The Goldilocks Economy Never Existed

We can't get any follow through in stocks. We are at levels of oversold which should eventually drive a rally of some sorts. But, unless the bulls get it in gear soon, we are going lower.

So, anyone take a look at the program trading volume on the NYSE? 73%? Uh, is that like some kind of record? Ok, so there may be some double counts in there. When was the last time we saw this? Can you say 1987? And the macroeconomic circumstances could be loosely interpreted as similar as well. Forget about what "kind" of growing economy we had, more along the lines of international trade, the dollar, gold, real estate bubbles overseas, etc.

This is NOT a healthy correction that we see in bull markets as we are led to believe by many. But bear markets always start with the bulls calling this an expected correction. The reality is this is a rout in developing markets and a market where growth in tech equity prices peaked two years ago.

Who's pushing the trigger on that rout? Seems to me we had this kind of scenario once before where a handful of financial institutions controlled most of the trading on Wall Street but now it's globally. When was that? Oh, yea. 1929. Didn't Congress fix that situation? Why they sure did. It was called Glass-Steagall. And, what happened to that reform? In the hey day of Pax Americana and goldilocks the greedy bastards on Wall Street lined your politicians pockets and they blew it up. Obviously for the betterment of Ma and Pa America.

http://www.pbs.org/wgbh/pages/frontline/
shows/wallstreet/weill/demise.html

So, does the concept of reversion to the mean apply to more than just equity markets? We are told by many that it is a natural progression that we move away from heavy industries into finance and services. A service based economy. ie, We are too sophisticated to be bothered with menial labor. We outsource that to the developing world. Maybe. Finance is a higher percentage of GDP, and therefore profits, than at any time I can find. I've argued repeatedly that we would have a re-emergence of American competitiveness in basic industries as we've seen in the past. There's always been a cheaper labor pool. I believe the companies making wholesale bets on Asia are very exposed. Especially, if the currency bands are adjusted. IBM, for one, seems to be really betting the farm on India by hiring 50-70 thousand people in a short period of time. A very, very risky strategy IMO. Expected costs savings are driving this type of corporate decision making. Not productivity, customer satisfaction, innovation, etc. Those savings could be wiped out with a dollar readjustment quite quickly. And, the ability to develop a strategy and effective solutioning globally with people ten thousand miles away (in an already tight labor pool where IBM and others are now hiring below average talent.) from your major markets in Europe and North America could backfire. Just one example of a possible outcome as it pertains to the “one way” thinking with respect to Asia.

So, is housing a bubble? Maybe not. But, for forty years housing tracked about one to one with new household creation. Now, it's about two and one half to one. And mortgages? Well, the mortgages as a percentage of total banking loan revenue has doubled in the last few years to anything well beyond its modern historical averages. So, now those same financial institutions that control your equity markets are also overexposed to risk in real estate. Can you say banking crisis? I don't think it will happen but risks are rising and we are creating a potential mess at some point with lax regulatory controls. And why do we have those lax controls? Greed. Only the kind available to American financial institutions that donated hundreds of millions to our very willing elected representatives that would get the laws overturned for favors. Monetary favors. In the end, will the entire process lead to self destruction? ie, Will Wall Street’s drive for more and more power ultimately lead to its own self destruction and rebuilding? Like 1929 when the head of the NYSE was carted off to jail?

So, are we in the heavily regulated 1970s where inflation was the problem or are we in the wild and wooly 1920s where regulation was yet to be adopted to keep Wall Street from hosing us all? Don't just think in terms of America. We've had thirty years of deregulation. But think in terms of Russia, China, Indonesia, Malaysia, Brazil, etc. You think these scenarios in our country are of concern, imagine what it is like in those economies. Jesse James and Wild Bill Hickock roam the wild economies of all of those countries with wreckless abandon. Basic regulatory controls are nonexistent or still weak. Why do we need regulation? To protect us from ourselves. To protect us from 1929. To protect us from concentrated control and power. To protect us from those who would become king if our Constitution were not there to save us from such unnatural attempts at power.

Anyone who thinks the markets are selling off because Bernanke is mealy mouthed about inflation is one of the three monkeys: see, hear or speak no evil. The imbalances caused by thirty years of deregulation and bubbles are what concerns the global markets. It’s the precarious nature of stable instability. In the US, IMO, it's all about housing. If prices drop significantly, we are headed for a very hard landing. And, it is just as likely or more likely, we'll have global deflation for many reasons beyond housing. Want to see how quickly inflationary pressures can abate? In one month, we saw metals drop precipitously. Poof, inflationary concerns abate in that sector nearly overnight. That could happen across all hard assets in a short period of time. And, as long as wages don't go up, deflation is a devil to be concerned with. So, if commodities go down, real estate goes down and equity markets go down in a possible outcome, can someone tell me why we are chasing the inflation ghost? Maybe we won’t repeat the 30s or the 70s. Maybe it’ll just rhyme. But the forces building may lead to one or the other. Would you rather live through the 1970s or the 1930s? Profits in the 1970s were better than the 1990s so unemployment, while high, did not reach 35% of the population we saw in a deflationary 1930s. So, let’s say assets start to deflate in a very noticeable way and the economy starts to collapse. Bernanke would employ his strategies to save us from a remake of the 1930s? And what are the ramifications of those actions? With American debt as high as it is, likely a collapse of the dollar. And what does that portend? Global economic collapse and a developing world depression at a minimum? Higher probability than maybe imagined. These things do not need to come to pass but the risks to the system are not Bernanke raising interest rates 25bps. They are far more grave. IMO the Fed needs to pause. If they do and higher than normally accepted inflationary pressures should arise, we should rejoice as the lesser of two evils takes hold. And allow an unpleasant outcome to unfold rather than a catastrophic outcome to unfold.