Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
US Presidential Election Forecast Matrix, Stock Market Uncertainty - 29th Oct 20
Stock Market Turning? Look For These Support Levels - 29th Oct 20
Silver: A Conceivable Dead-Cat-Bounce on the Cards - 29th Oct 20
Stocks are Strong but be Aware of this Continuing Pattern - 29th Oct 20
The Most Profitable Way To Play The Gold Boom - 29th Oct 20
Why You Should Hire An Accountant To Complete Your Tax Return - 29th Oct 20
Global Banking: Some Sectors Look as "Precarious as Ever" - 28th Oct 20
Silver Price Minor Dip Possible Before 2nd Major Upleg Starts - 28th Oct 20
�� How to Carve a Simple and Scary Pumpkin Face for Covid Halloween 2020 �� - 28th Oct 20
Gold Price One Last Dip Likely Then Major Upleg to New Highs - 28th Oct 20
Smart Money Is Going All-In On This New Gold Frontier - 28th Oct 20
Gold Stocks Still Correcting - 27th Oct 20
Gold and Crypto: Is This How Charts Look Before A Monetary Collapse? - 27th Oct 20
Silver's Coming Double Trigger Shotgun Price Explosion - 27th Oct 20
The $126 Billion Gold Opportunity in Australia - 27th Oct 20
Tips to Breeze through Your Spanish Classes Online - 27th Oct 20
Try The “Compounding Capital Gains” Strategy Today - 26th Oct 20
UK Coronavirus Broken Test and Trace System, 5 Days for Covid-19 Results! - 26th Oct 20
How the Coronavirus is Exacerbating Global Inequality, Hunger - 26th Oct 20
The Top Gold Stock for 2021 - 26th Oct 20
Corporate Earnings Season: Here's What Stock Investors Need to Know - 25th Oct 20
�� Halloween 2020 TESCO Supermarkes Shoppers Covid Panic Buying! �� - 25th Oct 20
Three Unstoppable Forces Set to Drive Silver Prices - 25th Oct 20
Car Insurance And Insurance Claims and Options - 25th Oct 20
Best Pressure Washer Review - Karcher K7 Full Control Unboxing - 25th Oct 20
Further Gold Price Pressure as the USDX Is About to Rally - 23rd Oct 20
Nasdaq Retests 11,735 Support - 23rd Oct 20
America’s Political and Financial Institutions Are Broken - 23rd Oct 20
Sayonara U.S.A. - 23rd Oct 20
Economic Contractions Overshadow ASEAN-6 Recovery - 23rd Oct 20
Doji Clusters Show Clear Support Ranges for Stock Market S&P500 Index - 23rd Oct 20
Silver Market - 22nd Oct 20
Goldman Sachs Likes Silver; Trump Wants Even More Stimulus - 22nd Oct 20
Hacking Wall Street to Close the Wealth Gap - 22nd Oct 20
Natural Gas/UNG Stepping GAP Patterns Suggest Pending Upside Breakout - 22nd Oct 20 -
NVIDIA CANCELS RTX 3070 16b RTX 3080 20gb GPU's Due to GDDR6X Memory Supply Issues - 22nd Oct 20
Zafira B Leaking Water Under Car - 22nd Oct 20
The Copper/Gold Ratio Would Change the Macro - 21st Oct 20
Are We Entering Stagflation That Will Boost Gold Price - 21st Oct 20
Crude Oil Price Stalls In Resistance Zone - 21st Oct 20
High-Profile Billionaire Gives Urgent Message to Stock Investors - 21st Oct 20
What's it Like to be a Budgie - Unique in a Cage 4K VR 360 - 21st Oct 20
Auto Trading: A Beginner Guide to Automation in Forex - 21st Oct 20
Gold Price Trend Forecast into 2021, Is Intel Dying?, Can Trump Win 2020? - 20th Oct 20
Gold Asks Where Is The Inflation - 20th Oct 20
Last Chance for this FREE Online Trading Course Worth $129 value - 20th Oct 20
More Short-term Stock Market Weakness Ahead - 20th Oct 20
Dell S3220DGF 32 Inch Curved Gaming Monitor Unboxing and Stand Assembly and Range of Movement - 20th Oct 20
Best Retail POS Software In Australia - 20th Oct 20
From Recession to an Ever-Deeper One - 19th Oct 20
Wales Closes Border With England, Stranded Motorists on Severn Bridge? Covid-19 Police Road Blocks - 19th Oct 20
Commodity Bull Market Cycle Starts with Euro and Dollar Trend Changes - 19th Oct 20
Stock Market Melt-Up Triggered a Short Squeeze In The NASDAQ and a Utilities Breakout - 19th Oct 20
Silver is Like Gold on Steroids - 19th Oct 20
Countdown to Election Mediocrity: Why Gold and Silver Can Protect Your Wealth - 19th Oct 20
“Hypergrowth” Is Spilling Into the Stock Market Like Never Before - 19th Oct 20
Is Oculus Quest 2 Good Upgrade for Samsung Gear VR Users? - 19th Oct 20
Low US Dollar Risky for Gold - 17th Oct 20
US 2020 Election: Are American's ready for Trump 2nd Term Twilight Zone Presidency? - 17th Oct 20
Custom Ryzen 5950x, 5900x, 5800x , RTX 3080, 3070 64gb DDR4 Gaming PC System Build Specs - 17th Oct 20
Gold Jumps above $1,900 Again - 16th Oct 20
US Economic Recovery Is in Need of Some Rescue - 16th Oct 20
Why You Should Focus on Growth Stocks Today - 16th Oct 20
Why Now is BEST Time to Upgrade Your PC System for Years - Ryzen 5000 CPUs, Nvidia RTX 3000 GPU's - 16th Oct 20
Beware of Trump’s October (November?) Election Surprise - 15th Oct 20
Stock Market SPY Retesting Critical Resistance From Fibonacci Price Amplitude Arc - 15th Oct 20
Fed Chairman Begs Congress to Stimulate Beleaguered US Economy - 15th Oct 20
Is Gold Market Going Back Into the 1970s? - 15th Oct 20
Things you Should know before Trade Cryptos - 15th Oct 20
Gold and Silver Price Ready For Another Rally Attempt - 14th Oct 20
Do Low Interest Rates Mean Higher Stocks? Not so Fast… - 14th Oct 20
US Debt Is Going Up but Leaving GDP Behind - 14th Oct 20
Dell S3220DGF 31.5 Inch VA Gaming Monitor Amazon Prime Day Bargain Price! But WIll it Get Delivered? - 14th Oct 20
Karcher K7 Pressure Washer Amazon Prime Day Bargain 51% Discount! - 14th Oct 20
Top Strategies Day Traders Adopt - 14th Oct 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

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

6 Critical Money Making Rules