Washington’s Blog
March 10, 2010
There
are at least 6 theories about why the stock market has rallied some 70% off its
lows a year ago, even though nothing has been done to actually address the
root causes of the financial crisis.
What
The Dumb Money Believes
The
dumb money believes what CNBC and their trusty stock churner … er, broker …
says: that the government has fixed the economy but it just has to “kick in”
(and that unemployment is just a lagging indicator, nothing important. See this, this, this and this).
Therefore,
these folks believe that stocks are hugely undervalued, and that if they buy
while most people are still afraid, they’ll make a killing when the market goes
to the moon.
Temporary
Juice
Others
believe that it is the quantitative easing, low rates, bank bailouts, stimulus
spending, and other portions of the “wall of money” which the feds have thrown
at the economy are creating a temporary pump to the stock market.
But
they think that – when the spigot is turned off – the market will tank.
The Situation is Inflation
Others
believe that – regardless of continued loose monetary and fiscal policy or real
stock valuations, we’re in for some serious inflation.
Stocks
tend to preform well during inflationary periods.
For
more on inflation versus deflation, see this.
Machines Run Amok
Tyler Durden explains that all of the stock
market gains have occurred after hours when mystery buyers purchase stock
futures in low volume environments (and see this).
Vincent
Deluard – a strategist for TrimTabs Investment Research (25% of the top 50 hedge funds in the world use
TrimTabs’ research for market timing) – said last month:
We’ve
never seen this before – such a huge rally, and the little guy is out.
Some
argue that it is high-frequency trading or momentum-chasing trading algorithms
doing the buying, and that the market will tank when they change their game.
Fed Futures
Others
argue that the government is itself buying
stock futures.
Some
believe that the Feds aren’t buying, but that they have intentionally showered
the big banks with money, and encouraged the banks to buy. In other
words, they argue that the Feds are indirectly promoting a stock market rally.
Fraud Central
Karl
Denninger believes that the market has rallied due to the systemic, fraudulent
overvaluation of assets.
As
Denninger wrote yesterday:
[A
reader wrote] the FDIC to ask about [allegations of fraudulent valuations].
This was their response:
That’s
the value the bank had them on their books on their year-end financials, but
the true value is much less. It is
similar to someone in Las Vegas saying that their house is worth $300,000
because that’s what they paid for it three years ago, but the reality is, if
they had to sell it in today’s market, they’d only get $250,000 for it. The
FDIC has to sell assets in today’s market…
Or
tomorrow’s market.
The
simple fact of the matter is that there it is, right in front of you.
A
raw admission that the banks are carrying these loans at dramatically above
their actual value.
Yes,
this means that essentially all balance sheets must now
be considered fraudulent, and thus the valuations assigned by the market to
them are also fraudulent.
Extending
this to the stock market as a whole you now have a market that is intentionally
overvalued as a direct and proximate consequence of fraud, permitted and
endorsed by the government, of somewhere between 25-40%.
Now
you know why the market rallied off the SPX 666 lows to where it is now. 1139
(where we are now) * .60 (a 40% haircut) = 683.40, or awfully close to that 666
bottom.
Of
course this “valuation” expressed in the market can only be maintained for as
long as the fraud is. If the ability to maintain that fraud is lost for any
reason then values will instantly collapse back to reflect reality.
Note:
Obviously, I believe this is a bear market rally which will eventually fizzle out. If the bulls are
instead right, then that will make me the dumb money. But I
think it much more likely that the rally will change direction
in the not-too-distant future.
