Better Late Than Never..... (Current Stock Market Bubble Explained - Yikes!)

The Market Ticker ^ | Thursday, November 12. 2009 | Karl Denninger

[PreciousLiberty]

For two and a half years The Market Ticker has pointed out the foibles of The Fed and other claims of "help" for the economy - when the prescription for "help" is just an extension of the same failed policies that created the mess in the first place.

But now we are starting to see this show up in the so-called "mainstream media", with the latest being The Wall Street Journal:

It takes similar reasoning to reconcile the elation felt across America every time the stock market rises—partially replenishing personal investment portfolios and 401(k) retirement plans—with the uneasy feeling that we are being set up for yet another big financial disappointment. We dare to hope that the economy is growing solidly once more, that the Federal Reserve has superior knowledge about providing liquidity, and that the U.S. Treasury knows what it's doing by guaranteeing money market-fund assets.

But what if the Fed's efforts to stoke a recovery are merely creating asset bubbles in equities and elsewhere? What if government guarantees—explicit and implicit—are encouraging high-risk investment behavior rather than restoring conditions for normal market returns? What if excess dollars produced here are being channeled by speculators into foreign stock and bond markets as part of a currency play?

[MHGinTN]

Buy silver ... the rise of silver will either deflate gold or allow gold to go even higher. Either way, buy silver before it too inflates into bubble proportions, then sell while the bubble is growing.

[Neoliberalnot]

So should we get our money out now and just put it into savings accounts? I already bought gold!””

Nothing wrong with 15% in gold. Anytime a currency value is ‘moving’, the opportunity for a profit exists. In the instant case, leveraging U.S. real property with debt is a winning strategy. I’m going to put down only 20% in cash and finance the rest with a first mortgage.

[FromLori]

FDIC Decision Due Out Soon On September 29th the FDIC announced a plan to bolster its reserves. There were three basic choices. A) Borrow from the Federal Financing Bank, B) Charge a large special assessment on the banks and C) Have the banks pre-pay three years of insurance premiums up front. At the time, the FDIC gave the public a thirty-day comment period before the final determination. That time period is up. The letters are in. I would expect an announcement on this by Ms. Bair before the end of the week. This is the link to the letters. There are a lot of them. The FDIC may choose to ignore all of the comments, but I think they will address some core issues raised in their final ruling. The FDIC went after this with a carrot and a stick. They said to the banks,” If you pay up front we will make the accounting work for you”. “If you don’t, we will charge you a ‘Special Assessment’. That would go through your income statement”. Bankers being bankers it is understandable why they would not want to recognize an expense up front if there was another way around it. Therefore almost all of the letters were in support of the pre-pay deferred recognition approach. There was some support for the FDIC to tap its credit lines at the Federal Financing Bank. They have a blank check at the FFB for $100 billion. So the pre-pay option isn’t really necessary. But the easier FFB option had a significant cost. Ms. Bair is acutely aware of the ‘anti bailout’ mentality. Her words on the subject: “It's clear that the American people would prefer to see an end to policies that look to the federal balance sheet as a remedy for every problem.” This is why the FDIC made it easy for the banks to choose door (C). It’s cosmetics. Not surprisingly the Banks all wanted a bone thrown to them. They made a good case. If they did not prepay they would have earned a spread on the cash. So in effect the proposal has a negative impact on income. We wouldn’t want that. A few examples: Some thoughts on what may come: -The $45 b prepay is a done deal. -There will be exceptions in a number of cases and categories of banks. These banks will get a drawing from the FFB. That drawing will be guaranteed by the FDIC. This is small beer. Maybe $5b. It will look like the FDIC will have no borrowings however. -There will be no special assessments. -There will be a discount on the pre-payment. The banks will be allowed to take that as income. Top line benefit that has no substance. -The assumption that deposits will grow by 5% will be reduced. This will have the impact of reducing the net amount that the FDIC takes in. (by just a few billion) -The statement will reaffirm that deposits are safe and that the FFB (and this cash) is backstopping that promise. -This will be made to look like a great success. A true private sector solution. -The ‘system’ will have created another $45 billion of off balance/income statement funding. This will not show up anywhere. -If a discount is awarded to the banks then that percentage should be compared to the cost of tapping the FFB for the shortfall. Any excess would be a measure of the Government's willingness to avoid the perception of a bailout. Also of interest was this comment by the ABA. http://www.zerohedge.com/article/fdic-decision-due-out-soon

[IYAS9YAS]

I honestly don’t understand why the market is going back up with all of the worthless paper and debt being kited now.

You answered your own question. The dollar is worth less now than it was a few months ago. Since the dollar is worth less, stocks cost more, hence the rise in the stock market based on dollar values.

[PreciousLiberty]

I’d have preferred you didn’t do that. First off, I’m sure he wants direct page views. Secondly, you didn’t include the graphs, which are important.

Ah, well.

[Gaffer]

Your answer, however, presupposes that there is an intrinsic value in those stocks that must be considered. I’m beginning to wonder if there is even any of that (value) left any more. Example, whatever GM’s stock is now, whatever the cooked books say, I wouldn’t give an asswipe for one share of their stock....

[Vigilanteman]

I'd rather see gallows being built for the guilty.

I have a lot of scrap lumber I could contribute to the cause. Some of it is solid maple from a tree I took down earlier this year.

[ctdonath2]

“Corrections” happen. They WILL happen. If you delay the correction, or push it somewhere else, you’re just re-arranging the correction and probably making it cumulatively worse. Smart people will either take advantage of it (great risk, but hence great profits), or stay the heck away (great losses if you bet wrong). There is no “fixing” the problem, esp. by doing more of what made it worse in the first place.

[litehaus]

"My wife & I went 90% cash earlier this week - now what do we do with that!"...

PLEASE, lemme know if you come up with an answer.Tried "going Canadian" and so far-- NADA in way of return....

[PreciousLiberty]

“You answered your own question. The dollar is worth less now than it was a few months ago. Since the dollar is worth less, stocks cost more, hence the rise in the stock market based on dollar values.”

In normal markets, inflation is not kind to equities. Take a look at the DJIA during the 70’s for instance.

[FromLori]

Well I post his things all the time and belong to his forum and have never heard him say it is a problem and I always post his articles in full. That was the part I felt was important the fact that it is us the taxpayers being taken for a ride.

[PreciousLiberty]

“That was the part I felt was important the fact that it is us the taxpayers being taken for a ride.”

I hear you there!

[org.whodat]

Oh, I was following my nephews advise. He has a few barrels of money, anyway, I say how did you not lose your ass in the teck bubble. His answer, I got out of a cab in New York, he lived in CA. after I had to listen to a cab driver tell me about stock investments for the ride.

He said I went to school for many years, CPA, with A DR degree, his conclusion, when a cab driver knew more about it than he did it was time for him to get out.

He went home and converted all his stock to cash.

He was one of the top 6 executives at one of the banks you read a lot about today.

[Brad from Tennessee]

If you haven't already done so, I would suggest investing some portion of your savings in rifles, ammunition and a large gun safe.

http://hunting.about.com/od/guns/l/aastrugerautosb.htm

http://www.rt66.com/~korteng/SmallArms/sks-56.htm

[Tax Government]

Gold can be confiscated and be made un-transferrable.

[PreciousLiberty]

‘If you haven’t already done so, I would suggest investing some portion of your savings in rifles, ammunition and a large gun safe.’

Hah, didn’t occur to me to even mention that - I thought it went without saying!

Investment wise, handguns and AR type weapons are probably your best bet. If things go really badly, there’ll be plenty of demand for both.

[PreciousLiberty]

“Gold can be confiscated and be made un-transferrable.”

Not if its buried somewhere... “Gold? What gold?”

Sure, it’d be a black market - probably as unsuccessful of one as the current black market in illegal drugs.

[silverleaf]

and obama’s role in this is....?

[PreciousLiberty]

“and obama’s role in this is....?”

Man-child-puppet in Chief. Same as his role in everything else...

[MrB]

The peasants carried pitchforks and torches because those were the best weapons they possessed...

We have better.