Wall Street stocks hit fresh record highs again - 14-Jul-07 - Generational Dynamics

Wall Street investors now believe that they're completely immune to everything. It's like they believe that they've taken some injection that innoculates them against any stock market loss whatsoever.

On Monday, Citigroup’s chief executive, Charles O. Prince, says that he's still going full steam ahead with credit and leveraged deals. He said, "As long as the music is playing, you’ve got to get up and dance. We’re still dancing."

A few months ago, I was writing about China's skyrocketing trade surplus and the Shanghai stock market bubble. I said that American investors were showing at least a tiny bit of sense because they do have some kind of national memory of the 1929 crash and the Great Depression of the 1930s. I wrote that "China is different. The Chinese people apparently have NO IDEA what's about to happen to them."

Well, I really have to take that back. Wall Street investors are now fully as manic as Chinese investors. Wall Street investors, like Chinese investors, are running as fast as they can, following each other like lemmings as they head for the edge of the cliff. (Ironically, the story about lemmings following each other off a cliff isn't true; lemmings are smart enough not to do that. It's only today's investors who are so stupid that they do it.)

As I've said many times, once the crash occurs people will be looking around for other people to blame. I may not be immune to that myself: The mythical Cassandra was able to foresee the future, but was cursed by not being believed. After her prophecies came true, she was reviled and raped. That's what happens even to innocent people after a disaster. That fact that this is the only web site in the world that's accurately predicted the world situation for five years has never brought me anything but grief up till now, and probably won't bring me anything but grief in the future.

Ratings agencies (S&P, Moody's, Fitch) are increasingly being blamed for the subprime mortgage security disaster. They're scrambling to point out the small print in their contracts where they say, "We're giving you ratings, but we're not promising anything."

Ordinary financial advisors are doing the same thing, saying that they give advice, but the fine print says that they're not responsible for what happens.

But it doesn't matter. All of these people are going to be blamed, and some may even go to jail.

Friday's Wall Street Journal has an article about Bear Stearns chief analyst, Gyan Sinha. It seems that in February he hosted a conference call for 900 investors, and told them that the market had overreacted, and that it was time to buy mortgage-backed securities again.

Now he claims that he was trying to give investors a "frank sense of the underlying value of the mortgage securities" and that his research wasn't intended as "a prediction of where the index would trade in the future based on technical or other market forces." Funny, I'll bet a lot of those 900 investors hadn't read that fine print before the conference call.

I remember quite vividly what happened in 2001 after the Enron debacle (but before 9/11). People were screaming for the jailing of EVERY CEO in the country, whether they were guilty or not. It was like the French Revolution, where anyone even distantly acquainted with an aristocrat was hauled off by the crowds, given a quick trial, and sent to the guillotine, where their heads were mercifully chopped off.

Another analogy is the Iraq war. In 2002, everyone was in favor of the war. After it started, everyone cheered the victories. Today, things haven't gone well, and the thing that everyone cheered just a few years ago is now the greatest crime in history. That's the way that people are.

My expectation is that the people who are going to be severely blamed are those who had a vested interest in giving people advice that turned out be wrong, and thus made money by giving wrong advice. For example,

In that same article about the Shanghai stock exchange, I wrote about the xenophobia in Congress, causing congresspersons to irrationally blame the Chinese for America's debauched credit binge.

In other words, the American Congress is blaming the Chinese for America's economic troubles, just as investors are blaming the ratings agencies.

According to Chan, Asians are going to lose a great deal of money because of the mortgage-based securities shakeout, and Americans won't suffer at all, and it's all the fault of America and the ratings agencies:

"What happened this week was a result of the prices of mortgage securities falling sharply in the past few weeks. Finally on Wednesday, the rating agencies moved to cut ratings of more than $12 billion worth of bonds. This forced the "hogs" mentioned above to sell their bonds into a market that was already nervous about further weakness in the US economy.

The result was, of course, carnage. Being unable to sell all the securities they had, many of the investors had to sell other securities, including corporate bonds hitherto unaffected by the rating moves.

The immediate question arising from the rating agencies' action focuses on timing. Why did they downgrade this week, based on information that had been available since February? The reason, of course, goes back to the conflict of interest - if agencies admitted that their ratings criteria were wrong, they would lose a lot of business. Indeed, financial newspapers have been pointing out over the past few weeks that smart investors such as hedge funds have been "short" the stock of rating agencies (or their holding companies) for precisely this reason.

As alluded to above, we can see that the extra time gave the big investment banks the opportunity to get rid of their existing positions, most often to big central banks around the world. We will know how much these banks lost, especially in Asia, only over the next few years rather than weeks.

Next steps

The subprime banana skin has thus claimed a number of victims, including Asian central banks that are forced to hold billions in US dollar securities because of their currency manipulation that pushes up reserves. It almost seems poetic justice that the manipulators are given losses by the very people they think they are helping, namely over-consuming Americans.

I believe that forced liquidation of many portfolios in Asia will create further losses, but American borrowers will emerge in essence unscathed from all this. Holders of mortgage securities do not have any claim on the underlying assets, only on the intermediate companies, which will of course declare bankruptcy, thus leaving empty shells for lenders to pursue. Unlike in previous crises such as that involving the telecom sector in 2002, most of the losses will be absorbed by central banks around the world rather than North American or European commercial and investment banks.

This is one of the greatest robberies of our time, and it will go unreported in essence. Hard-working Asian savers will see their central banks post billions of dollars in losses on the US mortgage crisis in the next few years, but nothing can be done about it given the general lack of accountability across Asia."

Chan is wrong about several things: Americans WILL be hurt as bad as, or worse than, Asians. And it will hardly go unreported.

But the details of this are less important than the visceral content, same as with the Congressional xenophobia over China.

People are looking for other people to blame. Congress will pass "veto-proof" laws to punish the Chinese for being so evil as to lend Americans so much money. Damn those money-lenders!

And the Chinese? They'll be blaming the Americans. "For years, we've sacrificed our standard of living by lending you hundreds of billions of dollars, and shipping you low-cost, high-quality goods. And you pay us back by bankrupting us?"

Conflict risk level for next 6-12 months as of: 9-Feb-2006

W. Europe

Arab Israeli

Russia Caucasus

Kashmir

China

North Korea

Financial

Bird flu

Key:

1=Low risk 2=yellow

2=Med

3=High 4=black

4=Active

But this is more than sophistry with words. As I've said many times, China and the U.S. are headed for a major genocidal war. A financial crisis will trigger that war because each side will blame the other.

And it's not just a political matter. This blame will not come from the politicians; it will come from the people. The American people are already increasingly suspicious of the Chinese (and other foreigners, including Latinos). As time goes on, during a generational Crisis era, this suspicion turns to anger, to fury and to hatred.

The same will be true in reverse. Chan's article already exhibits a great deal of Asian anger at Americans, and there hasn't even been a real crisis yet. This anger will grow into fury and hatred as well.

As long as everyone's in a manic mood, as long as the music is still playing, as long as everyone's dancing, as long as everyone's making money -- that is, as long as the the stock market bubbles on Wall Street and in Shanghai grow huger and huger -- then everyone's happy. But when disaster strikes, as it will with certainty, people turn ugly. And we can see that happening, day by day by day.

Generational Dynamics Web Log for 14-Jul-07
Wall Street stocks hit fresh record highs again

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Generational Dynamics Web Log for 14-Jul-07 Wall Street stocks hit fresh record highs again

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Generational Dynamics Web Log for 14-Jul-07
Wall Street stocks hit fresh record highs again