It is with great regret and sadness that we announce the passing of the US stock market today. After suffering a horrific credit crash in 2008, the monetary life support initiated by the federal government was unable to properly restore the health of the patient. The market battled its way back from near death and fought diligently for 30 months, only to succumb to injuries that were addressable, but overlooked by the government medical staff. What we needed were responsible figures overseeing the patient and insuring a sustainable recovery. What we received were drugs that masked the internal injuries and provided us with false hope that things were in fact improving.
The market will be remembered for its purpose as a mechanism to raise capital to fund the growth of America and the growth of hard earned capital; Americans invested to fuel their dreams and retirement. In the latter years the market was not what we once knew. Gone are the days of being a proud owner of a piece of an American institution such as General Electric
(GE) and J.P. Morgan
(JPM). We set a dangerous route for it to follow through the repeal of laws to protect its speed and ability to drive -- with irresponsible direction coming from Washington and steered recklessly by Wall Street. We saw the market collapse and cave under a complex mess of derivative swaps and whiplashed by high frequency trading machines that we never met. But we cannot mourn in sorrow and point the finger directly at the stock market.
The entitlement programs enacted during the great society movement were never instituted with infinite life spans and divine right. As the programs ballooned they ultimately became too big to fail. A principle architect, Hubert Humphrey, voiced to the Senate floor in 1965 that said programs would need to evolve and reform as they grew. Sadly this went unnoticed. Humphrey’s statement amounted to: “if these programs are to become a burden to the taxpayer, I would change them”. Well that time is here.
Record low interest rates remained for far too long in 2004 and currently stand at the most accommodative period since World War II. Our debt to GDP level has reached a point also not seen since then, standing at roughly 100% without forecasting unfunded future liabilities. Yet the market flourished back then under new deals and great societies due to innovation and a revolution of industrial proportions. Roads, bridges, and dare I say levees were built. America came to life and the stock market grew with this expansion. Yet as we walked through the battle of debt destruction our eyes turned away from such expansion and commitment to creating new drivers of growth that made us the fine nation we became. We went away from innovative advancement, expanding skilled jobs to service our economy, and have been misguided that the Internet is our modern day money maker. So too the stock market is not the same. It went away from its capital raising, market making mechanism to Las Vegas without having to leave your living room.
US corporations moved their earning revenues to far off lands known as the BRICS. They sought places where cheaper labor and opportunities for growth could be found. Our market became levered to over leveraged countries with false capacity for buying capital goods. As global growth unwinds so will the current earnings cycle, which may have peaked in the second quarter of 2011. Our domestic markets are suffering from a crisis of global confidence and credibility. They will continue to falter and fail until this psychological confidence is restored. The difference being this is not an “in-house” issue. The leadership to stock market profits and prosperity rests with the Eurozone and in the US we're merely the tail being wagged in various directions. Global growth breaks are buckling and toeing the line of contraction. With this slowing growth demand, do we witness less of a need for commodities? With less buying of commodities comes less dollars to be spent by sellers.
The recent downgrade of our nation’s debt is something the market would have looked back upon in the rear view mirror as it paved its path forward. This may be priced into the market's prophecy and apply the needed paddles for a cardiac arrest gasp at a rally. The stock market's fate has largely been factored and its true path will now take -- as the medical procedures have been tried and failed. This is a problem that can no longer be financially engineered. It has morphed into a crisis of confidence and credibility.
Employment opportunities are, and will remain scarce. With that, housing will not gain a meaningful recovery until the former is fixed. Consumers are still deleveraging and recent consumer credit numbers are showing that they are being forced back to living on credit cards as unemployment benefits dry up.
Until there is a meaningful remedy to address the lack of economic growth to produce paying jobs, our market's future is bleak. This is not to say we can't witness a rebirth to a new bid that will one day awaken. I firmly believe in this and I will be ready to give it the capital needed to build a future. It is often said markets go out with a bang, and it has been one heck of a party.Twitter: @PeterPrudden
No positions in stocks mentioned.
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