“Bernanke comments keep equities in check,” says a headline in The Financial Times.
Sure enough. The Dow ended down again – 21 points down. It’s been going down for five weeks. But it’s still above 12,000. So there’s nothing to be alarmed about.
What did Ben Bernanke say? Not much really. He allowed as to how the economy was not as strong as he had hoped. But he said things were getting better. And he didn’t mention QE3.
So why was the market unhappy? What difference did it make what Bernanke said?
Ah…that’s the funny thing. Stock prices are now the responsibility neither of willing buyers nor sellers, neither of the bears nor the bulls…but of the US central bank.
Bernanke said he wanted higher stock prices. He used QE2 to boost them. He said the “wealth effect” would make people feel better off. Then, they’d spend more money. And then, they’d actually be better off.
Of course, you can see the problem with that. If it were that easy to make people richer, why not give them more quantitative easing every day of the week?
Instead, investors know how the game works. They know you “don’t fight the Fed.” So, if the Fed is trying to push up stock prices with cash and credit, you go along for the ride. You buy stocks, confident that the Fed has your back.
The economy actually gets worse…as higher prices sit on family budgets like a fat cowboy on a skinny horse.
And so, the stock market comes to reflect neither the economy nor what stocks are worth. Instead, it shows what speculators think they can make from anticipating Ben Bernanke’s next move. They watch the Fed. If Bernanke looks like he is going to pump in more money, they buy. If they’re not sure, they wait. If they think the Fed is pulling out of the stock market, they sell.
Right now, they’re selling…because they see QE2 ending…and no QE3 starting up.
‘Wait a minute, Bill, are you saying that the Fed is manipulating the stock market?’
‘Isn’t that against the law?’
‘How does the Fed get away with it? How come the SEC doesn’t come down hard?’
Oh, you silly goose. Stop asking stupid questions. The market is fixed. The SEC is in on it. It’s all part of the zombie system of finance. The dollar pretends to be real money. Debt pretends to be capital. And regulators pretend to be smarter than capitalists. Details to follow.
We promised yesterday to tell you more about what we think Mr. Market may be up to. You’ll recall that Mr. Market is wily. Sometimes cruel. Always inscrutable.
One thing Mr. Market will not do: he will not do what people expect. Why not? Because he would have already done it. In other words, if everyone thought stock prices were headed higher, they would already be higher.
From that bit of logic we infer that Mr. Market will generally do what most people do not expect…the very thing that will cause them most pain and suffering.
Well, what lesson have investors best learned over the last 20 or 30 years? They’ve learned that things go up. Since 1980, stocks are up about 12 times, even after the slipping and sliding of the last 10 years.
After such a powerful performance investors trust stocks, over the long run. Indeed, many analysts refer to the last 10 years as a reason stocks should go higher over the next 10.
‘It is so unusual for stocks to do so badly,’ they say. ‘Surely, they wouldn’t do that two decades in a row.’
Oh yeah? Stay tuned.
We saw yesterday that the federal government’s real debt has risen to $62 trillion. No way are the good citizens of the United States of America going to put their heads down and pay that kind of debt. They couldn’t do it even if they wanted to.
The history of the last 30 years is a history of debt accumulation. The future…perhaps for the next 10 to 20 years…will be a story of debt cancellation, restructuring, write-offs, defaults and foreclosures.
Psst. Want to make some easy money?
If you’re one of the 15 million Americans who is underwater, it’s easy. If your house is worth less than the mortgage outstanding against it, simply walk away.
Why not? Do you think the bank would stick with a losing position? Uh uh. It would cut its losses. You should too.
Bill Bonnerfor The Daily Reckoning
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010.
“If you’re one of the 15 million Americans who is underwater, it’s easy. If your house is worth less than the mortgage outstanding against it, simply walk away.”
Last I heard, that was a taxable offense. The IRS gets to count what you “make” on the transaction as income.
I wouldn’t walk away until you’re sure that the next round of QE won’t be some kind of scheme to pay down underwater mortgages.
There is nothing wrong with the US economy that can’t be cured with more $ Trillion bond fraud.
Someone cue the banks.
I will cue the Republican Dream Team.
Cheney, Rove, are you ready?
Bill, you are usually spot on but “walk away”? People that do this are not “sticking it to The Man”. They are sticking it to their friends and neighbors whose home values they trash when they default and move away. Good luck getting a rental after you do this.
How came when we do it,,, it’s not right,,, but when they do it,,, that’s the system.
Maybe we need to do a power reset?
The problem with walking away from a negative equity home surfaces almost immediately after one’s departure. First, some sort of accomodation must be found to live in, typically of a lower standard than the negative equity home just vacated. Second, in the event another more reasonably priced property presented itself, either lack of credit or, if paying cash, pursuit by greedy bankers wanting the rest of their money back would surely derail the endevaour. At the end of the day, the decision to walk away or to stay has less to do with negative equity than it does suitable alternative housing. For anyone able to ride out the storm, the best advice would be to stay current on the mortgage (if possible) followed by a huge relief celebration once the dollar fails. For anyone who is deeply in debt, –collectively, all of us really– the quicker the government destroys the dollar, they sooner we will receive debt relief. The real trick will be keeping the same pack of greedy bankers from again hijacking the system once a new currency is introduced. Because of the Washington proclivity to give all newly printed money immediately to the cabal on Wall Street, the only equitable solution is to destroy the whole concept of fiat currency at the same time the dollar fails. The only way for that to happen is for genuine political leadership to emerge that owes nothing to the established centers of power and wealth. By deffinition that implies revolution, bloodless if were lucky, an all out slaughter if were not so lucky.
Trolling for Oliphants said………
I’ve read that there is no income tax liability on your primary residence, only income on investment properties.
Most are not walking away without first getting a year or 2 or more free living. Then they put the screws to their old neighbors.
For Commoncents. Lets use a hypothetical example. Bill owes $300,000 on a house that is worth $100,000 now. His equity is $0 (he got it with a LIAR Loan).
If he drops the keys off at the bank and walks away, the bank can sell the house for $100,000. If the bank then forgives the loan, the IRS can call the missing $200,000 “income” and chase Bill for the taxes on it.
The general trend of the SnP can be estimated using the CFTC COT Traders in Financial Futures ; Futures-and-Options Combined Reports: U.S. TREASURY BONDS – CHICAGO BOARD OF TRADE Data using the following formula:
S&P 500 Weekly =1542.5782 + 0.000000012891622*Lev_Money_Positions_Long_All*Lev_Money_Positions_Long_All + 0.0000000093671533*Dealer_Positions_Short_All*Dealer_Positions_Short_All – 0.00029204032*Lev_Money_Positions_Long_All – 0.0043428377*Dealer_Positions_Short_All
The dollar in your pocket is worth a whole lot less today than 100 years ago. And you have the Federal Reserve to thank for you. So, as the Fed approaches its 100th birthday, Gregory Bresiger reflects on the controversial institution, relaying the criticisms of several of the Fed's most vocal opponents. Read on...
There's been a lot of press lately about the 3-D printing revolution - much of it right here on The Daily Reckoning. But there is one technology that's already threatening to make 3-D printing yesterday's news. Josh Grasmick examines a new kind of printing... that takes place in the 4th dimension. Read on...
Rejoice! What was perhaps the freest market in the entire world is now ended. Crushed. Wiped out by the swift hand of the state. Wait... That's NOT a good thing? (Sigh)... Oh well. It was fun while it lasted. Dominic Frisby explains why the shutdown of the Silk Road is such a travesty. Read on...
There is one chart, just one chart, that market analysts and gold bugs alike could learn a lot from. It displays clearly the ebb and flow of one critically important trend, where it's headed through the end of the year, and how you can use it to your advantage. Greg Guenthner explains...
China's push towards a more market-based economy could kick into high-gear, as recently proposed economic reforms are some of the country's most radical policy changes in over three decades. But what will that mean for foreign investors and how could it shape the global economy? Frank Holmes takes a closer look...
John Mauldin spoke with Steve Forbes on the future of gold and the Federal Reserve in an interview released yesterday. What he said may surprise you.