Tuesday, March 18, 2014

U.S. Stock Market: A Government Sponsored Enterprise

     One may wonder why, with the tinder box in Ukraine and the free falling economy at home, the stock market continues to reach new highs. This question can be largely answered by examining the behavior of Fannie Mae and Freddie Mac's soaring share prices just before the financial crisis of 2008. But even years prior to the crisis, their balance sheets were almost entirely constructed of toxic assets backed by sub-prime mortgage loans they bought from the banks who were forced by government authorities like the Justice Department to originate, knowing they would never be paid back.
     If you have not guessed by now, the thesis of this post is that the stock market has become a Government Sponsored Enterprise, somewhat in the mold of Fannie and Freddie. Partial evidence of my theory is something I read today, the theme of which has become the dominant driver of the market over the last five years. The piece I read seriously considered how the Federal Reserve could prop up the market if the situation in Ukraine escalated. We have long ago abandon a time in this country when the financial markets were coupled to the economic health of the nation. Recently it has become clear that the markets see themselves as insulated from the economy. Because no matter what happens, Big Momma Fed will be there with her trillions of monopoly money to pour into the empty hole of the market.
       More evidence that the market has become a prattling child grasping tightly to the apron strings of the Federal Reserve, is the anticipation of new Federal Reserve Chairman Janet Yellen's forthcoming comments this Wednesday. The direction of the market being dependent upon what some government official says or does not say is a sign of an unhealthy relationship between the markets and government. There was a time when the market rose or fell based on hard economic data, not based on some artificial solace provided by a shill of the administration.
     Barack Obama, shortly after he became president, said he wanted to "even out the markets so there were no busts or booms." When the market does not reflect economic reality in this way, it loses its credibility and becomes a buffoonish instrument of the administration. As such, the market becomes impervious to reality because it lives in a manufactured world where Momma Fed is ready on the pump handle to flood it with trillions of created-out-of-thin-air dollars.
     The problem with this approach, besides the obvious hyper-inflation that is bound to come, is that government has removed the natural fear from the market. The two emotions that run the market are fear and greed. Each emotion keeps the other in check when their counterpart begins to dominate. When government interferes and upsets this natural balance, greed in the market becomes out of control and causes a much bigger fear-induced crash when the Fed can no longer mask and veil the very real and fearful aspects of the economy.
     The government sponsored enterprise of the stock market is bound for failure like any other private sector business controlled by government. The reason is simple: Those who populate government in general, and especially those who populate it specifically in the current administration, have the hubris to think they can run private enterprise, coupled with the severe ignorance as a result of never having worked in the industries they control. This leads to spectacular failure like the one caused by Fannie Mae and Freddie Mac, which were at the epicenter of the crisis of 2008. Of course those in government that cause the crash are never held responsible, in fact their disastrous economic theories and ignorant policies are recycled and repackaged as some new "brilliance" in the future that is bound to start the cycle all over again, and it is the average American who pays the price for such foolishness.

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