Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
USDT Ponzi Scheme FINAL WARNING To EXIT Before Tether Collapses Crypto Exchange Markets - 22nd Jun 21
Stock Market Correction Starting - 22nd Jun 21
This Green SuperFuel Could Change Everything For the $14 Trillion Shipping Industry - 22nd Jun 21
Virgin Media Fibre Broadband Installation - What to Expect, Quality of Wiring, Service etc. - 21st Jun 21
Feel the Inflationary Heartbeat - 21st Jun 21
The Green Superfuel That Could Disrupt Global Energy Markers - 21st Jun 21
How Binance SCAMs Crypto Traders with UP DOWN Coins, Futures, Options and Leverage - Don't Get Bogdanoffed! - 20th Jun 21
Smart Money Accumulating Physical Silver Ahead Of New Basel III Regulations And Price Explosion To $44 - 20th Jun 21
Rambling Fed Triggers Gold/Silver Correction: Are Investors Being Duped? - 20th Jun 21
Gold: The Fed Wreaked Havoc on the Precious Metals - 20th Jun 21
Investing in the Tulip Crypto Mania 2021 - 19th Jun 21
Here’s Why Historic US Housing Market Boom Can Continue - 19th Jun 21
Cryptos: What the "Bizarre" World of Non-Fungible Tokens May Be Signaling - 19th Jun 21
Hyperinflationary Expectations: Reflections on Cryptocurrency and the Markets - 19th Jun 21
Gold Prices Investors beat Central Banks and Jewelry, as having the most Impact - 18th Jun 21
Has the Dust Settled After Fed Day? Not Just Yet - 18th Jun 21
Gold Asks: Will the Economic Boom Continue? - 18th Jun 21
STABLE COINS PONZI Crypto SCAM WARNING! Iron Titan CRASH to ZERO! Exit USDT While You Can! - 18th Jun 21
FOMC Surprise Takeaways - 18th Jun 21
Youtube Upload Stuck at 0% QUICK FIXES Solutions Tutorial - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations Video - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations and Trend Analysis into Market Correction - 17th Jun 21
Stocks, Gold, Silver Markets Inflation Tipping Point - 17th Jun 21
Letting Yourself Relax with Activities That You Might Not Have Considered - 17th Jun 21
RAMPANT MONEY PRINTING INFLATION BIG PICTURE! - 16th Jun 21
The Federal Reserve and Inflation - 16th Jun 21
Inflation Soars 5%! Will Gold Skyrocket? - 16th Jun 21
Stock Market Sentiment Speaks: Inflation Is For Fools - 16th Jun 21
Four News Events That Could Drive Gold Bullion Demand - 16th Jun 21
5 ways that crypto is changing the face of online casinos - 16th Jun 21
Transitory Inflation Debate - 15th Jun 21
USDX: The Cleanest Shirt Among the Dirty Laundry - 15th Jun 21
Inflation and Stock Market SPX Record Highs. PPI, FOMC Meeting in Focus - 15th Jun 21
Stock Market SPX 4310 Right Around the Corner! - 15th Jun 21
AI Stocks Strength vs Weakness - Why Selling Google or Facebook is a Big Mistake! - 14th Jun 21
The Bitcoin Crime Wave Hits - 14th Jun 21
Gold Time for Consolidation and Lower Volatility - 14th Jun 21
More Banks & Investors Are NOT Believing Fed Propaganda - 14th Jun 21
Market Inflation Bets – Squaring or Not - 14th Jun 21
Is Gold Really an Inflation Hedge? - 14th Jun 21
The FED Holds the Market. How Long Will It Last? - 14th Jun 21
Coinbase vs Binance for Bitcoin, Ethereum Crypto Trading & Investing During Bear Market 2021 - 11th Jun 21
Gold Price $4000 – Insurance, A Hedge, An Investment - 11th Jun 21
What Drives Gold Prices? (Don't Say "the Fed!") - 11th Jun 21
Why You Need to Buy and Hold Gold Now - 11th Jun 21
Big Pharma Is Back! Biotech Skyrockets On Biogen’s New Alzheimer Drug Approval - 11th Jun 21
Top 5 AI Tech Stocks Trend Analysis, Buying Levels, Ratings and Valuations - 10th Jun 21
Gold’s Inflation Utility - 10th Jun 21
The Fuel Of The Future That’s 9 Times More Efficient Than Lithium - 10th Jun 21
Challenges facing the law industry in 2021 - 10th Jun 21
SELL USDT Tether Before Ponzi Scheme Implodes Triggering 90% Bitcoin CRASH in Cryptos Lehman Bros - 9th Jun 21
Stock Market Sentiment Speaks: Prepare For Volatility - 9th Jun 21
Gold Mining Stocks: Which Door Will Investors Choose? - 9th Jun 21
Fed ‘Taper’ Talk Is Back: Will a Tantrum Follow? - 9th Jun 21
Scientists Discover New Renewable Fuel 3 Times More Powerful Than Gasoline - 9th Jun 21
How do I Choose an Online Trading Broker? - 9th Jun 21
Fed’s Tools are Broken - 8th Jun 21
Stock Market Approaching an Intermediate peak! - 8th Jun 21
Could This Household Chemical Become The Superfuel Of The Future? - 8th Jun 21
The Return of Inflation. Can Gold Withstand the Dark Side? - 7th Jun 21
Why "Trouble is Brewing" for the U.S. Housing Market - 7th Jun 21
Stock Market Volatility Crash Course (VIX vs VVIX) – Learn How to Profit From Volatility - 7th Jun 21
Computer Vision Is Like Investing in the Internet in the ‘90s - 7th Jun 21
MAPLINS - Sheffield Down Memory Lane, Before the Shop Closed its Doors for the Last Time - 7th Jun 21
Wire Brush vs Block Paving Driveway Weeds - How Much Work, Nest Way to Kill Weeds? - 7th Jun 21
When Markets Get Scared and Reverse - 7th Jun 21
Is A New Superfuel About To Take Over Energy Markets? - 7th Jun 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

U.S. Debt Classification Game is Over

Politics / US Debt Aug 14, 2011 - 01:20 PM GMT

By: Fred_Sheehan

Politics

Best Financial Markets Analysis ArticleStandard & Poor's downgrade of the United States Treasury Department is a harbinger of changing times. The institutional mind has been trained to operate within the framework of the Capital Asset Pricing Model (CAPM). The CAPM is a formula, designed by professors, that assigns assets to distinct and simple categories. It filled a need when the investment management industry drew in the masses. Not, in this case, the mass of investors, but the mass of so-called investment professionals, that include consultants to pension plans, endowments, and foundations. Most of the well-compensated consultants have little understanding of investing, so substitute vocabulary for thought. The same is true of the professors who hand each other Nobel Prizes and collect seven-figure consulting fees for pontificating.


In the October 2002, issue of Marc Faber's Gloom, Boom and Doom Report, I wrote an essay about the Capital Asset Pricing Model and its companions (e.g., efficient markets), that doused the homogenized investment industry which had contributed to the then-current consequence (in October 2002) of a runaway housing mania. Quoting from that 9,000-word dirge: "Indexing is an obvious conclusion to efficient markets. Since companies do not matter, the asset class is all. Indexes are also practical. We all have some idea of what's going on today when we hear that the Dow is down 200 points. From that rudimentary average have been added the Standard & Poor's 500, the Russell 1000, 2000, and 3000. Dozens of offspring met the demand for ever more microscopically defined asset classes that fill the mauve, turquoise, and magenta slices of the consultants' pie charts."

The CAPM includes a "risk-free rate of return." The risk-free asset is, in its simple form, a United States Treasury bill, which has more recently been noted for its "return-free risk." Both in theory and in fact, Standard & Poor's downgrade of the United States from AAA to AA+ is another death rattle for the CAPM. (The downgrade itself has little real meaning, aside from its influence on minds.) This action foreshadows the declassification of assets according to such dreary concoctions as "mid-cap growth," comparative asset benchmarks, and the hierarchy of asset classes that equate higher return with higher risk (e.g., cash, bonds, stocks).

There is also the much larger problem of constructing an asset pecking order with rigged asset returns and yields. The market rate for Treasury bills is not zero. The coming dislocation that institutional and retail investors face is, to most if not all, incomprehensible. Consider the reconstruction of Scarlet O'Hara's Capital Asset Pricing Model after 1860. She discovered what can happen to chimerical fortunes built on the backs of government-fixed, zero-percent, risk-free rates.

The authorized hierarchy is a reason that Treasury yields fell after Timothy Geithner was downgraded on August 5, 2011. Europeans peering over the precipice owe professors and the (so-called) investment professionals - in reality, they are all a bunch of bureaucrats - a kick in the behind for their simplifications. European banks are not required to allocate tier 1 capital against government bonds since sovereign debt is risk-free. So, they bought like there was no tomorrow. Tomorrow has arrived and European banks are furiously ridding themselves of Greek, Portuguese, Italian, French - and anything else that isn't German - sovereign bonds (so, risk-free!!!) that have left them on (or over) the brink of insolvency.

The classification game is finished. In these waning hours of western civilization, gold is safer than government bonds. It also has much higher return possibilities than the unlimited supply of 0.001%, 10-year Geithners - take that, CAPM! Many institutions will sink, including governments. Sovereignty is not what it used to be. Some of the universities where highly decorated professors teach will cease to exist. This is a deleveraging world. It does not conform to the categories. Periodic bursts of insight, such as market behavior of the past two weeks, are preceded by months of mental hibernation.

Looking at that October 2002 diatribe in the Gloom, Boom and Doom Report, probably for the first time since I wrote it, brings to mind all the frauds - central, commercial, and investment bankers, in particular - who claim: "We never saw it coming." The two most recent Federal Reserve Chairmen, Greenspan and Bernanke, have most adamantly insisted, during sworn testimony, that not only did they not see "it" coming, but also, that nobody - yes, nobody - could have seen the credit bubble before it burst.

There were many readers of the October, 2002 issue of the Gloom, Boom, and Doom Report who had already identified the housing bubble. Telephone calls and emails came from all points of the compass. They saw it coming in Hong Kong, London and Madrid, but not at the Fed. Quoting myself from the 2002 essay (this is inevitably an instance of self-promotion, but, inseparable from another attempt to expose these mental and moral midgets):

"Most people who have seen the Internet bubble inflate and burst, who have seen the Nasdaq bubble inflate and burst, do not recognize, even though similar characteristics and atmosphere surround them, that the U.S. real estate market is a credit bubble (of which the stock market bubble was a sibling) and it is living on borrowed time."

"America is broke. We could really stop right here. For an investor, a helpful rule-of-thumb is to own real money (cash, gold, a company trading at its cash value) and squeeze debt-dependent conglomerations until they gag and choke."

I wrote several pages about the then - October, 2002 - obvious housing and credit bubble. Following is one paragraph:

"There never has been a time, since World War II, when homeowners have held less equity in their residences than they do today (about 55%). Is 'homeowner' a dated description? There is an incredibly well tuned mechanism at work here. The savings rate of individuals fell to zero a couple of years back. The ready reason was the stock market -- who needed to save? That money lost, the Average Joe tapped his home equity line. This is unfortunate; a chance to regain his financial solvency is lost. As Nicholas Retsinas of the Center of Housing Studies at Harvard noted, "With real-estate prices up, you would think that Americans would be rolling in home equity. But as fast as they lay hands on it, they are borrowing it out." Not only is this a source of credit, but also the interest rate structure is so low and the borrowing terms so aggressively profligate (loans of 120% of appraised value are hot, Fannie Mae and Wells Fargo have restrained themselves at 107%, interest-only loans for the first 15 years are a big hit) and so flagrantly unscrupulous (the Philadelphia Inquirer reported of brokers tracking down more aggressive appraisers) that the village idiot is living a very princely existence. (Need it be said that buying on infinite margin, house prices have risen according to a structure that might be called the home carry-trade?)"

I was already trying to expose the most destructive American who has ever lived. An effort, I might add, that was a waste of time:

"Greenspan is still talking about the New Era producing miraculous leaps in the timeliness of information, yet he couldn't tell there was a bubble when the Nasdaq traded at a 400:1 price-to-earnings multiple."

"'What Greenspan says is what the market does.' That eight-word proposition that so many believed was all they cared to know. Now, a growing number have second thoughts. This may have been what prompted him to deliver what has become known as his "Jackson Hole Speech" on August 30 [2002]. He claims there is no way he could have seen a bubble coming, seen it when it was here, or done anything about it even if it cuddled up beside him and offered to buy lunch. He claims he couldn't have known about a bubble since that knowledge is available 'only in history books and musty archives.' What are we to make of that? Maybe, bred in a republic, he is confused about his [then recent] British knighthood and thinks it requires him to play the role of court jester. Why hasn't some politician grilled him, at least to evaluate his mental faculties? Maybe they fear the precarious financial state of the union is positively correlated to our confidence in the head of the Fed. To rant now may cause real capitulation and a liquidation of over leveraged and non-performing assets. (Compared to a shoe factory, a new 6,000-square-foot house is not all that productive. It is an asset that fills up previously empty air.)"

Even in 2002, the Most Destructive American - who still appears on the Sunday-morning talk shows, still enjoys periodic love-ins with Maria on CNBC (subsidiary network to NBC, where Greenspan's wife pulls strings), continues to write tripe in the Financial Times, has read (so-called) academic papers (thus validating his importance) at the Brookings Institute and Counsel of Foreign Relations - was working hand-in-hand with the housing industry:

"In other words, chaotic lending and borrowing reigns, although few see it as such. We have it on the authority of David Seiders, Chief Economist of the National Association of Home Builders, whose stentorian late-July blast comforted the wary: 'The time has come to put this issue to rest. The nations [sic] home builders have said it, the [r]ealtors have said it, and Alan Greenspan has said it once again, in no uncertain terms: there is no such thing as a current or impending house price bubble.'" It is an odd feeling to correct my grammar nine years later. Why didn't you catch that, Andrea? (Andrea was my top-notch assistant who proofread countless tirades against empty suits and on behalf of gold. If you are looking for someone with such talents, please let me know.)

The following two extracts are a warning of how faith-based investors continue to think today:

"[Greenspan] sought... adulation like the celebrities who grace the covers of People magazine. He filled the role of fashion model to perfection. He was known for what he was rather than what he did. He was the man who forever moaned incantations to the New Era and New Economy, and he drew legions of followers, agape as we were to this new technology, of which we did not understand the actual importance, but he unfailingly did."

"[Greenspan] met a willing audience, one that was quite content to believe his testimony even though his speeches were nearly impossible to understand, even by the most astute Fed watchers. He speaks in hieroglyphic abstractions. Common sense should have told his legions of admirers to act prudently, but that was not the mood of times. As Samuel Johnson reflected, 'In time some particular train of ideas fixes the attention, all other intellectual gratifications are rejected, the mind, in weariness or leisure, recurs constantly to the favorite conception, and feasts on the luscious falsehood whenever she is offended with the bitterness of the truth.'"

By Frederick Sheehan

See his blog at www.aucontrarian.com

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, November 2009).

© 2011 Copyright Frederick Sheehan - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in