How We Lost Faith in the Financial Superstructure

by: Tim Price July 31, 2008 | about stocks: DIA / QQQQ / SPY / XLF    

Tim Price

About this author: Author's weblog
Become a Contributor Submit an Article
  • Font Size:
  • Print

“We live in an economic system in which a particularly good crop is often an economic disaster, and we restrict some of our agricultural productivity in order to ‘stabilise the market’, although there are millions of people who do not have the very things we restrict, and who need them badly.. We have a literacy above 90 per cent of the population. We have radio, television, movies, a newspaper a day for everybody. But instead of giving us the best of past and present literature and music, these media of communication, supplemented by advertising, fill the minds of men with the cheapest trash, lacking in any sense of reality, with sadistic fantasies which a halfway cultured person would be embarrassed to entertain even once in a while. We have reduced the average working hours to about half what they were one hundred years ago. We today have more free time available than our forefathers dared to dream of. But what has happened ? We do not know how to use the newly gained free time; we try to kill the time we have saved, and are glad when another day is over.”

– Erich Fromm, ‘The Sane Society’, 1955.

 

The world is not flat, but upside down. How else to account for the developing world sending its capital over to the ‘affluent’ west, in the form both of government bond purchases, and banking sector rescues investments ? Perhaps the delusion was not in having higher expectations for the Doha Round, but in believing in the existence of something called global free trade in the first place. Textiles might be a special case, but as Pietra Rivoli pointed out in ‘The Travels of a T-Shirt in the Global Economy’ (Wiley, 2006), the only time in its entire existence that her Floridian t-shirt ever encountered a free market was when, as a second-hand cast-off, it entered the mitumba for-profit market in used clothing in Africa. At all other times it was at the mercy of federal price supports, trade tariffs, lobbyists and an alphabet soup of sundry protectionists.

And of course, there is precious little evidence of free markets operating in the Anglo-Saxon banking world – rather, administrations on both sides of the Atlantic seem determined to perpetuate a culture of privatising profits and socialising losses, and pulling any number of rabbits out of hats to avoid dealing with the messy reality that an extraordinary period of easy money and increasingly lax lending standards has culminated in an appalling collapse of credit, confidence and trust in the financial system. No matter how long the property bear market persists, the distrust of financial institutions will likely outlast it. The late pursuit of short-sellers of banking stocks is only the most recent manifestation of an ingrained authoritarian support for the morally indefensible. Short sellers aren’t the problem, incompetent and venally conflicted financiers are.

Charles Hugh Smith expands on this theme: has the USA, he asks, become a giant Enron ? The Houston-based energy giant, it will be recalled, was once the seventh largest corporation in the US by market capitalisation and claimed revenues of $111 billion in 2000. By late 2001 it was bankrupt, having destroyed 20,000 jobs and $2 billion in employees’ pensions. “How,” asks Charles, “is our entire financial system any different ?”

Bogus inflation numbers are the first factors Charles cites behind a financial system “based on cooked books, lies and deceptions”. Readers who like to contemplate their economic statistics from beneath a tinfoil (or tin, for that matter) helmet can use John Williams’ Shadow Government Statistics website. The US Government is not acting in isolation in ensuring its books are extensively cooked – the UK Treasury has now torn up the rule books relating to something our prime minister once referred to as prudence. And normal conditions have been suspended for the banks, which have now been given a one-year reprieve from the accountants for taking back debt assets onto the balance sheet. Widespread money illusion is now entirely understandable: As we first wrote two years ago, the good ship ‘Money’ has slipped its moorings and, unanchored by anything as troublesome as fiscal discipline, is being blown all over the harbour.

Since regulatory fiat, investment banking “innovation” and accounting procedure can effectively conjure up money out of nothing, who is to say what any paper-based assets are really worth any more ? Where financial markets are allowed to trade freely without the regulatory grit of short-selling special circumstances, it is no surprise that the shares of financial companies, the recent relief rally notwithstanding, are on semi-permanent sale. Other manipulations: the unemployment rate, GDP, and the balance sheets of corporations, pension funds and government agencies which significantly understate liabilities and exaggerate assets and likely future earnings.

Of course, to truly ensure that all faith is lost in the financial superstructure, it is not enough that politicians lie. Corporate executives are also required to be evasive. Happily, there has been no shortage of equivocation there: see, for example, the completeness and transparency of the rolling write-down process as announced by Merrill Lynch over the past twelve months: $5bn on October 5 2007, revised to $7.9bn on October 24, with another $11.5bn on January 17 2008, followed by $6.6bn on April 17, with another $9.4bn on July 18, and another $5.7bn on July 28.

But at least US banking institutions have defenestrated the more obviously guilty accountable parties; their British counterparts are still stuck firmly in denial mode. That points to further stock market losses by the banking convoy of death.

As to the broader equity market, evidence of lower oil prices would doubtless help sentiment. Happily, there is a growing amount of the stuff, and not just the primary trend in the price itself. In a recent letter to the Financial Times, a Mr. John Holmes wrote as follows:

Sir, the peak of every speculative bubble is always marked by some extraordinary event that demonstrates the excesses resulting from that bubble. The news that oil prices have swollen Kuwait’s national coffers so much that they are to invest $132 billion on a new city – the Silk City – and to build an international rail network linking with Damascus, Baghdad, Iran and China is the best sell signal that we could ever see for the oil price.”

Jeff Matthews sees evidence of lower oil prices to come in the cartoon strip of his local newspaper:

Guy: “The Huns are scaling the north wall.”

King: “Prepare the troops for hand-to-hand combat !”

Guy: “Shouldn’t we dump the boiling oil on them ?”

King: “Not at 140 bucks a barrel.”

 

... when Congress is moved to blame the spike in oil on “speculators” in order to cover up their own miserable failings, and a comic strip uses the price of crude oil as a punch line, you know we’re at the end of a cycle.

So the oil market may be on the point of confirming a dramatic softening – but that still leaves the ongoing deterioration in international property markets, banks and consumer spending to contemplate. An environment of widespread deleveraging on the part of financial institutions suggests that investors now anticipating the return of easy profits are likely to be disappointed. There are plenty of cheerleaders forecasting days of plenty – cheaper oil will help the market tone, but it does not cause our very real global economic problems to vanish overnight. Investors still require three attributes: patience, discipline, and a plan.

Related Articles

This article has 12 comments:

  •  
    Jul 31 03:11 PM
    There won't be a dramatic softening in the oil market:instead the world is running out of oil. This is called peak oil, see theoildrum.com. What you will see in oil prices is a pattern of two steps forward, one step back. So gasoline prices go up to $4/gallon then drop back for a few months to $3.50. This is then followed by an increase to maybe $5/gallon, followed by a drop for a few months...then the pattern repeats.
    Reply | Link to Comment
  •  
    Jul 31 03:12 PM
    One step at a time my good man. Let the oil bubble pop (Murti over at Goldman will "suddenly" realize we have more than he said and calls all clear. But not before their prop desk gets into full short mode. They will call in the subprime trading team to capture maximum capital efficiency) and the consumers go wild because they sorta/kinda feel better and we start to work our way back. Next thing to do is make all derivatives mark to market. These two simple things (I know they aren't simple. I'm being facetious) will make us all whole and bright shiny happy people again.
    Reply | Link to Comment
  •  
    Jul 31 03:29 PM
    @PastTense. You couldn't be further from the truth. "Peak oil" is marketing nomenclature developed to validate pain at the pumps. Do you have any idea who Matt Simmons is and what he does for his day job? An world class exercise in conflicts of interest with $billions on the line. Do you realize that his predictions of gas lines, wars and general mayhem have already come and gone. You do realize that Hubberts projection for peak is erroneous as this year will set -- another -- record for all liquids extraction. You do realize that the averaged correlation for all relevant peak oil projections puts global peak somewhere between 2045 and 2065. You do realize that the visual aid of a bell curve is not accurate because there is a precipitous degree in slope at peak which in fact is much more like a plateau.You do realize that the peak oil theory has no intellectual capacity to accept the massive new finds we are stumbling over almost on a record basis. Fields such as the Bakken and Brazil's deep water. You do realize that firms such as Goldman Sachs distort the global supply demand equation to institutional investors to create a false panic in the market as their prop trading desk rakes in unfathomable amounts of money front running the oil trade.

    And finally, you do realize that the incredible amount of brainpower and venture investment from firms like Kleiner Perkins and Khosla Ventures will head off any of this nonsensical Malthusian nonsense. Just look at one investment at Kleiner for direction. EEStor. Note the input from Lockheed Martin. This company has the ability to rewrite the entire global energy paradigm. A serious watershed moment in human history.

    Peak Oil is complete nonsense from a factual standpoint and the "fringe truth" will never materialize because human beings will not lay down and die like the "novelists" predict.
    Reply | Link to Comment
  •  
    Jul 31 06:23 PM
    Oil economic considerations are premised on difficult substitutions for liquid fuel for cars.

    Yet, the true cross-elasticity for gas in the tank is the internet -- telecommuting.

    This is the fastest, cheapest, and cleanest way to eliminate dependence on mid east oil.

    We need to decide if cultural issues are so important that we have to devote most of our national resources to keeping people in their cars so they can drive to a desk downtown.
    Reply | Link to Comment
  •  
    Jul 31 08:17 PM
    annie trust telecommute and do what? financial engineering from home?
    uS needs factorie that produce something. you can't telecomute for that. and all those service jobs is just a joke. the service real production. No real production on real factories - no real jobs
    Reply | Link to Comment
  •  
    Jul 31 11:38 PM
    Dmitri Kashirin - A job that can be done at a desk can be done at any desk. Here is a report by Rand for the US Dept. of Labor describing the labor pool for the next decade or so - the fastest growth area is in "knowledge workers" - I also thought it was interesting that in 2012, the average age of a US worker will be 59.5 y.o.:
    www.rand.org/pubs/mono...

    Of course factory floor jobs require on site workers, although I would query whether there will be alternatives to single individuals driving automobiles.
    Reply | Link to Comment
  •  
    Aug 01 10:05 AM
    People use the phrase socializing losses and privatizing profits as if this is something new. It is socialism. Socialism takes from the many and gives to the few, see USSR through EU/US today. Who the winners are varies, sometimes it is corporations, sometimes political elites, sometimes the middle class, sometimes the lazy.
    Reply | Link to Comment
  •  
    Aug 01 01:21 PM
    "socializing losses and privatizing profits"
    good point huangjin. Except both these actions cause lost revenue to the govt. Their choice is either fiscal policy (taxes) or monetary policy (expanding currency-potential inflation) to recoup.

    Peak oil is BS. Sure, it's a finite resource. Sure supply will eventually dwindle gradually and correspondingly demand destruction will occur. What we're seeing now are not supply and demand forces. It's market trading when prices change this fast. Not that there's anything wrong with that. We will see $2.50/gall gas by election day.

    RE the service economy- "we can't all make a living doing each others laundary." Chinese people ask tourists what we do over here in the USA, because we sure don't make anything from their perspective. One thesis has it that anything of worth originates from the ground, a good argument for the intrinsic value of real estate. Also, service jobs are even easier to off-shore than mfg jobs. My only concern is what will happen when the Chinese decide to spend / cash the IOU's. If you don't owe much to the bank, they own you. If you owe a sizeable portion of the bank, you own them.
    Reply | Link to Comment
  •  
    Aug 02 12:11 AM
    Peak oil has already occurred in the US, and is currently being repeated worldwide. Matt Simmons is not the originator of the idea, but several well respected geologists have confirmed that, it is a fact, at least in the US.
    Reply | Link to Comment
  •  
    Aug 04 07:06 AM
    It's all about energy...and who owns it.

    Did you forget that OPEC is a Cartel and OPEC can limit production.

    As speculators in the Commodity Futures Markets push up the price of ALL commodities, we are seeing higher prices for energy, food, lumber,toilets,coal,et...

    This author ( and others) are wrong when they say that it's only supply and demand. This author is also wrong when he says that speculation has nothing to do with high oil prices.

    Go To:

    www.stopoilspeculation.../

    if you are angry about paying $4.00 for a gallon of gas.

    Also, Congress is now on vacation and Congress has not passed any legislation that forces the Commodity Futures Trading Commission to do it's job properly.

    If you do not know what the CFTC has done to screw you into having to pay more for oil, gasoline, home heating oil and everything else then you should stop listening to analysts at Goldman Sachs and this author and Google Michael Greenberger or read Phil Davis and EDUCATE YOURSELF.

    Don't waste so much time shopping or watching television.

    Here is Greenberger's report....tell your friends too

    www.commerce.senate.go...

    and Ed Wallace's article:

    www.star-telegram.com/...

    Read the info. I have.

    You will find that we have been cheated by investment banks, the CFTC employees, Congress, George Bush and others.

    Disclosure - I am not short anything in any industry and I do not own stocks in any oil or natural gas companies.
    Reply | Link to Comment
  •  
    Aug 04 07:12 AM
    The link to Greenberger's report did not work. I will try again:

    www.commerce.senate.go...
    Reply | Link to Comment
  •  
    Aug 04 07:15 AM
    When you get redirected to the US Senate website, type Michael Greenberger into the search box.

    You will then have a new page where you can access the report.
    Reply | Link to Comment
More Comments on DIA ยป
Top Rated Comment Streams:

Numbers are net rating-

See all Top 100 »
More by Tim Price

Investment Resources
Money Management
Research
Seeking Alpha provides these ads as a service to its leading contributors
Articles on related themes
Market Outlook
European Stocks
Agriculture
Economy