Late Night: Reflections from the Beach
By James J Puplava CFP, August 8, 2002
An Absence of Explanations
It was another bizarre day for the financial markets. The market charts look more like a roller coaster with each passing day. Even the reporters on CNBC couldn't explain it. Floor traders seem puzzled by the familiar pattern of second half and final hour rallies in the stock market. The best explanation at the moment is that order books for stocks are extremely thin, so it is easy to move stock prices with concentrated buying in a few key select stocks. It was the financial stocks and oil that moved markets, but mainly financials.
The explanation given was the IMF bailout loan to Brazil. That was known yesterday. So why the market movement today? There was another major revelation at WorldCom. WorldCom said it has found another $3.3 billion in misreported financial results since 1999, bringing the total to $7.18 billion. Earnings for most companies have been poor and analysts are now lowering their estimates for profits and the stock market for the remainder of the year. Two major Wall Street firms are now predicting that the Fed will have to lower rates by another point by the end of the year.
So much for the second half recovery. It was complete fiction from the very beginning. Now the focus is on more rate cuts as a means to move the markets.
International Crisis = US Banking Crisis
The spectator show in the markets is camouflaging the real crisis in the international monetary system. Another major financial crisis is on the horizon in Latin America. This one is proving to be too big to ignore. It began in Argentina. It spread to Uruguay, and has now moved on to Brazil. Add to that the growing problems in Paraguay, and Bolivia. The dominoes continue to fall in a chain reaction in Latin America. But, the problem is not just in Latin America. There is a major crisis in the big New York Banks such as J.P. Morgan, and Citigroup. Citigroup has close to $13 billion in Brazilian loans. The bank lost $2.2 billion in Argentina. You add the bad corporate loans, to bad emerging market loans, to derivative problems and it isn't hard to see where this is going.
The IMF loans are only temporary. They are designed to get the big boys out. Brazil has close to half a trillion in debt. Next to the US, their debt levels are nearly impossible to repay. While bank runs have occurred in Argentina, Uruguay, and Paraguay, they have yet to start in Brazil. That will come soon. Right now the big money is exiting fast before the banks close their doors. The big money is hoping the IMF loans will buy them more time to exit before Brazil goes bust. Brazil's government debt has quintupled since the peso crisis in 1994. Debt payments have been made only by additional borrowing. Everyone knows those loans aren't going to be repaid. It now remains a question of who gets stuck with them? That's where the big banks on are on the hook. It is also why money is fleeing the country before the financial system implodes.
Brazil's central bank has said it won't impose capital controls. When bankers say they won't do something, it usually means the opposite of what they say. Both presidential candidates are talking about repudiating Brazil's debts. That could mean problems for US and European banks. The IMF is there to put a band-aid to buy the big banks time.
It all seems so surreal to see all of this unfold. We have a major accounting fraud scandal, the possibility of multiple country defaults, a weakening US economy, and we have late stock market rallies. With all this news? Even the financial media seems at lost and is having difficulty explaining it.
What I suspect is happening, given the declining volume and the hazy nature of market rally explanations, is that John Q. is slowly heading for the exit gates. Nobody is buying this anymore. The market has become much too erratic and unexplainable. Down 700 points one week. Up 700 points the next few days. The stock market has become far too schizophrenic to engender any newfound buying on part of the public. They are hanging on and waiting for the moment to jump ship.
Path Towards Depression?
Authorities must be burning the midnight oil in an effort to dig their way out of the worst storm since the Great Depression. Their very actions now ensure that we are heading for another one every bit as bad as the last one by the very actions they are now taking. Seeing this unfold now shows we have learned nothing from history. A reading of Murray Rothbard's "America's Great Depression" will show that we are making all the same mistakes:
- Preventing or delaying debt liquidation by expanding credit even further.
- Inflating even further, money supply is now growing at an annual rate of 10%.
- Keeping wage rates high.
- Keeping prices high--through tariffs.
- Keeping consumption high and discouraging savings.
- Subsidizing unemployment.
Read Rothbard and it isn't hard to see where this is all going. Like the Perfect Storm, where three storms converged and joined forces for four straight days, with winds blowing constantly until 100 foot waves were formed, we are seeing the same today. The three storms, the economy, the stock market, and the currency market, are all converging to form that rare event. It is far easier to see the parallels now and reach a conclusion. A new chapter or epilogue to my Perfect Financial Storm is in the works. I thought I was finished, but now I more clearly see the shape of the storm forming. It will be unlike any storm we have seen before.
I spent a quiet day in the sun reading Rothbard's book with an eye on CNBC. I've always found economic history fascinating... especially when it provides you with a window into the future.
Note: Free PDF download of Rothbard's book at Mises.org: America's Great Depression (5th edition)
Reporting from the beach,
© 2002 James Puplava