews The Currency Cavalry Rides Again 
Market Watch
|
By Jeff Clark Two things worry me about the stock market right now... Wait... that's not quite right. There are dozens of things that worry me. But two of them scare the heck out of me. |
|
| More... |
Most Popular
Login Form
| The Currency Cavalry Rides Again |
| Tuesday, 21 August 2007 | |||||||||
|
The U.S. Fed cut lending rates and markets came back. I’m not worried. I think we’re going to see higher prices.” The man speaking was a retired French banker. Like everyone else with any money, he has been watching recent events and wondering what was going on. And like almost everyone else, he has come to the wrong conclusion. As to where stock prices are headed, we are as dumb as everyone else. Many times we have tried to look into the future – even when we were on vacation. But we’ve never gotten the hang of it. It just isn’t possible to know what will happen. But probably a clear majority of the world’s investors now believe in two great delusions: One, that central banking has taken the risk out of investing...and its corollary, that market prices are now on the rebound.Again, they may be right – by accident – about the latter point. But it will prove to be an expensive triumph, in our view, because they are surely wrong about the former one. Central banking has not taken the risk out of investing ; it has magnified it.
On Friday, the Bernanke Fed looked a lot like the old Greenspan Fed...riding out to rescue speculators like the cavalry to the aid of desperate pioneers. The trumpet sounded...the rifles fired...and the savages were beaten back. “Thank god for the boys in blue,” said the pilgrims. “They come along just when you need them. Now, we can go and settle that rich bottomland across the river. They’ll always protect us.” If only running an economy were so easy! We’re on vacation, so we’re not going to think about it too much. But it was only a week or so ago that the Fed told us that inflation was real enemy. Now, Ben Bernanke has cut the discount rate by half of a percentage point so as to counter the deflationary effects of a credit crisis . Banks – and other financiers – got themselves into trouble because they had too much money on their hands. They lent it out much too freely. So Bernanke comes to their rescue . And with what? More money of course.The markets let out a big hoorah on Friday. But how, exactly, is a lower discount rate going to solve the problem? In October of this year, the big hump in mortgage resets comes – with more than $50 billion in mortgages to be adjusted upwards. Then, next year another half a trillion in mortgages is to be reset, with the final peak coming in March. The typical subprime borrower from 2004-2006 will have to come up with about $400 per month more. Where will he get the money? Who will lend to him? And why would he borrow? If you think the rate of foreclosures is up now – just wait until October. And if won’t just effect those subprime borrowers. Unfortunately, you could be the best homeowner in the world...maybe you’ve even paid off your mortgage... but if there is a foreclosure near your house, it could lower the value – by up to $20,000! Yes, we’re all believers in the Theology of Capitalism now. That is, we don’t think we have to look too deeply into the Holy Mysteries that surround modern markets. The place is full of miracles; that is all we have to know. But when it comes to real, free-market capitalism, we are all agnostic. People think that central banks can collude to manipulate the markets...and thereby avoid a much-needed correction forever. Our guess is that investors will pay dearly for the delusion.“The world is flat after all,” a friend wrote us, sending the following item: “Yi Xianrong, a banking and finance expert at the Chinese Academy of Social Sciences, said Chinese banks had been lax as they built up 3 trillion yuan ($396.2 billion) of mortgage lending. “‘The quality of housing loans are much worse than the subprime loans in the United States,’ Yi was quoted as saying by the South China Morning Post. “At least there has been a credit check system (in the United States) but in China anyone can borrow money to buy a house.” See, dear reader. Americans aren’t the only ones. Now, everyone can take part in foolish trends and fads. Until tomorrow, Bill Bonner The Daily Reckoning P.S. No man worships capitalism. Instead, if he has any sense, he fears it...and aims to put a stop to it as soon as he is able. In any economy, mistakes are made. People invest in projects that don’t pay off. They pay too much for a stock. They lend to people who can’t pay the money back. If these errors were to go unpunished, the mal-investment and misallocation of resources would continue. Eventually, the whole shebang would collapse into a heap of unwanted products and un-performing assets. That is why we have corrections...bear markets...and panics; they are an economy’s equivalent of natural selection, eliminating the weak and unfit.Source : Daily Reckoning
|
|||||||||
Reviews (1)
| < Prev | Next > |
|---|
