Today's Three-Pronged Nexus
Principles of the Stock Market

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Have You Seen This?

Have You Seen This?

Monday, April 7th, 2008:  Watching golf over the weekend, I know it’s so boring to many, I was amazed at the gorgeous setting of Punta Espada Golf Club, the Jack Nicklaus Course in the Dominican Republic.  The water was blue & beautiful, the waves strong.  If I get the chance, & I may, I want to play this course. THE BIG PICTURE 

Friends have asked me, angrily, why bail out some big financial firm like Bear Stearns, one of those big investment banks, which got us into the current financial crisis in the first place?  My answer ran this way:

 “The US Federal Reserve Bank came into being after the Bank Panic of 1907.  It now has a dual mandate, going back to a law change in 1977, after previously operating on a single mandate, like European central bankers still do; mandated to keep prices stable.  Our Fed is now supposed to:  (1) keep prices stable, fight inflation or deflation AND (2) support economic growth, almost, but not quite, diametrically opposed objectives.  This current US and global credit freeze up and resulting crisis came about because of competitive Wall Street pressures to garner maximum profits and after a long run of "unfettered capitalism," as even Republican presidential candidate John McCain admits.  Going to excess is normal in a capitalistic economy, risk being way under-assessed in the latter stages of any bull market.  That’s why the prudent investor takes some money off the table after stocks rise for an extended period of time; the recently deceased bull market running from October 2002 to October 2007, an inordinately long lived bull market.  Any capitalistic economy is inherently cyclical.  Looking back, there were such lucrative fees available from securitizing US mortgages that everyone in that food chain, the borrowers, mortgage brokers, money center banks, investment banks, etc. all encouraged each other and made the whole process easy to perpetuate.  It blew up after so much profit caused huge overbuilding and thus house prices rising way too high from most everyone to afford.  Now this same process is reversing itself, unwinding.  Part of this deleveraging process is cutting back on far too heavily leveraged institutional investment portfolios, and leaving investors, globally, in today’s newly globalized world, stuck with huge billion dollar losses.  At the same time, the American consumer is about spent out after so many years of stagnant wages, work load increases, job losses, health care cost increases, upward real estate reassessments, etc.  Now US house prices are falling, effectively shutting off consumers major, large and oh-so-easy “ATM-like” source of buying power even while day to day expenses are rising; energy is at record levels, food prices are soaring and Chinese import prices have risen for the last eight months in a row.   Schwartz View:  In other words, we now (1) have the worse financial freeze up since the Great Depression, (2) a financially stressed out US consumer and (3) problematic inflation for the first time in 25 years.  I ask you, what would you have done if you were Federal Reserve Chairman Ben Bernanke with a high possibility of systemic risk rippling outward uncontrollably and dominoing through the US and then global financial system if you let Bear Stearns fail, with this three-pronged nexus as the financial and economic backdrop?”


Posted 04-07-2008 8:15 AM by Richard Schwartz
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