Friday, March 04, 2011

How to Buy Complicity: A Rising Stock Market Bails Out Everyone

A rising stock market buys near-universal complicity.

How can the Status Quo bail out pension funds without having to give them cash? It's easy--goose the stock market ever higher. Since pension funds are heavily invested in the stock and bond markets, the presto-magico way to inject hundreds of billions of dollars into the pension system was to generate an 80% leap in stocks and lower interest rates to zero, effectively goosing bondholders' equity as bonds rose in value.

No politically messy bailouts are needed--all you need is a permanently rising stock market. If the Federal Reserve can just goose the S&P 500 from 1,300 to 2,000, underwater pension plans will be "saved" without any visible sacrifice.

Thus is complicity bought and paid for.

Corporate management loves a rising stock market--it's the ideal setting for dumping one's stock options.

Politicians love a rising stock market--since the vast majority of one's campaign contributions flow from wealthy people who own stocks, then the "wealth effect" of a rising market makes one's contributors happy and fattens their contributions.

And as a bonus, this "wealth effect" is great PR for the unwashed masses who don't get much of a direct benefit because they own at best a few thousand bucks of mutual funds in an IRA. But hey, that warm fuzzy feeling of a rising market makes everyone feel like "good times are here again," even if they're only marginally attached to the trillions of dollars in "new wealth" being generated.

Government employees love a rising stock market, too, because it means they won't have to contribute much to their own pensions. What every employee wants is a return to 1995-1999, when the stock market enabled a quantum leap up in their "sweetened" benefits packages.

The financial media loves a rising stock market, because it helps generate positive buzz and more readership and advert sales.

Wall Street loves a rising stock market, because it masks the entire panoply of fraud and embezzlement that is the beating heart of Wall Street, from high-frequency skimming to the "never have a losing day" trading desks.

The Fed loves a rising stock market, of course, because it makes the Fed look successful and omnipotent.

The President and his administration love a rising stock market, too, because it offers up a welcome sheen of economic "growth" that extends the promise of the mythical "self-sustaining recovery" just around the corner.

Politicos also love a rising market because the capital gains generate rising tax receipts. If there was ever financial magic, it's tax receipts increasing even while the real economy tanks. You just gotta love that permanently rising market!

Everybody benefits from a permanently rising stock market, and as a result they don't really care how it is engineered or at what eventual cost. The Fed has a free hand as long as it's enriching pension funds, insurance companies, politicos, corporate management, the media--what's not to like?

Thus is complicity bought and paid for.

But there are signs that this skyscraper rising to the stratosphere is built on swampy muck. The stock market looks impressively robust as it rises toward the outer atmosphere, but that strength and power may be masking vulnerabilities that are rising side by side with the market.

The game of driving down the dollar to goose stocks seems to be running out of oxygen. Despite the best efforts of the Fed to keep it heading to zero, the dollar is tracing out a long-term uptrend.

Then there's that massive double-top in the market's star performer, the NASDAQ:

If the Fed can't blast through that resistance to a new high soon, that could signal the end of the entire "everybody loves a permanent rally" project.

The problem is that this project is a one-time deal: once faith in the Fed's ability to permanently game the stock market is lost, the Fed will have used up its three wishes. And when that brittle delusion of Fed omnipotence expires, it will do so with breathtaking speed.

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