Bear market trap
PIM of SPAIN | May 21, 2009 at 02:06 amby
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"Look, things seem a lot better now than they did back in October, I think we really hit bottom towards the end of last year." commented a radio news reporter. “Things are looking better, not yet good, but by all means "less bad" than was expected”. Is expressed by another.
Reality is that jobless numbers still are rising and foreclosure filings are at a record high. While on the Internet is read; "Most homeowners think bottom is reached." and "Bank crisis in US could last to 2013," is a headline from Reuters, followed by. “Banks are improving performances, no major bank failures are expected. The financial sector will come back”.
All these comments appear true but it’s just bogus, because the feds are combating this downturn with far more money than usual, at least 10 times more than typical. This in fact disguises reality and is drawing even more people into this trap of belief. The longer it lasts the more people will believe that all is over.
For the sake of good order: to recall why we still have a financial crisis and despite all this hypocrisy this is a real bear market trap caused by just one problem called DEBT. This debt was built up during a quarter of a century to levels that even President Obama says are "unsustainable." People have too much debt; student debt, credit card debt, private equity debt, mortgage debt, and every other kind of imaginable debt. As long an economy is expanding, credit markets are able to offer more debt, because there are no dangerous setbacks. Creating a ‘debt-chain’ in which one debt is to be paid off by taking on another ‘greater’ debt. Houses can be refinanced because their values have increased. But when the economic cycle turns, as is now the case, credit tightens so people cannot refinance anymore by lending more money on their property, they discover that their collateral ‘house’ is worth less than before, real interest rates are higher, while lenders are not interested to lend money anyhow.
All that debt built up during the last quarter century is the greatest problem altogether. Because first it has to be paid down to the point where it isn't a problem anymore. Which implicates that people have to cut back on their spending. As long as the amount of debt is growing smaller, interest rates are rising, asset prices are falling, in short people do have more debt than they can carry; consequently sales, profits, and stock prices are falling too. Conclusion so far there is no condition whatsoever indicating a new upswing in the market.
The reduction of debt is a process that requires a long time, since it takes more time to pay off debt than to run it up. People first have to earn the money before being able to pay down their debt. It still is harder to earn money in a declining economy than it is when the economy is booming. People have to change their buying behaviour this could add up to many years, most likely up to decennia before debt levels are becoming sustainable. Meanwhile the approx 15 trillion earmarked for the big bailout and stimulus programs are not very supportive for improvement either. This does make the economic climate for a recovery even worse, for the simple reason that financial mistakes can’t be corrected by bailing them out. Subsidizing money can’t turn around bad businesses, because by borrowing more money, debt can’t be reduced.
Instead of forcing people to correct their mistakes made in the bubble era, the government is doing all it can to let continue bad businesses and keep zombie banks alive. The more money the feds put in, the slower the economy will be able to correct itself from the made errors and adjust to new realities.
Every dollar used to support Wall Street must come from somewhere else. A headline in the paper wrote; "Rich get richer on Wall Street." That’s true, instead of going broke and firing the mismanaging executives, as should have been done, the government steps in with more money. Not only to keep the banks in business under same management, but also to pay those managers even bigger bonuses.
The economy isn’t yet working correctly. People don't know which projects will work and which ones won't. Falling asset prices don’t support lending. No one takes a chance on lending money when the collateral might disappear as snow in the sun. Consequently, new lending is unlikely until the process of debt adjustment and restructuring is completed, before a real recovery can set-in.
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