the visible hand

it is the theory which decides what can be observed – einstein

market climbs a wall of worry, bounces off glass ceiling

Posted by ecoshift on July 21, 2007

The Dow broke 14k this week, yet another new record.

WTF. The dollar is in decline, prices on food, fuel and commodities are going up, the housing market isn’t due to rebound till at least 2009 and the willingness of foreign central banks to purchase US debt is weakening.

The Dow also fell over 150 points from peak to trough twice prompting an increase in sightings of the rumored Plunge Protection Team in the comments sections of blogs that follow such things.

It appears that most local folks don’t care much about the market unless they have money invested. While I’m sympathetic with this point of view there are a number of local issues impacted by national and global trends — in particular county land use policy and low income housing. Bucking these trends will be hard, we might want to plan ahead.

For those of you who might be interested in points of view on the current record setting stock market and the underlying economy itself that aren’t directly funded by it’s beneficiaries or housing market info that isn’t specifically aimed at rebuilding lost confidence and minimizing downsides here are a couple of blogs worth reviewing. Don’t forget to read the comments sections… very informative. If you want the consensus view, just watch TV.

Nouriel Roubini’s Blog

Roubini is an economist and doesn’t slow down to explain his terms. You may find it useful to use Firefox so you can select unfamiliar terms, right click and google them on the spot.

Calculated Risk

The Calculated Risk blog is definitely irreverent… even funny. It’s focuses on the mortgage market with many comments from traders and industry pros that range far beyond straight up mortgage/investment instrument analyses. If you don’t want to start with the nerdly details you might try this link first.

Check it out…

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4 Responses to “market climbs a wall of worry, bounces off glass ceiling”

  1. Anonymous said

    Still reading you often, and ‘Calculated Risk’ is a great site, I’ve been reading it since I first saw a link on your page.

    Why shouldn’t markets climb? Those in charge appreciate that the unwashed masses will work harder and accept lower wages in the years to come, while consumption can in large part be transferred to hyper consumption for the top 5-10%. In other words, productivity can rise, wages can fall, and ownership of industry can continue to be centralized, which is what the markets represent. Those who own the markets (large stockholders)appreciate that all metrics are in their favor.

    It’s ‘inefficient’ for lots of people to own their own homes, it’s much better if the bank or corporations own them and everyone rents. The housing cycle is designed to draw fees and sales commissions out of consumers, taking decentralized wealth and consolidating it. The looming housing bust is a long term gain for the banks– they’ve generated tons of fees riding the prices of property up. Now, they’ll repossess the physical property (no less valuable than before except on paper) after having tapped out the middle class owners. They’ll own more property (prices will be way down) and then begin the transaction cycle again. Only those who still have money after the crash will be able to buy (and then rent out to the losers). The middle class, whose only real assets were those homes, won’t have the wherewithal to buy even though prices may be below rental value.

    If the market (stockholders) can continue this cycle up and down you can forget the numbers–they’ll continue consolidation of the physical assets like homes and factories.

    So the market should continue to rise logically, the big boys know what’s up.

    Ugly but probably true–what do you think?

    -JMan

  2. ecoshift said

    A couple of thoughts:

    Why shouldn’t markets climb?

    With real wages relatively flat and Joe 6packs house values in decline the spending that keeps domestic markets viable is tenuous — retail markets are relatively weak.

    No doubt some business serving domestic markets (high end retailers as an example) are actually performing as well, but I don’t think consumption, as an engine of growth, can be shifted to the upper 5% of income earners and keep the domestic engine pumping. How many cars can one person drive? How much food can one person eat?

    Those who own the markets (large stockholders)appreciate that all metrics are in their favor.

    I think it was William Greider that got me to understand that the range of action available to even the largest corporation is limited by the logic and dynamics of capital. It’s easy to believe that entities with that much wealth can afford to do what they wish: pay decent wages… or not, deal appropriately with their toxic waste… or not, etc. But, in fact, they must maintain “competitive” practices in viable markets or they can vanish overnight. Current housing market examples here.

    You can look at the mortgage lender failures as small fry whose losses don’t necessarily impact the largest stockholders with adequately diversified and hedged investments. But the Bear Sterns hedge funds failures are making larger investors nervous as they indicate the scale of loss that could spread as mortgage backed investment instruments are marked to their real value. Tanta’s recent post at calculated risk outlines the issues that leverage introduces into the equation.

    It’s ‘inefficient’ for lots of people to own their own homes, it’s much better if the bank or corporations own them and everyone rents.

    If there is an unraveling of the domestic economy, lead by the coming housing industry depression, I think you’re right: there will be a consolidation of real wealth and US housing prices will provide an array of choices for those that have the cash. And US assets in general will be a bargain to investors with capital denominated in stronger currencies.

    But, I actually think that the sub-prime mortgage market scams outlined at calculated risk were a very efficient mechanism for building the housing bubble, sucking wealth from the increasing asset values and transferring the risk for poorly documented and fraudulent loans to pension funds and other institutional investors. For those investors that get out in time, I doubt that any kind of owning and renting scenario could generate a more efficient means of sucking wealth out of Joe 6pack’s net worth-and his pension fund.

    If the market (stockholders) can continue this cycle up and down you can forget the numbers–they’ll continue consolidation of the physical assets like homes and factories.

    The question is how will the unraveling of the mortgage market scams play out in the domestic economy and how will that impact stock prices?

    Though I’m not a republican, Ron Paul’s discussion of US monetary policy since the 1970’s has some bearing here. An increasing supply of money has devalued the dollar. Denominated in anything but dollars (euros, loonies, gold, etc.) the stock market has been in decline since 2000 or 2001. Imagine what housing prices would look like denominated in euros. Whereas the combination of increased money supply and low interest credit has traditionally acted as a stimulus to the domestic economy today this “easy payments, no money down” liquidity appears to be financing leveraged buy outs (consolidation of physical and financial assets), corporate investments in low cost production regions and corporate stock buy backs.

    So the market should continue to rise logically, the big boys know what’s up.

    The rising stock market may be composed of both “real values” generated by US corporations with significant overseas business interests that are actually performing, corporate assets denominated in stronger currencies, businesses selling into high end markets, service and tech components of global production, etc. as well as “false values” such as manipulative financial transactions, LBOs and corporate stock buybacks made possible by low interest rates and the increasing money supply. I believe the concern among the larger players is that tighter credit standards, increased interest rates and a lower tolerance for risk could dry up the liquidity that is driving the deals. There could be some significant losers. Even among the big players.

    That said, I’m not going to try to call the top of the current bull run.

    It may be that the declining dollar will open up access to both emerging and established markets for domestic producers leading to increased investment in domestic capacity.

    Or, the declining dollar could decrease the willingness of foreign central banks to buy US dollars and lead to an increase in interest rates beyond the Fed’s control. At that point I’d guess is that investments in US production capacity will be most enticing to foreign central banks holding lots of dollars in their reserves (China) or investors with assets denominated in stronger currencies.

    Ugly but probably true–what do you think?

    I’m just an average joe, for all I know the Fed’s money printing press could allow the US domestic economy could enter a full on depression without a stock market crash.

    Or, it could be the US’ dominant position as the engine of growth and investment for world capitalism is shifting. I think we are approaching the point where China, India, Russia, and Brazil will begin to generate the investment, and the demand, that keeps the global economy pumping. It may be that we will begin to hear more foreign accents among the big boys.

  3. Anonymous said

    Your answer is way too well thought out for my flip comment. That said, I think I’m beggining to get a sense of your ethical worldview and which interest groups you’re morally aligned with (nominally nationalist, focused on local sustainability and a humans-first society where we protect the environment for our own long term interests–correct me if I’m wrong, a basic moral framework would be useful to evaluate the ‘why’ of all the ‘what’ you put out on the blog).

    –I don’t think consumption, as an engine of growth, can be shifted to the upper 5% of income earners and keep the domestic engine pumping. How many cars can one person drive? How much food can one person eat? —

    I think you underestimate the amount of comsumption possible by a small minority, watch an episode of MTV’s ‘Cribs’ and you’ll see the huge resources a few people can consume, and the low paying service jobs this can create–lots of lawns to mow, lots of crystal to dust.

    –But the Bear Sterns hedge funds failures are making larger investors nervous as they indicate the scale of loss that could spread as mortgage backed investment instruments are marked to their real value.–

    True, and these investment vehicles are largely used by the (nominally) wealthy and don’t directly impact the small consumer.

    –the sub-prime mortgage market scams …were a very efficient mechanism for … sucking wealth from the increasing asset values and transferring the risk …to pension funds and other institutional investors… I doubt that any kind of owning and renting scenario could generate a more efficient means of sucking wealth out of Joe 6pack’s net worth-and his pension fund. —

    No argument here. The wealth transfer method is the same– to charge fees on the trading of securities (as opposed to fees for buying and borrowing real property)and pass the risk on. In other words, the homebuyers got hosed by paying huge fees and mortgages on property they could not realistically hold on to long term. Their slightly better off neighbors got hosed by investing in funds (assuming the risk)that the APR homebuyers would fund through their payment on the homes.

    Hope that wasn’t too convoluted. In the end, the capital transfer folks (hedge funds, mortgage brokers) take a percentage at each trade and let the little guy take the risk. The Little Guy then has a weakened financial position and is ripe for the picking in the form of lower wages and job security.

    –The question is how will the unraveling of the mortgage market scams play out in the domestic economy and how will that impact stock prices? —

    Maybe I’m making too esoteric a point, but I think that stock prices as a whole are largely irrelevant, and a crash could ultimately be ‘good for business.’

    Ultimately, wealth comes from control of the physical assets (homes and factories) and efficient, preferrably cheap labor.

    Complicated problem and I don’t have it figured out, but I’d love more insight into your philosophical position of the way it should be so I can attach some context to your position on the weakened dollar and shrunken middle class.

    Thanks for the well thought out reply.

    -JMan

  4. ecoshift said

    I’m not sure my personal moral framework is as relevant as a moral framework for a larger consensus, or hoped for consensus, to which public policy and private economic strategies can be linked.

    For instance the county (humboldt) has invested a great deal of time in putting together a draft general plan around a number of issues. A number of goals appeared to be shared by many who participated in the process. Many comments were nominally localist and focused on: local “sustainable” (meaning long-lasting) economic development, protection of high “value” environmental resources, the creation or maintenance of affordable housing, maintenance of open-space (productive timber, ag and ranchlands)and our rural quality of life. To my recollection there was very little overt discussion of flora and fauna first justifications for General Plan objectives.

    While it’s clear that some of these goals may conflict in the particulars I don’t recall anyone coming out as actively opposed to any of the above goals.

    I keep this blog (almost a “notes-to-self” notebook of notable developments) because there are global and national economic, environmental and policy trends that impact our ability to achieve those those goals.

    If we don’t pay attention to these trends our best laid plans will likely result in unanticipated consequences — so, I’m attempting to pay attention. Though like you I don’t have all the answers.

    Behind this blog is the question: How do we achieve shared local goals in this national and global context? And behind this question yet another: How do we cultivate a sense of irony about our ideological contradictions that will allow us to cooperate across ideological differences?

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