February 08, 2010

Wile E. Updates His Dow Projections

Yes, yes, I know. It was my finest hour, when I predicted a Dow fall to 9,100 when the NYSE was cooking along at about 14,000. Yet Krugman got the Nobel for Economics. Go figure. What's he ever been right about? Well, I won the Nobel Prize of My Mind, which, unfortunately, does not come with a large honorarium and a trip to Stockholm.

Those were the halcyon days, when equipped solely with the back of an envelope (which had once enclosed a late notice from PG&E) and a dull pencil, and unable to find the novel I was reading and yet still needing to...well, never mind. Such details are extraneous. The Swimmer Theorem is simplicity itself, exemplifying the elegant Occamesque eschewal of all frivolous detail. The American "economy" was based on 70% consumer spending, as in, I will mow your lawn if you will wash my car. Or we can all do each other's laundry. The beauty of a "service" economy is that it doesn't really matter what pointless activities we occupy ourselves with. We're not building wealth. That's what the countries do who have the jobs all the multinational corporations in America sent to them so that what wealth remained could be concentrated in fewer and fewer hands, which swag could be used to buy Congress to keep the tax code and "free trade" agreements amenable, and the Out-of-Work Artists Formerly Known as the Middle Class could go straight to Hell, do not pass Go, do not collect your $200 Social Security payment, because the system is bust-o. A moment's reflection will also tell you that the "subprime" crisis (which can now be characterized more generally as the Debt Depression) really was the real estate and credit card (and auto loan & student loan) equivalent of the same offshoring principle; that is, by securitizing everyone's debt, the same cabal of the super wealthy could control this remaining American "industry" (i.e., going in hock up to your eyeballs). This is why, of course, no one on Wall Street pays any price whatsoever for the greatest swindle in history; it's what Washington wanted them to do (gee, let's think - why again are the Chinese and Japanese getting testy? Couldn't be those mountains of fraudulent Fannie & Freddie debt instruments they bought, could it? That can't be it. That would be our fault. So it must be Barack palling around with the Dalai Lama.)

Mondays - I just love 'em. Anyway, back to the Theorem. The Federal Reserve is obviously tiring of manipulating the stock market, so the Dow, obedient to the laws of gravity, is settling back to a more sustainable level below 10,000. Washington couldn't run that con forever, and they never planned to do so. Touching in their naivete, and perhaps motivated by a bad conscience secondary to their enabling of our destruction out here in the land of strip malls and multiplexes, far, far from the Caffe Milano in Georgetown, Congress, the Fed & the Treasury operated on the idea that this Recession was just another cyclical blip, instead of a structural turning point in American economic history. To wit, we're not coming out of this for a very long time. Nevertheless, the Fed and the White House bought up the entire mortgage industry in the United States by taking all of the Fannie & Freddie guarantees onto the Fed's balance sheet or by making the Congressional sponsorship of the GSE's explicit (on Christmas Eve, so no one would notice), to the tune of $6 trillion (which amount, however, is not carried as part of the current deficit, although it is a moral certainty that some significant fraction of this load will go bad over the next few years). Who's got time for reality anymore?

But where was I. Okay, so the Dow is sinking like an anvil in deep water once again. The downward pressure must be considerable to overcome the Fed's habitual trading of stock market futures through its New York prop desk. When you consider that the Fed can, through its prestidigitalization (ah, why do I give this stuff away?) make money up at will, financial g-forces must be Jupiter-like to overcome the levitation. Maybe they're starting to realize that we're just going to have to face it: the equity's gone, everywhere in this country.

So if you'll recall, the original Theorem held that the American peasantry were really only capable of fueling their 70% share of consumer economy to about half the level suggested by the GDP. The rest was borrowing, and a lot of that from mortgage re-fi and lines of credit. Well, we can't do that anymore, now can we? So simple math told you that we should see a fall of 35% from 14,000 to 9,100, at which point the Fed went to work. But as suggested by analysts here at the Walden think tank, there would also be a knock-on effect caused by the results of the general fall-off in economic activity. Rather than measuring this effect through the use of the GDP (another gimmicked number), it probably makes more sense to use the delta in the U-6 unemployment figure, which since the fall began has soared about10 percentage points to its current 17%. That would suggest about 900 points or so, down to 8,000.

Nice and round. Such a number perhaps represents the residual wealth of the American populace. It is about a 43% drop from peak to trough, and perhaps it will apply across the board: houses, commercial real estate, equity stocks. This will assure that the big banks will eventually go broke despite all the efforts to shield them from the effects of realistic accounting, such as actually marking to market all the worthless mortgage-backed securities still on their books.

If Greece (and the other members of the PIIGS) can teach us anything, besides the calculations of force necessary to move something up an inclined plane, or figuring the square on the hypotenuse, it might be that all this additional sovereign debt, in the not-very-long run, is simply going to make a terrible problem disastrous.

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