Tags: economy

Watch Out for the Bull Trap

Thursday, 13 Aug 2009 10:55 AM

Doesn’t it all seem too simple? We elected Obama, gave him trillions of dollars, and poof, the economy was fixed.

Within two months of his inauguration we were in the beginning of a bull market that has seen the Dow up almost 40 percent, the S&P 500 up over 45 percent, and the Nasdaq up over 50 percent.

If fixing the economy was as simple as electing Obama, we should have elected him years ago. Or so it seems.

What has changed in the market is not fundamental; what has changed in the market is sentimental.

People are more confident that the recession will be over. The banks seem to be healthy, even though we’ve given them $700 billion through TARP, given them trillions more in credit facilities and Fed lending, and changed the rules by which they report earnings, a little thing that we used to call mark-to-market.

So now that we’ve given the banks trillions and changed the rules by which they report their earnings — voila — the banks are now reporting record profits: Wells Fargo, Bank of America, even Citigroup, a bank that is teetering on the edge of going under, reported a $4 billion quarterly profit.

Sounds suspicious? Of course not. Obama fixed the entire economy in two months with just a couple strokes of a pen. Or so we are led to believe.

In the long run, investor sentiment does not win the day, fundamentals do. What is fundamental is that the monetary base in the United States has doubled without anyone even noticing. What is fundamental is that we have a government that is engaged in deficit spending to the tune of $1.8 trillion, overall borrowing of trillions more, and let’s not forget we’ve turned on the printing press. Because when the United States runs out of money, the best solution is to turn on the printing press and print new money.

News flash: the world doesn’t work like that, and the rest of the world knows it. The BRIC countries (Brazil, Russia, India, and China) are already starting to strike bilateral trade agreements that cut out the U.S. dollar and trade in local currencies.

For those who aren’t aware, countries have traditionally traded with each other in U.S. dollars because the dollar was thought to be the most stable of currencies in the world. Now that U.S. dollar stability is gone, countries are flocking away from the currency.

That means that when countries trade with each other, instead of buying dollars on the open market, they will just use their own local currency. This decreases demand for the U.S. dollar. That’s not a good thing for the dollar.

But what is really the problem in this economy is the housing market. More than one-third of all homes that are in foreclosure are in the pre-foreclosure state, meaning that people are living in them, not paying their mortgage, and foreclosure is within one to two years. We’ve still got a long way to go.

The rest of the homes that have been foreclosed are in bank-owned portfolios and on the auction block, in many cases withering away without any maintenance and losing value.

Combine that with mortgage rates that are going back up, which is increasing the number of delinquent option adjustable-rate mortgages. What you end up having is a recipe for disaster.

All of that is without mentioning the silent killer that the media doesn’t want to report on: unemployment. The unemployment rate is at 9.7 percent, and experts such as Marc Faber believe it to really be somewhere around 16 percent to 17 percent.

If unemployment continues to rise that means more people will be out of work. If more people are out of work that means that they won’t have any money to pay their mortgages. This means, presto, more foreclosures.

Sure the Obama administration wants to point out how many jobs that they’ve created. What the Obama administration won’t tell you is that some of these jobs last only three hours. After those three hours, that person is just as unemployed as they used to be.

Jobs don’t happen because of the government. Jobs happen because of private industry and entrepreneurship. That’s something the administration has to recognize.

But when in doubt, let’s pass another stimulus bill. Joe Biden says it’s good for the country. So why not?

In the short run, the United States will benefit from the change in market psychology. U.S. stocks will go up because people believe that the economy is better. Profit from that while you can.

But remember, fundamentally, the U.S. economy is no better now than it was a year ago. Just as the fundamentals reared their ugly head in 2008, the fundamentals will be back, and this time sooner than we think.

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Doesn’t it all seem too simple? We elected Obama, gave him trillions of dollars, and poof, the economy was fixed.Within two months of his inauguration we were in the beginning of a bull market that has seen the Dow up almost 40 percent, the S&P 500 up over 45 percent, and...

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