The foundation on which capitalism is built is known as the free-market, wherein a seller of goods seeks out a buyer in need of those goods and the two parties agree on a price to complete the exchange. Price is determined by mutual agreement and is set in terms of value measured in modern standards by way of fiat currency. When the transfer of goods is complete the free market has thus functioned properly. The buyer is in receipt of the goods they desired and the seller possesses the currency of which they can now go transact for whatever goods or services they desire. We do not live in this type of free market.
The Federal Reserve has decided that they alone set market price. As evidenced by their purchasing 80% of all MBS in the US they have become the de facto sole buyer in our modern form of capitalism. Anyone who would willingly strap into this ride is a fool. You are being set up for slaughter. There is no other way to view our present situation.
In modern terms capitalism had morphed into something completely different than would be recognized by its original architects. We exist in a system of finance capitalism wherein the major purchases of which average people need to make just to keep pace with the rest of society must be purchased with the aid of borrowed money from lending institutions that have the power to create interest bearing commercial money – money that is loaned into existence. On the flip-side, all other money is created by the Federal Reserve and again, it is loaned into existence vis-a-vis the issuance of US Treasury Securities – debt instruments of which bear interest to the holder.
When the Federal Reserve, the Obama administration, or the main stream media reports that the housing market has stabilized they are in fact, lying. I don’t care if they can’t wrap their pea-sized brains around the fact that you can’t replace a free-market buyer with the creator of money and expect the price quotient to reflect market terms. Seventy-percent of US GDP is based on consumerism and the majority of consumerism is based on the wealth-effect American’s have as reflected in the value of their homes. And when the Fed became the sole purchaser of agency mortgages in the US they became the de facto buyer of all US homes in an attempt to prevent the free-market from functioning. To say that the present US housing market resembles any fair market terms is simply ludicrous. The Fed however will argue that as they exit the mortgage pimping business other pimps will re-enter the market as MBS buyers and housing prices will remain stable. This is absolute hogwash.
Tab 9 – Federal Reserve Balance Sheet – Factors Affecting Reserve Balances- November 19, 2009
Everything around you from the Dow Industrial Average to the value of your home, to the food in the grocery store or gas at the pump, all of it is in a distorted state of flux wherein the real value of such things cannot be known. Had the Fed not purchased a single MBS in the wake of September 2008 the entire real estate market would have collapsed along with the perverted fractional reserve banking system that surrounds it. Technically, the system has collapsed. It is merely on life support for now. We all know this. Yet we turn our heads as if somehow, some way, the Federal Reserve will pull the proverbial rabbit out of its ass and we’ll all stand by in amazement wondering, “Now how did they do that?”
The largest asset most American’s purchase in their lifetime is their home. The largest debt-load they carry is again wrapped up in their home. When both the price or value of these homes and the underlying mortgages become distorted by a misguided central bank policy wherein the central bank alone becomes the arbiter of fair market value – that, is an unsustainable model in direct conflict with every basic tenet of free-market capitalism. Participating in this market in any fashion is like making love to a blow-up doll – you know the air is going to leak out of her at some point, but you keep pumping her like there’s no tomorrow. Sooner or later the Fed will have let the air out of the doll. And any allure that made-up hussy had will vanish as she deflates to the floor, once and for all.
The Federal Reserve has become a mockery, an Alzheimer’s patient wandering the lawn of the asylum hiding their own Easter eggs for a hunt they will later forget the location of each egg they hid, let alone what Easter means anyway. They are virtually making this up as they go along. And we’re letting them do it. Bernie Madoff should be so proud. It’s the Ponzi scheme to end all Ponzi schemes – hide the fair-market-value of the world’s largest banking system. Buy a trillion dollars of MBS – prop up the falling homes. Maybe no one will notice we’re social engineers and that we just dismantled free-market capitalism.
There is no fundamental rooting in this stock market rally from the March 2009 lows. There is no consumer with an increasing wage base to justify confidence in any kind of so-called economic recovery. We are in the midst of a consumer credit contraction unlike anything seen even in the Great Depression – and it’s accelerating. 48 states are underfunded and will soon be knocking on the US Treasury’s door. Commercial real estate is imploding. All stimulus programs were temporary in overall effect, if effective at all. Less than one percent of loan modifications have been resolved and will only prove in the end to be futile. Unemployment is twice what the BLS is reporting. The dollar is under siege. And finally, we are about to see the next leg down in residential real estate. This one will be the death knell. It will either come when the Fed quits buying MBS or when the vintage 2005-2006 Alt-A mortgage pools incinerate.
It’s game over when the Fed bows out of the MBS buy program. It will be every man for himself, literally. Below is an excerpt from Scopelabs.net Market Insight section of their RealityArbiter.com web-site:
Scopelabs Insight – Thursday, November 19, 2009
US Markets -
11/19/2009 – The benchmark Standard & Poors (S&P) 500 closed down (14.90) to settle at 1,094.90 (a 1.34% decline).
The 50% retracement of the S&P 500 from its (13-year) low of 676 (set on March 9, 2009) to its all-time high of 1,565 (set October 9, 2007) draws near – see graph. Depending on how one graphs the Fibonacci retracement, the pattern points to (approximately) 1,120 as the 50% mean. Hence, a very logical short-term market top could be in place. If this 50% retracement is significantly breached to the upside, the next and always very important Fibonacci retracement number (of 61.8%) stands at 1,229.
So, from a risk management standpoint the potential upside in the S&P (to 1,229) based on today’s close (of 1,094) is positive 12%.
Conversely, a 50% (negative) retracement from the top of this rally would take the index back down to 893 – which for the bulls should be a logical support target as a buyer. 893 equates to an 18% downside risk from today’s close, not including event driven and/or systemic problems that we at Scopelabs see as a more acute in probability versus March when the market was at its all-time lows.
So, you’re a 3-to-2 dog going long vs. short here (i.e., the S&P is out of gas).
Scopelabs Insight originates from Greg Simmons, a prop trader living on Maui who made prescient market calls long before the names Peter Schiff and Nouriel Roubini became widely known. See 2003 Thesis and The Next One Could Be Worse to hear from a guy who’s been dead on since 2000 and is calling for near Armageddon in the markets when the Fed pulls out of their MBS buy program.
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Are you a professional journalist? You write very well.