The Inflationist - Making Money in Stocks, Bonds, Forex, Commodities, Agriculture

Sign In

Subscribe

Subscribe to The Inflationist


Stock Market Rally - Category Archive


Apr 20
Tuesday

Gaming the System – The Foundation of the U.S. Economy

Filed under Stock Market Crash, Stock Market Rally, Stocks

The status quo not just incentivizes gaming the system, it has made it the primary way to get ahead in today’s economy.

Gaming the system is not just encouraged–it has become the foundation of the U.S. economy. Without it, the status quo will implode. Goldman Sachs gamed the system to package guaranteed-to-default mortgages and present them to buyers as AAA-rated “safe” investments yielding a high return, while selling a hedge fund derivatives which were a bet against the mortgages. The hedge fund helped GS select the most likely to default mortgage tranches to raise the probability that their bet (going short) against the mortgages would rise to essentially guaranteed profitability.

This is the norm on wall Street and has been since at least the late 1990s, as revealed in the important book Fiasco: The Inside Story of a Wall Street Trader.

But it’s not just Wall Street which the status quo rewards for gaming the system: the housing/credit bubble offered average Americans ample opportunities to game the system–a practice they continue perfecting as the Federal government desperately attempts to reinflate the housing bubble with wave after wave of trillion-dollar bailouts, mortgage guarantees and tax credits.

Let’s start with Wall Street. Frequent contributor Harun I. referenced this Transcript of Bill Moyers Journal with Simon Johnson and James Kwak, authors of 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, in a note on the status quo’s extreme dependence on Goldman Sach’s trading volume and thus its extreme vulnerability to collapse:

I see the sharks are circling (Goldman Sachs). But along the lines of “be care what you wish for,” this process needs to proceed carefully, or, the individual investor needs to take measures to protect against a sustained market decline should the technical signs arise. Why? At one time GS comprised 70% of the volume on the NYSE. Should that decline sharply, if the big six banks merely stood aside and refused to buy, the market would likely free fall.

In the transcript above. Mr. Kwak points out:

“They have assets equivalent to 60 percent of our gross national product. And to put this in perspective, in the mid-1990s, these six banks or their predecessors, since there have been a lot of mergers, had less than 20 percent. Their assets were less than 20 percent of the gross national product.”

In the post industrial paradigm Wall Street ‘is’ the economy. Wall Street may kindly remind us of this fact by simply doing nothing as the market falls.

This system needs to be dismantled as carefully as one would defuse live ordnance. If this is done precipitously this bomb is going to hurt many when it explodes.

The system as it stands is doomed but how it unravels and on what political party’s watch it occurs and therefore upon whom the blame will fall will be attempted to be controlled on both sides of the aisle.

This leads to a staggering conclusion: were the gaming to cease, the stock market would collapse, as it now depends on dark pools, high-frequency trading, unregulated derivatives, and a host of other “gaming the system” tricks. Without the tricks to support it, the U.S. market will fall like a rotten plum.

Before you label this hyperbole, note that two sectors, Financial and Energy, are expected to account for a massive 53.9% of all incremental S&P 500 earnings between 2009 and 2011 even though they account for just 25.0% of the total market capitalization of the S&P 500.

By comparison, the Consumer Discretionary and Retail sectors will contribute just 5.5% of incremental earnings from 2009 to 2011: Zacks S&P 500 Earnings Analysis.

Were Wall Street forced to cease its gaming of the system via misrepresentation, malfeasance, fraud, embezzlement and failure to disclose material facts, then profitability would collapse.

In essence, fraud, embezzlement and corruption of the political process are the only profitable businesses left on Wall Street.

The same can be said of the housing market: without gaming the system, the housing market would go into a free-fall. This holds true not just for the mortgage lenders and Wall Street but also for the American public, many of whom are happily complicit in the fraud perpetrated by the mortgage packagers and lenders, as described by southern Nevada correspondent B.K.:

During the boom years, many (in fact, most) people purchased more than one home. In order to get around the “primary resident” issue (a.k.a. “wink and a nod” clause), contracts were drawn-up under the name of a sister, father, family dog, whatever.

Now - these “investors” are not simply living in one of their primary residences rent-free - they are also collecting rent on the other homes that they stopped making their mortgage payments on last week, month, or last year! This is the reality here in Las Vegas; it is the norm.

When you look deeper into the economic ramifications of this ongoing housing mess as it relates to consumer spending, you begin to see … the Deadbeats are so happy to get “free” money on their many homes, they offer attractive deals to tenants. A property that might normally rent for - say - $1,500/mo, is being offered for $1,000/mo. Now that puts extra money in the tenants’ pockets to spend on the economy as well.

Thank you, B.K. So consumer spending is being goosed to some degree by the fraud of those free-riding the “mortgage crisis” while the banks getting stiffed by those reneging on liar loans get made whole by the Federal government via guarantees, bailouts, zero-interest loans, and all the rest of the socialization of risk and privatization of profits engineered by the Federal Reserve, the Treasury, and Congress (via the bank bailouts and the socialization of “government-sponsored enterprises” (GSEs) Freddie Mac and Fannie Mae).

Stop the gaming, fraud and lying, and you gut the U.S. economy, which has grown dangerously dependent on Wall Street and housing for its “growth” and stability. Cripple the gaming which produces the outsized profits, and you cripple both Wall Street and housing, which would then eviscerate the stock market and the sick-unto-death U.S. economy.

As Harun observed, defusing the incentives to game the system is literally like defusing a very large, very volatile, very unstable weapon of mass destruction.

I say it can’t be done. The gaming mentality is now so deeply woven into the U.S. economy and culture that it is akin to a parasite so interconnected with its host that killing the parasite will also kill the host.

This is how empires dwindle, grow vulnerable, and then collapse: the productive are taxed while the wealthy game their way out of paying their equitable share, while the status quo (the State/Plutocracy partnership) showers bread and circuses on the unproductive to buy their silence and complicity as the Oligarchy/Plutocracy loots and ransacks what is left of a productive economy and culture.

Source: http://www.oilprice.com/article-gaming-the-system-the-foundation-of-the-us-economy-291.html

By. Charles Hugh Smith

All entries filed under Stock Market Rally


The Creeping Terror
no responses - Posted 04.16.10
Over the last few days I’ve noticed one significant thing. Creeping yields on U.S. commercial paper. Prior to the financial crisis in 2008, rising yields on commercial paper were one of the first signs of trouble in the credit markets. Holders sold off paper to reduce their exposure to troubled businesses. ...continue
Are Short Term Treasuries the Best Trade of the Next Five Years
no responses - Posted 04.12.10
st1\:*{behavior:url(/category/stock_market_rally/index.html) } <!-- /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0cm; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:"Times New Roman"; mso-fareast-font-family:"Times New Roman";} a:link, span.MsoHyperlink {color:blue; text-decoration:underline; text-underline:single;} a:visited, span.MsoHyperlinkFollowed {color:purple; text-decoration:underline; text-underline:single;} @page Section1 {size:612.0pt 792.0pt; margin:72.0pt 90.0pt 72.0pt 90.0pt; mso-header-margin:36.0pt; mso-footer-margin:36.0pt; mso-paper-source:0;} div.Section1 {page:Section1;} --> /* ...continue
Key Indicators Signal a Positive Shift in the Economic Landscape
no responses - Posted 03.31.10
Something has changed these last few weeks.   Yesterday I was struck by how many indicators have suddenly broken trend over the last few months. It appears that the economic landscape has shifted.   Last week, I mentioned that outstanding loans at U.S. commercial banks have flattened for the first time in ...continue
Critical Indicator Signals America’s Economic Fortunes May be Changing
no responses - Posted 03.25.10
Something unusual happened the last few weeks.   Bank lending in the U.S. didn't fall significantly.   Since the onset of the financial crisis, outstanding loans at U.S. commercial banks have been in a freefall. Over $600 billion in loans have been repaid or defaulted on. Representing an 8% contraction in credit. ...continue
The Trouble With Bonds
no responses - Posted 03.19.10
The U.S. deficit and the Treasury bonds which must be sold to fund it are beyond comprehension.   The trouble with bonds (the U.S. Treasury variety, among others) is simple: there's too many of them being issued. Given that every government on the planet except Lower Slobovia is issuing unprecedented quantities ...continue
Google’s Decision Highlights the Dangers of Doing Business in China
no responses - Posted 03.17.10
The ramifications of Google's decision to leave China are deep: China's leadership, be careful what you wish for.   I have been a student of China for 40 years. Alas, no, I did not learn Mandarin. When I started reading about China in 1969, and taking university courses on its culture ...continue


All content and source © 2008 The Inflationist - Making Money in Stocks, Bonds, Forex, Commodities, Agriculture |