As I sit here recovering from feeding my wood stove through two consecutive 6 degree nights, I watch CNBC report on worldwide markets down some 5-10% while the US market was closed for MLK day. The Federal Reserve panic'd and cut the Fed Funds rate today by 0.75% as the Dow Jones opened up down over 400 points. Today's drop was *after* the Dow and S&P500 gave back ALL the slim gains of in the Dow and S&P500 last year. Meanwhile, gold is up to about $900/oz and the US dollar is weaker today by 0.7%. Both to be expected with the Fed cutting rates and turning on the printing presses in the face of inflation data which, if it could speak, would say "don't do that!"
How did we get into this mess? The economy doesn't appear to be in that bad a shape, and is officially still not in a recession (as defined by two consecutive quarters of negative GDP growth). Although the market looks ahead, discounting and anticipating the future, this recent decimation of equity values is somewhat unusual in the face of the economic growth rates seen in 2007. So, what gives and why are the world market indexes selling off so drastically?
The difference, in my opinion, is the loss of confidence in the US dollar, the top US financial institutions, and the current administration from both a fiscal and "policing" perspective.
I've already commented on the sub-prime fraud and the selling off of US financial institutions to foreign powers and the corresponding impact on the US dollar. But let's talk about the "policing" aspect of my argument. We have in the Bush administration one which is very well acquainted with spying and policing. Just look at the cell phone tapping, the "Homeland Security" department's iniatives, etc. etc. Yet, when it comes to policing the economy, they don't seem to have had a clue. Or, did they really understand it, and turned a blind eye? I believe the latter.
Many financial experts knew the sub-prime fraud was a disaster waiting to happen and were raising red flags two years ago. Pimco's Bill Gross, nicknamed the "Bond King", was warning everyone about sub-prime at the end of 2006. The secretary of the treasury surely must have heard him as well as most folks at the Federal Reserve where Bill Gross is an acknowledged big player due to the amount of bond assests under his management. So, why did the administration do nothing?
The reason, of course, exactly like the S&L disaster under Bush #1, is that they people involved in the sub-prime fraud were making huge sums of money. Not only that, the S&L crisis was "solved" by using the US Treasury, via the "RTC", to bail out the same people who made money stealing retirees S&L assets in the first place(!) So, the thieves made money twice. The same thing is going on now. The same banks and institutions which pushed CDO's to our Europeans "friends" and made huge comissions on trading these repackaged debt instruments will be bailed out by the Fed and make money again as the leverage unwinds and the low rates allow them to escape financial (much less criminal) disaster. Even the fired CEO's of the companies involved are walking away with tens of millions of dollars in severence for their ability to destroy shareholder value
So, why do so many middle-class Americans support Bush? It is a question I wonder about constantly because if you ask a Bush supporter, you never get an answer! Part of the problem is middle class people often seem to believe they are "rich" and that Bush is looking out for their interests. I would define middle-class in America as anyone with $5 million or less in assets. By comparison, the Bush crowd, the "ultra-elite", have net worths in the order of 100's of millions of dollars if not billions. They have the inside information on interest rates and government policies, as well as recipients of the lucrative financial loop-holes in the tax system in order to maximize their gains further without being taxed (hedge fund managers for instance).
The democrats, or any other anti-republican group, can't seem to convince the American middle-class that the republicans are NOT acting in their best interest. In fact, the middle class in America has been decimated by Bush economic policies. At the same time, the ultra-rich, again, those over $100 million in assets are raping the US treasury, making huge fortunes on the backs of the middle class taxpayers and savers. They then take Dick Cheney's advice and invest their fraudulent money into European municiple bonds, where I am sure most are planning to relocate to when the US finally sinks into the abyss due to their lack of fiscal discipline. And this by the so called "MBA" administration who used to preach to the Democrats about spending. Oh please.
When will the middle class in America wake up and understand they are being taken advantage of? Probably not until the distractions used by the republicans are ignored. Religion, gay marriage, the right to life and similar issues are used to sidetrack folks from understanding the real issue - your tax dollars and the US treasury are being stolen from you.
Foreigners understand this fact. The US dollar has fell 40% since Bush has taken office. Meanwhile, oil, gold, and most commodities which are priced in US dollars have sky-rocketed. It's too bad foreigners are more observent of US policies than the average American voter. So, the world needs a new leader. Who will it be?
The Law of Numbers:
Say the market is at 1,000 and it drops 10% to 900. Did you ever stop to think that the market must now recover MORE than 10 to get back to where it was (1,000). In other words, a 10% gain from 900 only gets you back to 990.