Sunday, December 29, 2013

The Stock Market Has Officially Entered Crazytown Territory

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It is time to crank up the Looney Tunes theme song because Wall Street has officially entered crazytown territory.  Stocks just keep going higher and higher, and at this point what is happening in the stock market does not bear any resemblance to what is going on in the overall economy whatsoever.  So how long can this irrational state of affairs possibly continue?  Stocks seem to go up no matter what happens.  If there is good news, stocks go up.  If there is bad news, stocks go up.  If there is no news, stocks go up.  On Thursday, the day after Christmas, the Dow was up another 122 points to another new all-time record high.  In fact, the Dow has had an astonishing 50 record high closes this year.  This reminds me of the kind of euphoria that we witnessed during the peak of the housing bubble.  At the time, housing prices just kept going higher and higher and everyone rushed to buy before they were "priced out of the market".  But we all know how that ended, and this stock market bubble is headed for a similar ending.
It is almost as if Wall Street has not learned any lessons from the last two major stock market crashes at all.  Just look at Twitter.  At the current price, Twitter is supposedly worth 40.7 BILLION dollars.  But Twitter is not profitable.  It is a seven-year-old company that has never made a single dollar of profit.
Not one single dollar.
In fact, Twitter actually lost 64.6 million dollars last quarter alone.  And Twitter is expected to continue losing money for all of 2015 as well.
But Twitter stock is up 82 percent over the last 30 days, and nobody can really give a rational reason for why this is happening.
Overall, the Dow is up more than 25 percent so far this year.  Unless something really weird happens over the next few days, it will be the best year for the Dow since 1996.
It has been a wonderful run for Wall Street.  Unfortunately, there are a whole host of signs that we have entered very dangerous territory.
The median price-to-earnings ratio on the S&P 500 has reached an all-time record high, and margin debt at the New York Stock Exchange has reached a level that we have never seen before.  In other words, stocks are massively overpriced and people have been borrowing huge amounts of money to buy stocks.  These are behaviors that we also saw just before the last two stock market bubbles burst.
And of course the most troubling sign is that even as the stock market soars to unprecedented heights, the state of the overall U.S. economy is actually getting worse...
-During the last full week before Christmas, U.S. store visits were 21 percent lower than a year earlier and retail sales were 3.1 percentlower than a year earlier.
-The number of mortgage applications just hit a new 13 year low.
-The yield on 10 year U.S. Treasuries just hit 3 percent.
For many more signs like this, please see my previous article entitled "37 Reasons Why 'The Economic Recovery Of 2013' Is A Giant Lie".
And most Americans don't realize this, but the U.S. financial system and the overall U.S. economy are now in much weaker condition than they were the last time we had a major financial crash back in 2008.  Employment is at a much lower level than it was back then and our banking system is much more vulnerable than it was back then.  Just before the last financial crash, the U.S. national debt was sitting atabout 10 trillion dollars, but today it has risen to more than 17.2 trillion dollars.  The following excerpt from a recent article posted on thedailycrux.com contains even more facts and figures which show how our "balance sheet numbers" continue to get even worse...
Since the fourth quarter of 2009, the U.S. current account deficit has been more than $100 billion per quarter. As a result, foreigners now own $4.2 trillion more U.S. investment assets than we own abroad. That's $1.7 trillion more than when Buffett first warned about this huge problem in 2003. Said another way, the problem is 68% bigger now.
And here's a number no one else will tell you – not even Buffett. Foreigners now own $25 trillion in U.S. assets. And yet… we continue to consume far more than we produce, and we borrow massively to finance our deficits.
Since 2007, the total government debt in the U.S. (federal, state, and local) has doubled from around $10 trillion to $20 trillion.
Meanwhile, the size of Fannie and Freddie's mortgage book declined slightly since 2007, falling from $4.9 trillion to $4.6 trillion. That's some good news, right?
Nope. The excesses just moved to a new agency. The "other" federal mortgage bank, the Federal Housing Administration, now is originating 20% of all mortgages in the U.S., up from less than 5% in 2007.
Student debt, also spurred on by government guarantees, has also boomed, doubling since 2007 to more than $1 trillion. Altogether, total debt in our economy has grown from around $50 trillion to more than $60 trillion since 2007.
So don't be fooled by this irrational stock market bubble.
Just because a bunch of half-crazed investors are going into massive amounts of debt in a desperate attempt to make a quick buck does not mean that the overall economy is in good shape.
In fact, much of the country is in such rough shape that "reverse shopping" has become a huge trend.  Even big corporations such as McDonald's are urging their employees to return their Christmas gifts in order to bring in some much needed money...
In a stark reminder of how tough things still are for low-income families in America, McDonalds has advised workers to dig themselves "out of holiday debt" by cashing in their Christmas haul.
"You may want to consider returning some of your unopened purchases that may not seem as appealing as they did," said a website set up for employees.
"Selling some of your unwanted possessions on eBay or Craigslist could bring in some quick cash."
This irrational stock market bubble is not going to last for too much longer.  And a lot of top financial experts are now warning their clients to prepare for the worst.  For example, David John Marotta of Marotta Wealth Management recently told his clients that they should all have a"bug-out bag" that contains food, a gun and some ammunition...
A top financial advisor, worried that Obamacare, theNSA spying scandal and spiraling national debt is increasing the chances for a fiscal and social disaster, is recommending that Americans prepare a “bug-out bag” that includes food, a gun and ammo to help them stay alive.
David John Marotta, a Wall Street expert and financial advisor and Forbes contributor, said in a note to investors, “Firearms are the last item on the list, but they are on the list. There are some terrible people in this world. And you are safer when your trusted neighbors have firearms.”
His memo is part of a series addressing the potential for a “financial apocalypse.” His view, however, is that the problems plaguing the country won't result in armageddon. “There is the possibility of a precipitous decline, although a long and drawn out malaise is much more likely,” said the Charlottesville, Va.-based president of Marotta Wealth Management.

New Revelation that AG Eric Holder Is Protecting JPMorgan Chase NYC From Criminal Investigation

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Providing additional evidence that the Obama Administration's Department of Justice (DOJ) is protecting "banks too big to fail," Pulitzer Prize winning financial reporter David Cay Johnston has revealed that the DOJ has refused to force JPMorgan Chase to comply with an ongoing investigation into the bank's possible knowledge of Bernard Madoff's fraud scheme of a few years ago.
The information obtained might reveal that the bank chose to financially benefit from criminal activity:
Bernard Madoff’s principal bank, JPMorgan Chase, has for years obstructed federal bank examiners trying to ascertain what it knew about his gigantic Ponzi scheme, an official document obtained by Newsweek shows.
The Justice Department refused in September to back up Treasury inspector general staff who wanted a  court order to enforce a subpoena, in effect shielding JPMorgan from law enforcement, the October 8 document shows.
The Justice Department told the Treasury Inspector General “that they were denying the request for enforcement of the subpoena,” which means officials “could not undertake further actions regarding this matter,” wrote Jason J. Metrick, the inspector general special-agent-in-charge.
Johnston disclosed the latest damning indication of the DOJ shielding Wall Street banks that dominate US finanes in aNewsweek article. The DOJ pattern of not exploring potential big bank criminal activity was admitted to by Attorney General Eric Holder -- as BuzzFlash at Truthout reported at the time -- as recalled by Johnston:
Last March Attorney General Eric Holder told a Senate hearing he was afraid to prosecute the Too Big to Fail Banks, as it could do even more economic damage, in effect declaring them Too Big to Prosecute.
“The size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy -- perhaps even the world economy," Holder testified.
Although Madoff has been serving an effective life sentence in prison since 2009, a special Treasury Department inspector general with independent powers is still trying to ascertain if JPMorgan Chase turned a blind eye to Madoff's mega-ponzi scheme that left many individuals and organizations (including charities) with enormous losses.
The bottom line of the Obama DOJ's position is that Americans are left vulnerable to criminal bank activity on a massive scale because if they were held accountable, Holder believes, the US economic system would be hurt.
But the 2007-2008 crash showed what such uninvestigated and unprosecuted behavior leads to.
In short, the chief law enforcement officer of the United States is authorizing our largest banks to engage in criminal behavior because, he claims, preventing them from doing so might negatively impact our economy? But hasn't it prima facie been proven again and again that the likely criminal bank activity undermines our financial system?
This is so nonsensical, such a defilement of justice and economic integrity that there must be another answer to Holder's protection of suspected (and as indicated in civil and other suits) criminal actions on Wall Street.
The financial masters of the universe call the shots in DC.  Holder and his law firm base, Covington and Burling, represent many of them -- and Congress and the White House are beholden to them for campaign cash and revolving door jobs.

Fed decision fuels global financial parasitism

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The decision by the US Federal Reserve Board to begin to “taper” its program of “quantitative easing” (QE)—the pumping of $1 trillion a year into the financial markets—was supposed to signal a return to more normal monetary policy.
It turned out to be a commitment to continue the provision of ultra-cheap money to fuel the financial parasitism that has brought untold wealth to the corporate and financial elites, while creating ever-worsening social conditions for billions of people the world over.
The key decision was not the reduction in the asset-purchasing program by $10 billion a month—a move that will have little or no effect—but the Fed’s commitment to maintain the federal funds rate in the range of zero to 0.25 percent.
Previously, the US central bank had indicated it would consider lifting the rate—the interest it charges on loans to major banks—when the US unemployment rate went below 6.5 percent. But in its statement last Wednesday, the Fed made clear that money would continue to be provided to the banks at virtually no cost “well past the time” the official unemployment rate went below that level—in other words, at least until 2015, and probably beyond.
Financial markets duly celebrated the decision, with Wall Street’s S&P 500 index reaching a record high at the end of the week, having risen by 27 percent so far this year.
The announcement made clear that the Fed policy has never been about boosting growth in the real economy and creating more jobs—its official justification—but is instead directed to funding the financial parasitism that has become such a central feature of the global capitalist economy. As outgoing Fed Chairman Ben Bernanke repeated on numerous occasions during his hour-long press conference, the Fed remained “highly accommodative.” That is, it is there to do the bidding of the banks and the major finance houses.
The extent of that accommodation can be seen in the expansion of the Fed’s asset holdings. Last week alone they increased by $14.1 billion, taking the total to $4 trillion—up from $870 billion in 2008. The Fed’s holdings of financial assets are now greater in size than the entire US budget and larger than the gross domestic product (GDP) of Germany, the world’s third largest economy.
The rapid expansion of the Fed’s balance sheet, together with the increased holdings of the Bank of Japan and the Bank of England, both of which have been engaged in their own versions of QE, is creating the conditions for a new financial crisis. Bernanke suggested as much during his press conference.
“As the balance sheet of the Federal Reserve gets large, managing that balance sheet, exiting from that balance sheet, becomes more difficult,” he said.
This is because any significant diminution of monetary stimulus, and consequent return to higher interest rates, means a fall in the value of the financial assets held by central banks, since interest rates and bond prices move in opposite directions. This poses the danger of significant losses.
Earlier this year, research by the International Monetary Fund put those potential losses at 4 percent of GDP for the US Fed, 7.5 percent for the Bank of Japan, and almost 6 percent for the Bank of England. In other words, a new financial crisis, the conditions for which are being created by the QE program itself, would have even more serious consequences than the meltdown of 2008. Unlike the situation five years ago, this time the world’s major central banks would be directly impacted.
The Fed’s latest decision makes clear that far from having been resolved, the breakdown of global capitalism, which began in 2008, is deepening and assuming potentially more explosive forms.
All financial assets are, in the final analysis, claims on the underlying wealth of the global economy. For a time, the real situation can be masked by the continuous injection of money into the financial markets, which makes it possible to create wealth through speculation on rising asset values. But eventually the laws of the capitalist economy assert themselves, as Karl Marx put it, just as the law of gravity asserts itself when a house falls about our ears.
While financial assets have been growing to an enormous size, the real economy is barely expanding. Such expansion is driven by investment—capital expenditure that leads to a growth in markets and increased production. But as financial wealth rises in leaps and bounds, investment is falling.
Last July, the Financial Times Lex column pointed to what it called “the depressed state of global corporate capital expenditure.” Even though companies were sitting on cash holdings estimated to be around $4 trillion, capital expenditure was expected to fall in real terms this year, and could even drop by 5 per cent in 2014.
This signifies that rather than creating the conditions for future economic expansion, capital spending is not even covering depreciation on existing capital stocks.
The banks, hedge funds and investment houses, which are the majority and decisive shareholders in the world’s major corporations, are hostile to such spending, regarding it as a deduction from the profits they can make through financial manipulation.
Consequently, corporations are using their cash holdings not for investment, but to finance share buybacks, thereby boosting share prices and creating the conditions for reaping increased profits through stock market trading. According to data released last week, US companies are spending more on buying back their own shares than at any time since 2008.
Far from providing a cure for the crisis of the global capitalist system, the Fed’s policies are boosting the growth of a giant economic cancer, which threatens the lives and future of the world’s people. It must be surgically removed through the intervention of the international working class and the taking of political power to reconstruct the world economy. This starts with the expropriation of the major banks, finance houses and corporations so as to establish an economic system based on meeting human needs, rather than the rapacious demands of a financial oligarchy.

Inequality: Government Is a Perp, Not a Bystander

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In his speech on inequality earlier this month President Obama proclaimed that the government could not be a bystander in the effort to reduce inequality, which he described as the defining moral issue of our time. This left millions convinced that Obama would do nothing to lessen inequality.

The problem is that President Obama wants the public to believe that inequality is something that just happened. It turns out that the forces of technology, globalization, and whatever else simply made some people very rich and left others working for low wages or out of work altogether. The president and other like-minded people feel a moral compulsion to reverse the resulting inequality. This story is 180 degrees at odds with the reality. Inequality did not just happen, it was deliberately engineered through a whole range of policies intended to redistribute income upward.

Trade is probably the best place to start just because it is so obvious. Trade deals like NAFTA were quite explicitly designed to place our manufacturing workers in direct competition with the lowest paid workers in the world. The text was written after consulting with top executives at major companies like General Electric. Our negotiators asked these executives what changes in Mexico's law would make it easier for them to set up factories in Mexico. The text was written accordingly.

When we saw factory workers losing their jobs to imports from Mexico and other developing countries, this was not an accident. In economic theory, the gains from these trade deals are the result of getting lower priced products due to lower cost labor. The loss of jobs in the United States and the downward pressure on the jobs that remain is a predicted outcome of the deal.

There is nothing about the globalization process that necessitated this result. Doctors work for much less money in Mexico and elsewhere in the developing world than in the United States. In fact, they work for much less money in Europe and Canada than in the United States. If we had structured the trade deals to facilitate the entry of qualified foreign doctors into the country it would have placed downward pressure on the wages of doctors (many of whom are in the top one percent of the income distribution), while saving consumers tens of billions a year in health care costs.

In other words, the government quite deliberately structured our trade to put downward pressure on the wages of much of the labor force, while protecting doctors and other highly paid professionals from similar competition. Trade is just one of the many ways in which the government has redistributed income upward over the last three decades.

The subsidy for too big to fail banks, which makes the Wall Street crew incredibly rich, is another way that the government redistributes money to the top. Bloomberg estimated the size of this annual subsidy for the Wall Street gang at $80 billion a year, more than the government spends on food stamps.

The longer and stronger patent protection the government has given pharmaceutical companies is another way that money goes from the rest of us to the rich. The annual size of patent rents in the drug industry is currently in the neighborhood of $270 billion, more than three times as much as the government spends on food stamps.

And the macroeconomic policy run by the government has also worsened inequality. Budgets are crafted by politicians, not the gods or nature. The decision not to run a more stimulatory policy to reduce unemployment is every bit as much a conscious act as would be the decision to try to bring the economy to full employment with further stimulus.

In other words, Congress and the president have decided to craft budgets that lead to tens of millions of people being unemployed or underemployed. As Jared Bernstein and I point out in our new book, high levels of unemployment put downward pressure on workers' wages, especially those in the bottom third of the labor force. This means we have a federal budget that limits growth and employment in a way that redistributes income upwards.

There is a much longer list of ways in which the government has acted to redistribute income upwards over the last three decades. I have a fuller discussion in my book, The End of Loser Liberalism: Making Markets Progressive.

But the key point is that inequality didn't just happen, it was the result of government policy. That is why people who actually want to see inequality reduced, and for poor and middle class to share in the benefits from growth, are not likely to be very happy about President Obama's speech on the topic. His comment about the government being a bystander ignores the real source of the problem. Therefore it is not likely that he will come up with much by way of real solutions.