Tuesday, August 2, 2011


There are some stunned people this evening who were jubilant that the House and Senate and President came together on a deal that would hopefully avert default. They were expecting that the stock market would rise and everyone would be cheerful about the wonderful new future we faced.

But -- the market tanked. It lost 265 points, over 2%, for the day. This may seem counterintuitive to government figures, public employees, and newscasters, but there is a very logical reason for what happened. Unless I have misread what appears to be an obvious reaction, I predict that the next few days may show that it will continue to happen. In fact, as I write this, the Asian markets (on which the sun has risen and which are already in tomorrowland)are down over 2% -- a harbinger of tomorrow's Wall Street adventure.

What the Washington Klutzes have done over the past several decades has been the steady erosion of the worth of the US dollar. In order to score political points by artificially generating an "economic recovery", the gummint, through the evil genies at the Federal Reserve, has held interest rates at levels that are artificially low. My question for some time has been, "If it costs nearly nothing to borrow a dollar, then what is that dollar really worth?"

The panic over possible default was engineered by the Administration, the Fed, and the lapdog press, with the overt participation of the folks who make their living through usury -- the bond traders. In the last hours of the panic, there were those who moaned that if the US gummints credit limit was not increased, the gummint would not be able to pay its creditors.

That fiction ignored the fact that the President, via the Secretary of the Treasury, has the responsibility of prioritizing spending. He has put a high priority lately on bombing Libya, but such a low priority on such things as Social Security and Medicare as to threaten that those latter checks might not go out if he didn't get his way.

The usurious bond traders were particularly worried. If the credit limit were capped at the current rate, there could be no new borrowing. Because they make their money on the commissions from bond sales, capping the credit limit might cap their incomes. They needed an influx of new borrowing.

There are unintended consequences to every evil under the sun. The US dollar, already weakened by the stupid Quantitative Easing policies of the Fed, is about to get even weaker. Currency inflation has one side effect that the markets understand, and that is, that when money is devalued through printing, interest rates must rise.

When interest rates are held artificially low, and stock dividend yields outpace bond interest, stock prices rise due to higher demand. That was the scenario during the rounds of Quantitative Easing, and the reason for the interest in the stock market over the past year. I expect that this scenario is ending. Cheap money is risky money. Risk-takers demand higher compensation for higher risk, and interest rates are about to rise.

Classically, when interest rates rise, and their rate of return begins to exceed the rate of return for stocks, the market flees stocks and buys bonds. When savvy investors realize that everyone else in the marketplace will sooner or later get the same idea, panic selling sets in. Nobody wants to be the last guy to trade before the market hits bottom.

I have been wrong before, and am willing to concede that I may not be entirely on the right track. I will, however, predict that the stock market is in for a decline to a sustainable level, at say around 8500, maybe a little lower. That will be caused by an expectation that cheaper money will be seen as higher risk with higher returns, with the gummint selling economic snake oil in an effort to charm bond buyers. This will lead to a drawdown in capital invested in plans to expand operations and payrolls, with an accompanying depression of the employment figures.

The American people elected new Representatives who promised to hold to Tea Party principles. Instead, those Representatives appear to have been eating the Washington Establishment's magic mushrooms.

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