Posts Tagged ‘Stock Market Bubble’

Another stock market bubble ready to pop?

May 7, 2015

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Why are stock prices rising while the real economy is doing so badly?

Answer: Stock buybacks.

Mike Whitney, writing for Counterpunch, explains how corporate CEOs keep their stock prices high even when their sales and profits are lagging by borrowing money and buying back stock.

CEO salaries and bonuses are typically tied to stock prices, so CEOs are rewarded for increasing their corporate debt rather than figuring out how to improve efficiency and make better products.  Whitney quoted Wall Street analysts as saying stock buybacks account for more than half the post-recession rise in the stock market.

Janet Yellen and Ben Bernanke at the Federal Reserve Board made this possible by holding down interest rates, an action that punishes risk-averse small savers who’d prefer to keep their money in insured bank accounts and pushes them into the financial markets.

That’s why the financial markets are doing so well and working Americans are doing so badly.  But this cannot go on forever, and I think the next crash will be worse than the previous one, just as the current recovery is worse than the previous one.

LINKS

The Rich Get Richer: Titanic Stock Bubble Fueled by Buyback Blitz by Mike Whitney for Counterpunch.

The Whisper of the Shutoff Valve by John Michael Greer on The Archdruid Report.

Another global financial bubble is ready to pop

December 5, 2013
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In a well-functioning free enterprise economy, capitalists invest their wealth in ways that create new wealth, and thereby enrich society along with themselves.  What’s going on now, as these charts from the German magazine Der Spiegel show, is that capitalists are using their wealth to bid up the prices of real estate and corporate stocks, which are rising faster than the overall economy is growing.

This is not limited to the United States.  It is part of a worldwide pattern.  The only way it can end is with another financial crash.

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Too big to bail? the new financial bubble

November 21, 2013

too-big-to-failWhen the French Bourbon monarchs were restored to power after the defeat of Napoleon, it was said that they had learned nothing and forgotten nothing.  The same is true of the half dozen biggest U.S. banks after the financial crisis.  They are busy doing the same things that led to the crisis in the first place.

Blogger Michael Snyder quoted the following figures from the most recent report of the Office of the Comptroller of the Currency.  The figures show the big banks’ investments in derivatives, which are investments not backed by any asset—in short, they are not investments at all, but gamblers’ bets on the future direction of the economy.  If the banks bet wrong, they crash, and if they crash, they bring down a large part of the U.S. economy with them.

JPMorgan Chase

Total Assets: $1,948,150,000,000 (just over 1.9 trillion dollars)

Total Exposure To Derivatives: $70,287,894,000,000 (more than 70 trillion dollars)

Citibank

Total Assets: $1,306,258,000,000 (a bit more than 1.3 trillion dollars)

Total Exposure To Derivatives: $58,471,038,000,000 (more than 58 trillion dollars)

Bank Of America

Total Assets: $1,458,091,000,000 (a bit more than 1.4 trillion dollars)

Total Exposure To Derivatives: $44,543,003,000,000 (more than 44 trillion dollars)

Goldman Sachs

Total Assets: $113,743,000,000 (a bit more than 113 billion dollars – yes, you read that correctly)

Total Exposure To Derivatives: $42,251,600,000,000 (more than 42 trillion dollars)

That means that the total exposure that Goldman Sachs has to derivatives contracts is more than 371 times greater than their total assets.

via Michael Snyder.

The six largest banks control two-thirds of U.S. financial assets.  The five largest originate 42 percent of loans in the United States.  The four largest employ a combined 1 million people.  If these banks fail, it is not just their executives who will suffer (actually, the executives won’t suffer at all).

The Federal Reserve Board is trying to keep the economy afloat by keeping the big banks afloat, through its policy of Quantitative Easing.  It issues money to buy up the big banks’ bad investments prior to the previous crash, but without doing anything to stop them from setting up the same conditions again.

How much better it would have been to finance the rebuilding of crumbling bridges and dams, water and sewerage systems and other public works!

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Stock market recovery rests on thin air

November 6, 2013

wile-e-coyoteRight now the stock market is like Wile E Coyote in the Road Runner cartoons.  He can run for a while with nothing supporting him—just so long as he doesn’t look down and realizing he is standing on thin air.

Holders of financial assets have enjoyed a good economic recovery.  But what is holding it up is the Federal Reserve System’s policy of keeping interest rates as close to zero as possible.  If savers and investors can’t earn interest on their bank savings accounts or money market funds, and very little in the Treasury bond market, they have no choice but to venture into the stock market if they want income.

The hope of Ben Bernanke and the governors of the Federal Reserve Board is that the recovery will become self-sustaining, but each time they talk about or start tapering off, the stock market drops.  This hope has not been realized.  Without a recovery in the real economy, the employment of people to produce goods and services, stock price averages are bound to fall back.

Standard & Poor's 500 stock index

Standard & Poor’s 500 stock index

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Click on Here’s The Evidence That The Tech Sector Is In A Massive Bubble for analysis of the stock market bubble by Jim Phillips for Business Insider.  Hat tip to Daniel Brandt.

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