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Gandalf Grey
Guest
A "Slow Motion Train Wreck"
By Stephen Lendman
Created Aug 15 2007 - 9:08am
These days, financial/market punditry seems to follow two opposite lines of
thinking. It ranges from the predominant view that world economies are
growing and sound, problems in them minor and fixable, and current
volatility (aka turmoil) is corrective, normal and a healthy reassessing and
repricing of risk. Contrarians, on the other hand, believe the sky is
falling. Most often, extreme views like these turn out wrong and are best
avoided. Things are never that simple and hindsight usually proves only
Cassandra was good at forecasting although calling market tops and bottoms
wasn't her specialty.
Amidst all the commentary and sorting out of market Strang und Durm these
days, some financial world figures stand head and shoulders above the rest
for their wisdom, level-headednessness and believability. One in particular
is Jeremy Grantham, called by some the philosopher king of Wall Street even
though he's based to the northeast in Boston. In 1977, he co-founded
Grantham, Mayo and Van Otterloo, now known as GMO. In his Quarterly Letters
to clients, he assesses current market conditions and usually takes a longer
view as well. His commentaries are detailed, scholarly, sober and clear.
The Vanguard Group of mutual funds founder John Bogle calls Grantham "one of
the top two or three individuals in this business (and) If there's anybody
in this whole business who calls a spade a spade (that person is) Jeremy
Grantham." A metaphor for his wisdom, attitude and investing style sits
aside his office desk. It's a huge 9th century stone Buddha signifying
"everything in moderation" and one of Grantham's core beliefs that all
markets eventually revert to their mean values from their highs and lows.
Based on his company's exhaustive research, there are "no exceptions ever."
Bubbles come and go, but, in time, they all settle back in same place. As
Grantham puts it: "We know one principal truth at GMO and that is that we
live in a mean-reverting world in investing. (Our research) has
shown....that all bubbles....eventually break (and our definition of a
bubble is a) 2 standard deviation event - the kind of moves that occur about
every 40 years." Grantham mentions four stock market ones in particular that
stand out - the US in 1929, US again in 1965 - 72, 1989 in Japan (in land
and stocks) and the still ongoing greatest ever US 2000 bubble yet to come
back to its mean.
Grantham is known in the trade as a value investor. That means buying
financial assets at less than their intrinsic value or what famed
investor/Columbia University professor Benjamin Graham (1894 - 1976) called
a "margin of safety." Warren Buffett today calls it "finding an outstanding
company (or any financial asset) at a sensible price" as opposed to a
bargain that may turn out bogus or a booby trap. Grantham correctly called
the equity bubble in the late 1990s and believes the 2000 - 2003 bear market
is secular, long-term, and unlikely to end before 2010 despite a continuing
four year cyclical bull run reprieve from 2003 to the present. Only in the
fullness of time will he, and the rest of us, know if he's right.
Earlier in the year, Grantham toured the world for six weeks, returned
worried, and wrote about it in his April Quarterly Letter titled "It's
Everywhere, In Everything: The First Truly Global Bubble." It's "bubble
time," he observed "from Indian antiquities to modern Chinese art; from land
in Panama to Mayfair; from forestry, infrastructure, and the junkiest bonds
to mundane blue chips." All the necessary conditions are in place -
"fundamental economic conditions" look excellent; central bank supplied
liquidity is plentiful and cheap; and there's so much around, it's easy to
leverage. Since around mid-July or so, the latter condition no longer is
true or perceived to be by investors turned cautious and in some cases even
panicky.
Grantham explains human behavior causes bubbles when positive market
conditions unleash "animal spirits" to capitalize on opportunities that get
carried to extremes when there's enough cheap credit around as fuel. Even in
the best of times, that's a recipe for trouble with success feeding on
itself. It signals by leveraging up, the better investors can do until the
music stops as it always does, and the longer and louder it's been playing,
the severer the subsequent headache.
No one knows for sure when big trouble's coming next or how bad it'll be
when it arrives. Up to early summer, it was smooth sailing and easy profits,
but Grantham says what he sees today is unprecedented: "everyone, everywhere
(in all asset classes) is reinforcing one another." Across the world you
hear it confirmed that "they don't make any more land (and) with these
growth rates and low interest rates, equity markets must keep rising (and)
private equity (plus merger mania, huge stock buy-backs and plenty of
central bank supplied fuel) will continue to drive the markets."
It's become self-reinforcing and the results are "predictable and
consistent." The three major asset classes - real estate, stocks and bonds -
are "expensive compared with (their) replacement cost where it can be
calculated." Equally worrisome, risk premiums "reached a historic low
everywhere" until just weeks ago.
Grantham's conclusion is these are all warning signs spelling eventual
trouble because as noted above "Every bubble has always burst (with no
exceptions, ever)." When the 2000 bubble deflation resumes, "it will be
across all countries and all assets, with the probable exception of high
grade bonds." In addition, risk premiums will widen (and now are) forcing
companies to pay higher financing costs for borrowed funds that will depress
investor confidence and reduce economic activity.
No one knows how deep or protracted a decline will be, but Grantham stresses
it's coming because the current global bubble is unprecedented. "No similar
global event (of this magnitude ever) occurred before." Now that's pretty
scary stuff to chew on because economic troubles bite everyone and most of
all those most vulnerable and least able to weather the storm. That includes
ordinary working people with little or nothing invested.
During the current bull run, Grantham was troubled as early as January, 2004
when he advised clients that "The outlook for 2004 is not bad, but the
(stock) market is very overpriced and all predictors look bad for the next
year and the year after." As things turned out, he was wrong, or perhaps
with future hindsight just way early in his judgment. He was troubled again
at year end 2005 when he told investors to "prepare for a decline in the
performance of equities and other risk assets in 2006." Once more, his call
was either early or wrong as the past 18 months saw considerable strength
until just recently.
His January, 2007 Quarterly Letter assessed what happened saying "Against
all odds, Goldilocks tiptoed through the perils of the first (2005) and
second (2006) year of the Presidential Cycle....it (2006) was the rarest of
rare birds - a perfect year." As a result, "risk taking also prospered"
because of low global inflation, no financial crises anywhere, low interest
rates, and "very very" available credit. As things turned out, "this was
almost certainly the best year in the entire history of finance for the
selling of high credit risks at low premiums."
One extreme measure of it was the quadrupling of so-called securitized
Collateralized Debt Obligation (CDO) instruments (packages of risky and
other debt) to around $2.5 trillion facilitated by the so-called "expanded
'carry trade' of borrowing in cheap (low interest) Japanese and Swiss
currencies."
Downsides often accompany opportunities, and Grantham explained conditions
going into 2007 in breathtaking terms. "Goldilocks global conditions,
especially cheap and easy credit, have caused the broadest overpricing of
financial assets - equities, real estate, and fixed income - ever recorded."
However, he stressed, "Just because risk taking is off the charts does not
mean it can't keep going for another year" or longer.
The end of a Goldilocks economy was clearly on the minds of people Grantham
met on his world tour. Everywhere he travelled he was asked "What is the
catalyst for a (market) break" when none was then visible or imminent? He
answered citing these vulnerabilities: rising inflation (that's greater than
reported) constraining central bank support for a weakening economy,
pointing to the US as an example. This, in turn, will slow economic activity
and reduce profit margins that are still way above global norms but will
come down.
Then there's the housing decline a Center for Economic Policy Research
(CEPR) report shows is the result of overbuilding and home prices rocketing
70% in value since 1995 adjusted for inflation. It "created $8 trillion in
housing bubble wealth" and an unprecedented oversupply of unsold homes and
"vacant ownership units." CEPR believes the coming housing bubble correction
"is likely to throw the economy into a recession and quite possibly a very
severe (one)."
It notes housing construction has to decline, and revaluing $8 trillion in
housing wealth excess will reduce consumption and bring saving rates "back
to more normal levels." Consumers need all they can get because, at today's
elevated prices, the average potential home buyer can't afford one, and, as
one analyst observed, lenders are relearning how to say "no."
Current economic conditions worry PIMCO's Bill Gross as well. PIMCO is a 36
year old firm and "one of the largest specialty fixed income managers in the
world." Gross is one its founders and serves as managing director and chief
investment officer. In his July Investment Outlook, he said people are
"looking for contagion in all the wrong places." The Bear Stearns and other
hedge fund losses are "now primarily history (and) can be papered over with
100 cents on the dollar marks." The real problem lies in "those millions and
millions of homes....not going anywhere....except for their
mortgages....going up, up, and up....and so are delinquencies and defaults."
He cites a recent Bank of America estimate that about $500 billion of
adjustable rate mortgages (ARMs) will be reset in 2007, another $700 billion
in 2008, and a large proportion of them are subprimes. He noted 7% of these
loans are now in default, and the "percentage will grow and grow like a weed
in your backyard tomato patch." This will affect real money in the hundreds
of billions of dollars of "toxic waste" that will spill over into reduced
consumption, less new home construction, and even AAA-asset backed
commercial paper "feel(ing) the cooling Arctic winds of a liquidity
constriction."
In Gross' view, the sky isn't falling, and "there is no hint yet of a true
'crisis' - these developments" may, in fact, have a salutary effect with
"easy credit becoming less easy (and) excessive liquidity returning to more
rational levels." Gross still sees strong global growth ahead, but as a bond
fund manager, he's paid to worry.
In his report, Grantham is worried, too, and notes the housing decline
affects prices, credit growth and consumption when subprime and other loan
rates are reset higher with a considerable amount coming this year and even
more ahead as just noted. In addition, and most significantly, he says
rising inflation and widening risk premiums lower "the feasible leverage in
private equity deals and place many deals that can be done today (meaning
last spring) out of reach, which, in turn, has dire effects on the current
stock market (and economy)."
In his current July client Letter, Grantham conceded "no areas of this
unprecedented global bubble had yet gone hyperbolic like the internet and
tech stocks did in 1999 (until now):" The "candidate" is "the growth rate of
leveraged loans. At (a hugely speculative) $545 billion for the first half
of this year, it is running 60% up on last year" that's about the same size
gain dot.com and tech stocks made year over year in 1999 with painful
consequences not far behind for investors owning them.
Grantham's July commentary mentioned one other likely market headwind after
the 2008 election. It's the expected fallout from "piling on" moves of "more
wealth to the wealthy by shifting more of the tax load to sales and income
taxes of average taxpayers and away from the capital gains and dividend
taxes of the wealthy." It means "ordinary working stiffs are not doing
particularly well....and are getting antsy" enough to worry politicians to
raise taxes on the most well-off.
Grantham expects them to come in higher taxes on capital gains, dividends
and top-end ordinary income rates as well as redefining what income is. That
will mean more of it will be taxed to reduce the gross disparity between
what rich and ordinary folks now pay, and not a moment too soon for those
championing fairness, not special privilege. If this happens, however, it
"will not be good for the animal spirits of investors" who represent the
most important bubble-sustaining input.
Grantham sums up his current thinking with what he calls a "torture(d)
analogy." He compares the global financial system to a giant suspension
bridge. "Thousands of bolts hold it together. Today a few of them have
fractures and one or two seem to have failed completely. The bridge,
however, with typical redundancy built in (unlike the Minnesota one that
collapsed), can (easily) take a few failed bolts, perhaps quite a
few....This global financial structure is far too large and has far too many
interlocking pieces for weakening US house prices and a few subprime issues
to bring it down."
What is worrisome is whether or when we reach a "broad-based level of
financial metal fatigue" causing simultaneous multiple bolt failures "with
ultimately disastrous consequences." What's also scary is the global
financial structure is heavily "faith based, held together by unprecedented
amounts of animal spirits" moving in the same positive direction. If the
faith wanes, it's then "every man for himself" and look out below.
Also worrisome, but so far contained, is growing subprime mortgage trouble.
Until a month ago, equity markets were totally unaffected and may bounce
back from their current sell-off. Grantham isn't panicking but shows concern
about flat to declining home prices, a high inventory of unsold homes likely
moving higher, and mortgage "honeymoon rate" reset increases up to 2.5
points coming soon for holders "already stretched." We're told, he says,
that even the subprime market is "contained," but we have to wonder if "the
container, in this case, will turn out to be Pandora's."
Then there's a slowing economy, inflation concerns, high oil and other
industrial commodity prices and now agricultural ones as well "boosted by
ethanol production" pressuring consumers. "So two of the three great asset
classes (now all three) are having the wobblies in some of their
components" - real estate and low grade debt (and since mid-July equities
and other type debt instruments as well), "especially real-estate related
but increasingly including corporate loans and private equity funding...."
Grantham may have written this commentary before the the July-mid-August
equity market sell-off. However, based on his prior (and long-standing)
comments, his current analysis probably still holds true: "stocks (will
likely) make it through this third (and traditionally strongest) year of the
Presidential (four year market) Cycle." The third year in the Cycle "has
never declined materially and should be considered the bane of short sellers
(and equity market naysayers) everywhere."
In sum, Grantham says, "a few more bolts in the bridge may fail, but in the
end you have to bet the bridge will hold, supported by amazing animal
spirits." At least that's true up to October when the fourth year of the
Cycle begins. Then, the "odds of failure rise" but won't likely become high
until October, 2008 with a new administration and Congress soon to take
power. Grantham then gets blunt stating "based on history" (and tax
increases he expects), that's the most likely time for a bear market, and
he's betting on one that could be nasty.
He concludes saying he's been trying to come up with a simple way to explain
"how serious the situation is for the overstretched, overleveraged financial
system." He does it this way: "In 5 years I expect....at least one major
bank (broadly defined) to have failed and up to half the hedge funds and a
substantial percentage of the private equity firms in existence today (to
have) simply ceased to exist."
He continues saying he's been too bearish at times in the past 12 years but
his language "has almost never been this dire." His feeling is that today
we're "watching a very slow motion train wreck" beyond the point of stopping
so watch out ahead. It's a good idea to be cautious and prepare. If he's
right and economic conditions deteriorate enough, everyone will be affected
through job and income losses along with investors losing big from
speculative and other investments. All financial bubbles end. Sadly, even
those not participating in them get burned, especially those most vulnerable
and least able to ride out the storm that could be mean, nasty and long.
Engineering the Coming Wreck
Back in October, 2002, Grantham took aim at a financial icon Wall Street and
the financial press practically defied when he chaired the Federal Reserve
from August, 1987 to end of January, 2006. It didn't matter to them (and
still doesn't) that he engineered the largest ever stock market bubble and
bust in history through incompetence, timidity, dereliction of duty or a
combination of all three. In their eyes, Alan Greenspan was above reproach.
He could do no wrong, and here's why. His policies made it possible for
wealthy and powerful investors to cash in big as long as the party lasted,
and then get plenty of advance warning when to exit.
Most ordinary investors, on the other hand, were caught flat-footed based on
advice from market pundit fraudsters with Mr. Greenspan most deceptive and
influential of all. In January, 2000, just weeks short of the market peak,
he claimed "the American economy was experiencing a once-in-a-century
acceleration of innovation, which propelled forward productivity, output,
corporate profits and stock prices at a pace not seen in generations, if
ever."
Grantham's reply to this outburst: "Phew!" He might have also drawn an
analogy to famed Yale University economics professor Irving Fisher's
comments just before the 1929 stock market crash. He claimed economic
fundamentals in the country were strong, the stock market was undervalued,
and an unending period of prosperity lay ahead. It just took over a decade
to arrive and plenty of pain to go around before it did.
Grantham spared Fisher, but bashed Greenspan saying: "The internet
(highlighted by the dot.com bubble), which had 'pushed back the fog of
uncertainty' for corporations, was his particular pet." It's hard to believe
now Greenspan actually said: "Lofty equity prices have reduced the cost of
capital. The result has been a veritable explosion of spending on high-tech
equipment....And I see nothing to suggest that these opportunities will
peter out anytime soon....Indeed many argue that the pace of innovation will
continue to quicken....to exploit the still largely untapped potential for
e-commerce, especially the business-to-business arena."
One week later, the Nasdaq peaked at 5048 and fell to a low of 1114 on
October 9, 2002 losing 78% of its value. The broadly based S&P 500 stock
index merely dropped from its March 24, 2000 high of 1527 to an October 9,
2002 bottom at 777 for a loss of 49%. Mr. Greenspan was nowhere in sight but
was busy reengineering phase two of the bubble with a tsunami of easy money.
His successor now continues the same policy despite his high-sounding
Fedspeak concerns for inflation and a stable economy. Call it more
Fedbaloney pointing to the obvious eventual consequences ahead. The
Fed-built credit bubble and other excesses are unwinding. Before it's over,
they'll be plenty of pain to go around and another culpable Fed Chairman
claiming no responsibility and being able to get away with it.
Grantham was clearly upset in October, 2002 and made his views known to
investors. His commentary was titled "Feet of Clay - Alan Greenspan's
Contribution to the Great American Equity Bubble." He started out with a Fed
Chairman's job description saying "In its earlier years, the Fed's emphasis
seems to have been on economic activity....By the nineties, the heavy
emphasis (shifted) to inflation control." Both objectives are "critical to
stability," because the Fed's "underlying job" is to maintain "general
economic stability," not fuel bubbles. "Nothing threatens (that stability)
more than the deflating of a major stock market bubble." It's the Fed's job
to spot and moderate them in time and be willing "to bear the (political)
consequences" for its actions. Alan Greenspan failed on all counts.
"Did he see the (largest in US history) bubble coming," Grantham asked? He
provided generous amounts of liquidity fueling it, and when things began
getting out of hand, all he did was suggest "irrational exuberance" might
have "unduly escalated asset values" in a December, 1996 speech. He did
nothing to curb it then or thereafter whereas he could have raised interest
rates, margin requirements and added a lot more jawboning persuasion to cool
an overheated market and restore stability.
Grantham was clear and emphatic: "Had Greenspan been prepared to use all the
tools available and shown his determination, it almost certainly would have
worked" enough to prevent the market plunge after March, 2000. Not only did
he fail to act, but he then denied all responsibility for what Grantham
called "the Greenspan fiasco....he has overtaken my efforts with his
breathtakingly shameless and complete denial of responsibility....he seems
to have believed....this new era nonsense (at its) March 2000 peak more
completely) than anyone else....the title of 'most credulous' (and Fed
Chairman) belong to the same man." By his concocted "logic," he'd have
"fail(ed) a Finance 101 final."
Even worse, Greenspan "had the knowledge, experience, and belief and failed
to act." Yet, to this day he's gotten away with it. He's still extolled in
lofty terms, practically elevated to the ranks of sainthood, and is now
retired to new "green" pastures of lucrative book deals and speaking
engagements (at $100,000 fees) where his every word is still taken as market
gospel. In addition, Greenspan Associates began operating in May with his
lawyer, Robert Barnett, saying "virtually every major investment-banking
firm" in the world is eager to hire him for his rainmaking connections.
Better those than his advice best avoided.
The Greenspan legacy got Grantham to conclude: "You can indeed 'fool most of
the people all of the time.' 'Most of the people' this time probably
included Her Majesty who (days earlier on September 26) knighted (Sir Alan)
for his global services. My secret hope though is that she justified it by
having had a good short position for the last 3 years." Or "short" of that,
been tipped off in time to bail out at the top and let her subjects take the
pain.
Engineering the Coming Wreck - Part II
Other than rampaging armies on the move, no institution anywhere has more
power than central banks. And no central bank has more of it than the US
Federal Reserve unless it's the secretive, unaccountable Bank of
International Settlements (BIS) founded in 1930 and based in Basle,
Switzerland. The BIS is central banker to its member banks (a sort of
financial boss of bosses) that includes the Federal Reserve.
Some savvy financial experts believe the world's ruling elites control this
bank of banks and intend using it to establish a global borderless financial
world controlled by them. It's no hairbrained conclusion with the European
Union in place, talk of a similar one in Africa, and a North American
Security and Prosperity Partnership arrangement coming to a head that will
create a borderless continent headquartered in Washington and likely will
aim next to link with the EU for greater global control.
So what's important about the Fed, and why should we care? Despite common
belief, the Federal Reserve is not a government agency. It's a privately
owned for profit cartel of powerful banks (including Wall Street ones)
protected by law, even though the Federal Reserve Act of 1913 violates the
US Constitution. It's Article I, Section 8 states "The Congress shall have
Power To coin Money (and) regulate the Value thereof..." In 1935, the
Supreme Court ruled only Congress has this power and cannot constitutionally
delegate it to another group or body, and that includes private for profit
bankers running the Fed.
Simply put, commercial banks in charge of printing and controlling the
nation's money supply constitutes criminal fraud. It's the reason the
Federal Reserve was designed to look like a government agency when, in fact,
it isn't. Being headquartered in Washington in the stately mausoleum-looking
Eccles building is just part of the clever subterfuge.
But it's even worse than that. By establishing the Federal Reserve, Congress
and President Woodrow Wilson privatized the nation's money creation system
relinquishing the most important power governments have that got famed
banker Baron MA Rothschild once to say: "Give me control over a nation's
currency and I care not who makes its laws."
Ever since US private bankers got it, they've been empowered to print money
in any amount, control its supply and price, and benefit hugely by loaning
it out for profit. That includes making government pay interest on its own
money it wouldn't have to do by printing its own. This amounts to no less
that government sanctioning the right to counterfeit the national currency
for private gain with the Fed and private bankers being world class pirates
masquerading as guardians of the public interest.
It's no exaggeration to call this the all-time, greatest ever financial
scam, still ongoing, and totally beyond the reach of public or any other
type scrutiny. If there were any, it would be learned this institution was
created as a scheme to transfer wealth from ordinary people to giant banks
and Wall Street. It's worked like a charm, and few people are the wiser.
But there's more still to the story, and it keeps getting uglier.
Supposedly, the Federal Reserve was established to stabilize the economy;
smooth out the business cycle; maintain a steady, healthy rate of
sustainable growth; create price stability and control inflation; and work
for the betterment of everyone. So let's grade it on its performance.
Since 1913, we had economic crashes in 1921, and the major one in 1929
followed by The Great Depression lasting until the outbreak of WW II.
Post-war, we then had recessions in 1953, 1957, 1969, 1975, 1981, 1990,
2001, and we're likely heading for future major trouble resulting from past
Fed policy abuses under Alan Greenspan and his successor, Ben Bernanke,
carrying on in the same fashion. We also had a serious inflation problem
beginning in the 1960s that became crisis-level severe in the 1970s and
early 80s. In addition, in the wake of reckless financial market
deregulation in the 1980s and lack of government oversight (with the Fed's
blessing), we had a major financial crisis causing more bank failures than
ever before or since in our history.
Further still, under the Fed, we've had -
-- soaring consumer debt;
-- record high federal budget and current account deficits;
-- an off-the-charts national debt, far higher than the fictitious reported
number;
-- a high and rising level of personal bankruptcies and mortgage loan
delinquencies and defaults;
-- an enormous government debt service obligation we're taxed to pay for;
-- the systematic loss of manufacturing and other high-paying jobs to
low-wage countries;
-- a secular declining economy, 84% service-based, and mostly comprised of
low-wage, low or no-benefit, non-unionized jobs;
-- an unprecedented wealth gap disparity;
-- growing rates of poverty in the richest country in the world;
-- a decline of essential social services; and
-- a lawless nation devoted to militarism and imperial conquest with the
Federal Reserve complicit in supplying all the funds needed to fuel it, and
all the while caring not for the public interest it's supposed to serve.
This type record adds up to a clear conclusion. Above all else, the Federal
Reserve failed to accomplish what it's supposed to do revealing instead
what's really going on. The Fed doesn't serve the public interest. It abuses
it because that's how bankers and all corporate predators make money. In the
world of finance, ordinary people lose out because giant banks and Wall
Street are allowed to pull off the grandest of grand thefts, their thievery
continues unabated, and the stakes keep rising.
Some astute financial observers now believe current excesses and resulting
turmoil were caused by the intentional engineering of the US housing bubble
with the Fed in on the scheme. Insiders made loads of easy money in the
process and now stand to cash in big buying troubled assets for a fraction
of their value the way they always do in the wake of market meltdowns. It's
called "vulture" investing with shrewd buyers profiting hugely in good and
bad times that are all good for them.
One analyst calls the subprime mortgage turbulence a global bank run with
potential huge yet to emerge consequences. Writer Danny Schechter has
another view in his article titled: "Subprime Or Subcrime? Time to
Investigate and Prosecute," and he makes a strong case. He calls the
subprime credit squeeze a "sub-crime ponzi scheme (causing) millions of
people (to lose) their homes because of criminal and fraudulent tactics used
by financial institutions (posing) as respectable players in a highly rigged
casino-like market system." There's nothing free and open about it.
The problem is deep, structural and aided by stripped away regulatory
protections giving predatory lenders and Wall Street schemers free reign to
target unsuspecting victims. Part of Schechter's fix is calling for a
"jailout," not a "bailout," but with friends in high places, don't bet on it
beyond a small fry or two. It's sad and disturbing because this type
behavior is part of the American "ethic" to scheme, defraud and prey on the
innocent knowing big players nearly always get away with it, and under
George Bush, it's practically guaranteed.
With a clear field ahead and friends in high places, the "Masters of the
Universe" are now heading for their perfect kind of buying opportunity if
Jeremy Grantham and other worriers are right. Manipulation aside, Grantham's
persuasive evidence suggests we're watching an unstoppable "very slow motion
train wreck" likely to be pretty ugly on "impact." By his reckoning, it's
probably too late to undue the enormous damage done no one will escape from.
His advice is that to be forewarned is forearmed to prepare as best as
possible although for most people it's practically impossible.
It's a good time to think of the ancient Chinese proverb, that's, in fact, a
curse and not of Chinese origin, but it sounds good saying it is: "May you
live in interesting times." Whoever coined the phrase intended it to be
ironic and "interesting" meant dangerous, turbulent or uncertain. That,
indeed, is true now but to what degree we'll only know in the fullness of
time.
_______
About author Stephen Lendman lives in Chicago and can be reached at
lendmanstephen@sbcglobal.net [1]. Also visit his blog site at
sjlendman.blogspot.com [2].
--
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Law. In accordance with Title 17 U.S.C. Section 107
"A little patience and we shall see the reign of witches pass over, their
spells dissolve, and the people recovering their true sight, restore their
government to its true principles. It is true that in the meantime we are
suffering deeply in spirit,
and incurring the horrors of a war and long oppressions of enormous public
debt. But if the game runs sometimes against us at home we must have
patience till luck turns, and then we shall have an opportunity of winning
back the principles we have lost, for this is a game where principles are at
stake."
-Thomas Jefferson
By Stephen Lendman
Created Aug 15 2007 - 9:08am
These days, financial/market punditry seems to follow two opposite lines of
thinking. It ranges from the predominant view that world economies are
growing and sound, problems in them minor and fixable, and current
volatility (aka turmoil) is corrective, normal and a healthy reassessing and
repricing of risk. Contrarians, on the other hand, believe the sky is
falling. Most often, extreme views like these turn out wrong and are best
avoided. Things are never that simple and hindsight usually proves only
Cassandra was good at forecasting although calling market tops and bottoms
wasn't her specialty.
Amidst all the commentary and sorting out of market Strang und Durm these
days, some financial world figures stand head and shoulders above the rest
for their wisdom, level-headednessness and believability. One in particular
is Jeremy Grantham, called by some the philosopher king of Wall Street even
though he's based to the northeast in Boston. In 1977, he co-founded
Grantham, Mayo and Van Otterloo, now known as GMO. In his Quarterly Letters
to clients, he assesses current market conditions and usually takes a longer
view as well. His commentaries are detailed, scholarly, sober and clear.
The Vanguard Group of mutual funds founder John Bogle calls Grantham "one of
the top two or three individuals in this business (and) If there's anybody
in this whole business who calls a spade a spade (that person is) Jeremy
Grantham." A metaphor for his wisdom, attitude and investing style sits
aside his office desk. It's a huge 9th century stone Buddha signifying
"everything in moderation" and one of Grantham's core beliefs that all
markets eventually revert to their mean values from their highs and lows.
Based on his company's exhaustive research, there are "no exceptions ever."
Bubbles come and go, but, in time, they all settle back in same place. As
Grantham puts it: "We know one principal truth at GMO and that is that we
live in a mean-reverting world in investing. (Our research) has
shown....that all bubbles....eventually break (and our definition of a
bubble is a) 2 standard deviation event - the kind of moves that occur about
every 40 years." Grantham mentions four stock market ones in particular that
stand out - the US in 1929, US again in 1965 - 72, 1989 in Japan (in land
and stocks) and the still ongoing greatest ever US 2000 bubble yet to come
back to its mean.
Grantham is known in the trade as a value investor. That means buying
financial assets at less than their intrinsic value or what famed
investor/Columbia University professor Benjamin Graham (1894 - 1976) called
a "margin of safety." Warren Buffett today calls it "finding an outstanding
company (or any financial asset) at a sensible price" as opposed to a
bargain that may turn out bogus or a booby trap. Grantham correctly called
the equity bubble in the late 1990s and believes the 2000 - 2003 bear market
is secular, long-term, and unlikely to end before 2010 despite a continuing
four year cyclical bull run reprieve from 2003 to the present. Only in the
fullness of time will he, and the rest of us, know if he's right.
Earlier in the year, Grantham toured the world for six weeks, returned
worried, and wrote about it in his April Quarterly Letter titled "It's
Everywhere, In Everything: The First Truly Global Bubble." It's "bubble
time," he observed "from Indian antiquities to modern Chinese art; from land
in Panama to Mayfair; from forestry, infrastructure, and the junkiest bonds
to mundane blue chips." All the necessary conditions are in place -
"fundamental economic conditions" look excellent; central bank supplied
liquidity is plentiful and cheap; and there's so much around, it's easy to
leverage. Since around mid-July or so, the latter condition no longer is
true or perceived to be by investors turned cautious and in some cases even
panicky.
Grantham explains human behavior causes bubbles when positive market
conditions unleash "animal spirits" to capitalize on opportunities that get
carried to extremes when there's enough cheap credit around as fuel. Even in
the best of times, that's a recipe for trouble with success feeding on
itself. It signals by leveraging up, the better investors can do until the
music stops as it always does, and the longer and louder it's been playing,
the severer the subsequent headache.
No one knows for sure when big trouble's coming next or how bad it'll be
when it arrives. Up to early summer, it was smooth sailing and easy profits,
but Grantham says what he sees today is unprecedented: "everyone, everywhere
(in all asset classes) is reinforcing one another." Across the world you
hear it confirmed that "they don't make any more land (and) with these
growth rates and low interest rates, equity markets must keep rising (and)
private equity (plus merger mania, huge stock buy-backs and plenty of
central bank supplied fuel) will continue to drive the markets."
It's become self-reinforcing and the results are "predictable and
consistent." The three major asset classes - real estate, stocks and bonds -
are "expensive compared with (their) replacement cost where it can be
calculated." Equally worrisome, risk premiums "reached a historic low
everywhere" until just weeks ago.
Grantham's conclusion is these are all warning signs spelling eventual
trouble because as noted above "Every bubble has always burst (with no
exceptions, ever)." When the 2000 bubble deflation resumes, "it will be
across all countries and all assets, with the probable exception of high
grade bonds." In addition, risk premiums will widen (and now are) forcing
companies to pay higher financing costs for borrowed funds that will depress
investor confidence and reduce economic activity.
No one knows how deep or protracted a decline will be, but Grantham stresses
it's coming because the current global bubble is unprecedented. "No similar
global event (of this magnitude ever) occurred before." Now that's pretty
scary stuff to chew on because economic troubles bite everyone and most of
all those most vulnerable and least able to weather the storm. That includes
ordinary working people with little or nothing invested.
During the current bull run, Grantham was troubled as early as January, 2004
when he advised clients that "The outlook for 2004 is not bad, but the
(stock) market is very overpriced and all predictors look bad for the next
year and the year after." As things turned out, he was wrong, or perhaps
with future hindsight just way early in his judgment. He was troubled again
at year end 2005 when he told investors to "prepare for a decline in the
performance of equities and other risk assets in 2006." Once more, his call
was either early or wrong as the past 18 months saw considerable strength
until just recently.
His January, 2007 Quarterly Letter assessed what happened saying "Against
all odds, Goldilocks tiptoed through the perils of the first (2005) and
second (2006) year of the Presidential Cycle....it (2006) was the rarest of
rare birds - a perfect year." As a result, "risk taking also prospered"
because of low global inflation, no financial crises anywhere, low interest
rates, and "very very" available credit. As things turned out, "this was
almost certainly the best year in the entire history of finance for the
selling of high credit risks at low premiums."
One extreme measure of it was the quadrupling of so-called securitized
Collateralized Debt Obligation (CDO) instruments (packages of risky and
other debt) to around $2.5 trillion facilitated by the so-called "expanded
'carry trade' of borrowing in cheap (low interest) Japanese and Swiss
currencies."
Downsides often accompany opportunities, and Grantham explained conditions
going into 2007 in breathtaking terms. "Goldilocks global conditions,
especially cheap and easy credit, have caused the broadest overpricing of
financial assets - equities, real estate, and fixed income - ever recorded."
However, he stressed, "Just because risk taking is off the charts does not
mean it can't keep going for another year" or longer.
The end of a Goldilocks economy was clearly on the minds of people Grantham
met on his world tour. Everywhere he travelled he was asked "What is the
catalyst for a (market) break" when none was then visible or imminent? He
answered citing these vulnerabilities: rising inflation (that's greater than
reported) constraining central bank support for a weakening economy,
pointing to the US as an example. This, in turn, will slow economic activity
and reduce profit margins that are still way above global norms but will
come down.
Then there's the housing decline a Center for Economic Policy Research
(CEPR) report shows is the result of overbuilding and home prices rocketing
70% in value since 1995 adjusted for inflation. It "created $8 trillion in
housing bubble wealth" and an unprecedented oversupply of unsold homes and
"vacant ownership units." CEPR believes the coming housing bubble correction
"is likely to throw the economy into a recession and quite possibly a very
severe (one)."
It notes housing construction has to decline, and revaluing $8 trillion in
housing wealth excess will reduce consumption and bring saving rates "back
to more normal levels." Consumers need all they can get because, at today's
elevated prices, the average potential home buyer can't afford one, and, as
one analyst observed, lenders are relearning how to say "no."
Current economic conditions worry PIMCO's Bill Gross as well. PIMCO is a 36
year old firm and "one of the largest specialty fixed income managers in the
world." Gross is one its founders and serves as managing director and chief
investment officer. In his July Investment Outlook, he said people are
"looking for contagion in all the wrong places." The Bear Stearns and other
hedge fund losses are "now primarily history (and) can be papered over with
100 cents on the dollar marks." The real problem lies in "those millions and
millions of homes....not going anywhere....except for their
mortgages....going up, up, and up....and so are delinquencies and defaults."
He cites a recent Bank of America estimate that about $500 billion of
adjustable rate mortgages (ARMs) will be reset in 2007, another $700 billion
in 2008, and a large proportion of them are subprimes. He noted 7% of these
loans are now in default, and the "percentage will grow and grow like a weed
in your backyard tomato patch." This will affect real money in the hundreds
of billions of dollars of "toxic waste" that will spill over into reduced
consumption, less new home construction, and even AAA-asset backed
commercial paper "feel(ing) the cooling Arctic winds of a liquidity
constriction."
In Gross' view, the sky isn't falling, and "there is no hint yet of a true
'crisis' - these developments" may, in fact, have a salutary effect with
"easy credit becoming less easy (and) excessive liquidity returning to more
rational levels." Gross still sees strong global growth ahead, but as a bond
fund manager, he's paid to worry.
In his report, Grantham is worried, too, and notes the housing decline
affects prices, credit growth and consumption when subprime and other loan
rates are reset higher with a considerable amount coming this year and even
more ahead as just noted. In addition, and most significantly, he says
rising inflation and widening risk premiums lower "the feasible leverage in
private equity deals and place many deals that can be done today (meaning
last spring) out of reach, which, in turn, has dire effects on the current
stock market (and economy)."
In his current July client Letter, Grantham conceded "no areas of this
unprecedented global bubble had yet gone hyperbolic like the internet and
tech stocks did in 1999 (until now):" The "candidate" is "the growth rate of
leveraged loans. At (a hugely speculative) $545 billion for the first half
of this year, it is running 60% up on last year" that's about the same size
gain dot.com and tech stocks made year over year in 1999 with painful
consequences not far behind for investors owning them.
Grantham's July commentary mentioned one other likely market headwind after
the 2008 election. It's the expected fallout from "piling on" moves of "more
wealth to the wealthy by shifting more of the tax load to sales and income
taxes of average taxpayers and away from the capital gains and dividend
taxes of the wealthy." It means "ordinary working stiffs are not doing
particularly well....and are getting antsy" enough to worry politicians to
raise taxes on the most well-off.
Grantham expects them to come in higher taxes on capital gains, dividends
and top-end ordinary income rates as well as redefining what income is. That
will mean more of it will be taxed to reduce the gross disparity between
what rich and ordinary folks now pay, and not a moment too soon for those
championing fairness, not special privilege. If this happens, however, it
"will not be good for the animal spirits of investors" who represent the
most important bubble-sustaining input.
Grantham sums up his current thinking with what he calls a "torture(d)
analogy." He compares the global financial system to a giant suspension
bridge. "Thousands of bolts hold it together. Today a few of them have
fractures and one or two seem to have failed completely. The bridge,
however, with typical redundancy built in (unlike the Minnesota one that
collapsed), can (easily) take a few failed bolts, perhaps quite a
few....This global financial structure is far too large and has far too many
interlocking pieces for weakening US house prices and a few subprime issues
to bring it down."
What is worrisome is whether or when we reach a "broad-based level of
financial metal fatigue" causing simultaneous multiple bolt failures "with
ultimately disastrous consequences." What's also scary is the global
financial structure is heavily "faith based, held together by unprecedented
amounts of animal spirits" moving in the same positive direction. If the
faith wanes, it's then "every man for himself" and look out below.
Also worrisome, but so far contained, is growing subprime mortgage trouble.
Until a month ago, equity markets were totally unaffected and may bounce
back from their current sell-off. Grantham isn't panicking but shows concern
about flat to declining home prices, a high inventory of unsold homes likely
moving higher, and mortgage "honeymoon rate" reset increases up to 2.5
points coming soon for holders "already stretched." We're told, he says,
that even the subprime market is "contained," but we have to wonder if "the
container, in this case, will turn out to be Pandora's."
Then there's a slowing economy, inflation concerns, high oil and other
industrial commodity prices and now agricultural ones as well "boosted by
ethanol production" pressuring consumers. "So two of the three great asset
classes (now all three) are having the wobblies in some of their
components" - real estate and low grade debt (and since mid-July equities
and other type debt instruments as well), "especially real-estate related
but increasingly including corporate loans and private equity funding...."
Grantham may have written this commentary before the the July-mid-August
equity market sell-off. However, based on his prior (and long-standing)
comments, his current analysis probably still holds true: "stocks (will
likely) make it through this third (and traditionally strongest) year of the
Presidential (four year market) Cycle." The third year in the Cycle "has
never declined materially and should be considered the bane of short sellers
(and equity market naysayers) everywhere."
In sum, Grantham says, "a few more bolts in the bridge may fail, but in the
end you have to bet the bridge will hold, supported by amazing animal
spirits." At least that's true up to October when the fourth year of the
Cycle begins. Then, the "odds of failure rise" but won't likely become high
until October, 2008 with a new administration and Congress soon to take
power. Grantham then gets blunt stating "based on history" (and tax
increases he expects), that's the most likely time for a bear market, and
he's betting on one that could be nasty.
He concludes saying he's been trying to come up with a simple way to explain
"how serious the situation is for the overstretched, overleveraged financial
system." He does it this way: "In 5 years I expect....at least one major
bank (broadly defined) to have failed and up to half the hedge funds and a
substantial percentage of the private equity firms in existence today (to
have) simply ceased to exist."
He continues saying he's been too bearish at times in the past 12 years but
his language "has almost never been this dire." His feeling is that today
we're "watching a very slow motion train wreck" beyond the point of stopping
so watch out ahead. It's a good idea to be cautious and prepare. If he's
right and economic conditions deteriorate enough, everyone will be affected
through job and income losses along with investors losing big from
speculative and other investments. All financial bubbles end. Sadly, even
those not participating in them get burned, especially those most vulnerable
and least able to ride out the storm that could be mean, nasty and long.
Engineering the Coming Wreck
Back in October, 2002, Grantham took aim at a financial icon Wall Street and
the financial press practically defied when he chaired the Federal Reserve
from August, 1987 to end of January, 2006. It didn't matter to them (and
still doesn't) that he engineered the largest ever stock market bubble and
bust in history through incompetence, timidity, dereliction of duty or a
combination of all three. In their eyes, Alan Greenspan was above reproach.
He could do no wrong, and here's why. His policies made it possible for
wealthy and powerful investors to cash in big as long as the party lasted,
and then get plenty of advance warning when to exit.
Most ordinary investors, on the other hand, were caught flat-footed based on
advice from market pundit fraudsters with Mr. Greenspan most deceptive and
influential of all. In January, 2000, just weeks short of the market peak,
he claimed "the American economy was experiencing a once-in-a-century
acceleration of innovation, which propelled forward productivity, output,
corporate profits and stock prices at a pace not seen in generations, if
ever."
Grantham's reply to this outburst: "Phew!" He might have also drawn an
analogy to famed Yale University economics professor Irving Fisher's
comments just before the 1929 stock market crash. He claimed economic
fundamentals in the country were strong, the stock market was undervalued,
and an unending period of prosperity lay ahead. It just took over a decade
to arrive and plenty of pain to go around before it did.
Grantham spared Fisher, but bashed Greenspan saying: "The internet
(highlighted by the dot.com bubble), which had 'pushed back the fog of
uncertainty' for corporations, was his particular pet." It's hard to believe
now Greenspan actually said: "Lofty equity prices have reduced the cost of
capital. The result has been a veritable explosion of spending on high-tech
equipment....And I see nothing to suggest that these opportunities will
peter out anytime soon....Indeed many argue that the pace of innovation will
continue to quicken....to exploit the still largely untapped potential for
e-commerce, especially the business-to-business arena."
One week later, the Nasdaq peaked at 5048 and fell to a low of 1114 on
October 9, 2002 losing 78% of its value. The broadly based S&P 500 stock
index merely dropped from its March 24, 2000 high of 1527 to an October 9,
2002 bottom at 777 for a loss of 49%. Mr. Greenspan was nowhere in sight but
was busy reengineering phase two of the bubble with a tsunami of easy money.
His successor now continues the same policy despite his high-sounding
Fedspeak concerns for inflation and a stable economy. Call it more
Fedbaloney pointing to the obvious eventual consequences ahead. The
Fed-built credit bubble and other excesses are unwinding. Before it's over,
they'll be plenty of pain to go around and another culpable Fed Chairman
claiming no responsibility and being able to get away with it.
Grantham was clearly upset in October, 2002 and made his views known to
investors. His commentary was titled "Feet of Clay - Alan Greenspan's
Contribution to the Great American Equity Bubble." He started out with a Fed
Chairman's job description saying "In its earlier years, the Fed's emphasis
seems to have been on economic activity....By the nineties, the heavy
emphasis (shifted) to inflation control." Both objectives are "critical to
stability," because the Fed's "underlying job" is to maintain "general
economic stability," not fuel bubbles. "Nothing threatens (that stability)
more than the deflating of a major stock market bubble." It's the Fed's job
to spot and moderate them in time and be willing "to bear the (political)
consequences" for its actions. Alan Greenspan failed on all counts.
"Did he see the (largest in US history) bubble coming," Grantham asked? He
provided generous amounts of liquidity fueling it, and when things began
getting out of hand, all he did was suggest "irrational exuberance" might
have "unduly escalated asset values" in a December, 1996 speech. He did
nothing to curb it then or thereafter whereas he could have raised interest
rates, margin requirements and added a lot more jawboning persuasion to cool
an overheated market and restore stability.
Grantham was clear and emphatic: "Had Greenspan been prepared to use all the
tools available and shown his determination, it almost certainly would have
worked" enough to prevent the market plunge after March, 2000. Not only did
he fail to act, but he then denied all responsibility for what Grantham
called "the Greenspan fiasco....he has overtaken my efforts with his
breathtakingly shameless and complete denial of responsibility....he seems
to have believed....this new era nonsense (at its) March 2000 peak more
completely) than anyone else....the title of 'most credulous' (and Fed
Chairman) belong to the same man." By his concocted "logic," he'd have
"fail(ed) a Finance 101 final."
Even worse, Greenspan "had the knowledge, experience, and belief and failed
to act." Yet, to this day he's gotten away with it. He's still extolled in
lofty terms, practically elevated to the ranks of sainthood, and is now
retired to new "green" pastures of lucrative book deals and speaking
engagements (at $100,000 fees) where his every word is still taken as market
gospel. In addition, Greenspan Associates began operating in May with his
lawyer, Robert Barnett, saying "virtually every major investment-banking
firm" in the world is eager to hire him for his rainmaking connections.
Better those than his advice best avoided.
The Greenspan legacy got Grantham to conclude: "You can indeed 'fool most of
the people all of the time.' 'Most of the people' this time probably
included Her Majesty who (days earlier on September 26) knighted (Sir Alan)
for his global services. My secret hope though is that she justified it by
having had a good short position for the last 3 years." Or "short" of that,
been tipped off in time to bail out at the top and let her subjects take the
pain.
Engineering the Coming Wreck - Part II
Other than rampaging armies on the move, no institution anywhere has more
power than central banks. And no central bank has more of it than the US
Federal Reserve unless it's the secretive, unaccountable Bank of
International Settlements (BIS) founded in 1930 and based in Basle,
Switzerland. The BIS is central banker to its member banks (a sort of
financial boss of bosses) that includes the Federal Reserve.
Some savvy financial experts believe the world's ruling elites control this
bank of banks and intend using it to establish a global borderless financial
world controlled by them. It's no hairbrained conclusion with the European
Union in place, talk of a similar one in Africa, and a North American
Security and Prosperity Partnership arrangement coming to a head that will
create a borderless continent headquartered in Washington and likely will
aim next to link with the EU for greater global control.
So what's important about the Fed, and why should we care? Despite common
belief, the Federal Reserve is not a government agency. It's a privately
owned for profit cartel of powerful banks (including Wall Street ones)
protected by law, even though the Federal Reserve Act of 1913 violates the
US Constitution. It's Article I, Section 8 states "The Congress shall have
Power To coin Money (and) regulate the Value thereof..." In 1935, the
Supreme Court ruled only Congress has this power and cannot constitutionally
delegate it to another group or body, and that includes private for profit
bankers running the Fed.
Simply put, commercial banks in charge of printing and controlling the
nation's money supply constitutes criminal fraud. It's the reason the
Federal Reserve was designed to look like a government agency when, in fact,
it isn't. Being headquartered in Washington in the stately mausoleum-looking
Eccles building is just part of the clever subterfuge.
But it's even worse than that. By establishing the Federal Reserve, Congress
and President Woodrow Wilson privatized the nation's money creation system
relinquishing the most important power governments have that got famed
banker Baron MA Rothschild once to say: "Give me control over a nation's
currency and I care not who makes its laws."
Ever since US private bankers got it, they've been empowered to print money
in any amount, control its supply and price, and benefit hugely by loaning
it out for profit. That includes making government pay interest on its own
money it wouldn't have to do by printing its own. This amounts to no less
that government sanctioning the right to counterfeit the national currency
for private gain with the Fed and private bankers being world class pirates
masquerading as guardians of the public interest.
It's no exaggeration to call this the all-time, greatest ever financial
scam, still ongoing, and totally beyond the reach of public or any other
type scrutiny. If there were any, it would be learned this institution was
created as a scheme to transfer wealth from ordinary people to giant banks
and Wall Street. It's worked like a charm, and few people are the wiser.
But there's more still to the story, and it keeps getting uglier.
Supposedly, the Federal Reserve was established to stabilize the economy;
smooth out the business cycle; maintain a steady, healthy rate of
sustainable growth; create price stability and control inflation; and work
for the betterment of everyone. So let's grade it on its performance.
Since 1913, we had economic crashes in 1921, and the major one in 1929
followed by The Great Depression lasting until the outbreak of WW II.
Post-war, we then had recessions in 1953, 1957, 1969, 1975, 1981, 1990,
2001, and we're likely heading for future major trouble resulting from past
Fed policy abuses under Alan Greenspan and his successor, Ben Bernanke,
carrying on in the same fashion. We also had a serious inflation problem
beginning in the 1960s that became crisis-level severe in the 1970s and
early 80s. In addition, in the wake of reckless financial market
deregulation in the 1980s and lack of government oversight (with the Fed's
blessing), we had a major financial crisis causing more bank failures than
ever before or since in our history.
Further still, under the Fed, we've had -
-- soaring consumer debt;
-- record high federal budget and current account deficits;
-- an off-the-charts national debt, far higher than the fictitious reported
number;
-- a high and rising level of personal bankruptcies and mortgage loan
delinquencies and defaults;
-- an enormous government debt service obligation we're taxed to pay for;
-- the systematic loss of manufacturing and other high-paying jobs to
low-wage countries;
-- a secular declining economy, 84% service-based, and mostly comprised of
low-wage, low or no-benefit, non-unionized jobs;
-- an unprecedented wealth gap disparity;
-- growing rates of poverty in the richest country in the world;
-- a decline of essential social services; and
-- a lawless nation devoted to militarism and imperial conquest with the
Federal Reserve complicit in supplying all the funds needed to fuel it, and
all the while caring not for the public interest it's supposed to serve.
This type record adds up to a clear conclusion. Above all else, the Federal
Reserve failed to accomplish what it's supposed to do revealing instead
what's really going on. The Fed doesn't serve the public interest. It abuses
it because that's how bankers and all corporate predators make money. In the
world of finance, ordinary people lose out because giant banks and Wall
Street are allowed to pull off the grandest of grand thefts, their thievery
continues unabated, and the stakes keep rising.
Some astute financial observers now believe current excesses and resulting
turmoil were caused by the intentional engineering of the US housing bubble
with the Fed in on the scheme. Insiders made loads of easy money in the
process and now stand to cash in big buying troubled assets for a fraction
of their value the way they always do in the wake of market meltdowns. It's
called "vulture" investing with shrewd buyers profiting hugely in good and
bad times that are all good for them.
One analyst calls the subprime mortgage turbulence a global bank run with
potential huge yet to emerge consequences. Writer Danny Schechter has
another view in his article titled: "Subprime Or Subcrime? Time to
Investigate and Prosecute," and he makes a strong case. He calls the
subprime credit squeeze a "sub-crime ponzi scheme (causing) millions of
people (to lose) their homes because of criminal and fraudulent tactics used
by financial institutions (posing) as respectable players in a highly rigged
casino-like market system." There's nothing free and open about it.
The problem is deep, structural and aided by stripped away regulatory
protections giving predatory lenders and Wall Street schemers free reign to
target unsuspecting victims. Part of Schechter's fix is calling for a
"jailout," not a "bailout," but with friends in high places, don't bet on it
beyond a small fry or two. It's sad and disturbing because this type
behavior is part of the American "ethic" to scheme, defraud and prey on the
innocent knowing big players nearly always get away with it, and under
George Bush, it's practically guaranteed.
With a clear field ahead and friends in high places, the "Masters of the
Universe" are now heading for their perfect kind of buying opportunity if
Jeremy Grantham and other worriers are right. Manipulation aside, Grantham's
persuasive evidence suggests we're watching an unstoppable "very slow motion
train wreck" likely to be pretty ugly on "impact." By his reckoning, it's
probably too late to undue the enormous damage done no one will escape from.
His advice is that to be forewarned is forearmed to prepare as best as
possible although for most people it's practically impossible.
It's a good time to think of the ancient Chinese proverb, that's, in fact, a
curse and not of Chinese origin, but it sounds good saying it is: "May you
live in interesting times." Whoever coined the phrase intended it to be
ironic and "interesting" meant dangerous, turbulent or uncertain. That,
indeed, is true now but to what degree we'll only know in the fullness of
time.
_______
About author Stephen Lendman lives in Chicago and can be reached at
lendmanstephen@sbcglobal.net [1]. Also visit his blog site at
sjlendman.blogspot.com [2].
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Law. In accordance with Title 17 U.S.C. Section 107
"A little patience and we shall see the reign of witches pass over, their
spells dissolve, and the people recovering their true sight, restore their
government to its true principles. It is true that in the meantime we are
suffering deeply in spirit,
and incurring the horrors of a war and long oppressions of enormous public
debt. But if the game runs sometimes against us at home we must have
patience till luck turns, and then we shall have an opportunity of winning
back the principles we have lost, for this is a game where principles are at
stake."
-Thomas Jefferson