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The Four Horsemen Of The Financial Apocalypse - Who Is To Blame For The Bear Market
By Tony D’Altorio on April 11, 2009 | More Posts By Tony D’Altorio | Author's Website
I’m sure readers are familiar with the term “Four Horsemen of the Apocalypse” from the Bible’s Book of Revelation. It seems to me that the “end times” for the long-standing bull market in stocks was caused by what could loosely be called “The Four Horsemen”.
While not an apocalypse, the stock market is back to where it was in 1997. 1997 was, of course, the year that Alan Greenspan made his now-famous utterances about “irrational exuberance”. “Irrational exuberance” sure seems to have been wrung out of the stock market.
Here is some data which should not be taken lightly. On a total return basis, Ibbotson data shows that the S&P 500 has now underperformed long-term Treasury bonds for the last five-year, 10-year and 25-year periods, and by substantial amounts.
In the future, if the long-run expected returns on bonds were expected to be higher than the expected return on equities, capitalism as we know it would grind to a halt. After all, who would buy stocks when they “know” that the returns on bonds is better?
So, who are the “Four Horsemen” that helped kill the bull market? The four culprits are - Wall Street, the Federal Reserve, Washington D.C. and the media.
Congress Gone Wild
Over the past 40 years, Washington - both political parties - has followed a ruinous policy and has progressively transitioned America from a “producer” economy to a “consumer” economy. Instead of accumulating wealth, America is rapidly depleting its wealth.
One way to measure this depletion of wealth is by looking at the long-term value of the US dollar, which affects everyone, not only investors. I believe that the best way to look at the dollar’s long-term decline is not by comparing its value to other declining currencies, but versus the value of gold.
Since 2000, the US dollar has depreciated against gold by an average of 16.3% annually. In the past three years, versus gold all holders of US dollars have suffered a 60% erosion of their wealth. That’s before taxes and that’s not counting any investment losses.
Bankers Gone Wild
Now let’s look at Wall Street. The top three Wall Street money center banks have a total of $100 trillion in exposure to derivatives. And that is just the tip of the iceberg as far as problems on Wall Street. Wall Street bankers seem to have lost their collective minds. Why?
A major part of the problems on Wall Street has stemmed from their distorted and perverted incentives system. The capitalist system is all about incentives. People are rewarded handsomely when they take risks and win. But when people take risks and they lose, they should have to pay the penalty.
What we have now in America is something completely different. The incentive system put in place by Wall Street has produced the worst possible economic system. We have capitalism for the profits and socialism for the losses. Heads - Wall Street wins, Tails - taxpayers lose.
Media Gone Wild
Everything connected to Wall Street seems to have become corrupted, including media. CNBC is such an obvious target, with people Larry Kudlow and Jim Cramer, but I wanted to talk about another media company - McGraw-Hill.
A prime example of problems with how the media has covered this financial crisis is the recent controversy surrounding the publication of Barry Ritholtz’s book “Bailout Nation: How Easy Money Corrupted Wall Street and Shook the World Economy”. Barry Ritholtz, by the way, is the author of a popular finance blog, “The Big Picture”.
In 2008, the book was to have been published by McGraw-Hill. But they dropped the book. Why? Ritholtz claims that he butted heads with McGraw-Hill over some passages he wrote about bond-rating agencies. McGraw-Hill happens to own ratings agency Standard & Poor’s.
Bond-rating agencies, of course, accepted huge fees from investment banks for rating many types of securitized bonds as “AAA”. Many of these securitized instruments contained nothing but garbage in them. However, the AAA-rating allowed Wall Street to sell these securitized instruments all over the world and are a major contributor to current financial markets woes.
According to Newsweek, in his original draft Ritholtz dubbed the acceptance of fees as “payola” and called the ratings agencies “pimps”. Apparently, this did not sit well with McGraw-Hill. Why? Because the author was truthful?
The Fed Gone Wild
Finally, there is the Federal Reserve. In an effort to combat the current downturn, Ben Bernacke and the Fed seems intent to compound Alan Greenspan’s previous mistakes and has gone full-time into the creation of funny money.
The Fed seems to believe that monetarism can fight a financial crisis caused by excess liquidity and debt by churning out even more liquidity. The Fed seems to be ignoring the fact that the strong growth and low inflation seen for the past two or three decades was simply a credit-driven illusion induced by deficit nations like the US.
The flood of cheap goods from the emerging markets is the main reason that the historical link between the supply of money and inflation has been weak. It seems absolutely absurd to continue to assume that the exponential growth in the monetary base will not eventually produce some very nasty side effects, namely inflation.
Yet, this is what the Fed, Wall Street and Washington wants investors to assume. They want investors to focus on the very short-term deflation and to ignore that in the longer-term, in a fiat money system, deflation simply cannot exist. If investors continue to focus on short-term deflation, they will continue to purchase (foolishly) US Treasuries at near zero per cent interest rates.
Instead of pursuing its current policies, the Federal Reserve and other policy makers should be focusing on trying to create a new paradigm where economic growth is created by something other than a flow of cheap credit. Until that happens, the bear market in stocks looks to continue to linger.
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A good article - couldn’t agree more.
C-Trick
The US government (also the UK and others) are using exactly the same smoke and mirrors tactics to try to get out of this mess as those which got us in them in the first place - opaque loans, the never-never (debt), and the ordinary man in the street will end up paying for it, either through taxes or, even worse, social unrest of one kind or another. The more that the governments try to tinker with the system, the longer this nightmare will continue. Gamblers do the same thing - “the next bet will win for sure”. They end up betting all they have, and even worse, what they haven’t, on a loser. I do not see us out of this mess in 10 years.
It is also to be seen, that Governments generally can’t manage finances whet times are good, never mind when times are bad. Where is the money that should have been put away for this type of event?
Of course, the answer is that governments want to get re-elected, and this is based on the human failing of greed. People re-elect governments who have increased their wealth, not their well-being. I find it rather puzzling why people feel better when their house has increased in value. Don’t they realise that this applies to all the rest of the population as well, therefore one has a zero net gain? The only good thing about an increase in the house price is that you can borrow more against it… voila!
I would call it a C-Trick - you can decide whether C is for Conjuring or Confidence.
The markets are being manipulated each and every day, with a bit of “good news” to prevent a collapse. It is not easy to say when people will realise that the “Emperor has no clothes”, but it must come sometime or another. Their tactics will not help in the long-term. You can place an up-tick rule without a down-tick rule, allow assets to be valued at whatever you like, but in the end people will see through it.
Personally, I find the current situation exactly the same as 12 months ago. Since December 07, I debated with my wife as to whether the DOW would plunge. Each day she would say “it’s not going to fall - look, it keeps on rising.” That, in my humble opinion, is what we have now - precipice-teetering.
I must end by saying that I am a capitalist (perhaps you would have thought the opposite reading my diatribe!), but if you allow excesses to the upside, you must allow excesses to the downside. Wintertime is a necessary part of life, and the bankrupt should be swept away, not mollycoddled in case they get a sore thumb and pout, nor kept on life-support.
Buy physical gold.
Tony - - -
You wrote: “…the stock market is back to where it was in 1997. 1997 was, of course, the year that Alan Greenspan made his now-famous utterances about “irrational exuberance”. “Irrational exuberance” sure seems to have been wrung out of the stock market.”
If the market almost doubled after the “irrational exuberance” declaration, what is to prevent the market from going down 50% from here now that (you say) “irrational exuberance” sure seems to have been wrung out of the stock market?
Hello jloundsbury59:
My answer would be: “Nothing at all”.
As far as the UK is concerned our prime minister, Gordon Brown, is personally responsible to a large extent for the collapse of of a large part of the Uk banking system & the subsequent stockmarket meltdown.
This is because after becoming chancellor in 1997 Gordon Brown dismantled the then regulation of UK banks, taking it away from the Bank of England & giving it to a new regulator, the FSA, which was totally ill equipped to carry out such a task - a task which had been well handled by the BOE for generations.
This fact seems to be forgotten as he struts the world telling everyone else how to regulate their financial markets!
Of course your “Four Horsemen” analysis is correct. It is also, however, incomplete. To fully understand the situation, one must understand the forces that established and influence the Federal Reserve, Washington, D.C., the General Media and the Major Bankers around the Globe.
Look deeper - and further back.