The Media And Markets Move Toward Hysteria

Over the past few months the DOW Jones has moved up at a breathtaking pace. The past two weeks saw the largest gain since the year 2000.

Last night I turned on CNBC at 7:00 for Kudlow and company. Kudlow opened his show standing at a podium telling viewers that he felt that this market was going to 12,000 on the DOW. He said this is good news for investors still in cash because you have plenty of upside to capture in the new bull market.

Tonight at 8:00, CNBC reports spent one full hour doing a segment on how the housing market has bottomed. As I've mentioned before, Jim Cramer has called the housing market bottom this month. Prices will not fall from here he tells us.

This is what people hear when they turn on their television, but what about in print? Walking into a news stand this week, you can pick up the most recent addition of Newsweek magazine. The cover of the magazine reads in bold letters:

"The recession is over."

Ah, where to begin. Lets start with stocks.

Stocks have surged due to companies beating estimates; Earnings estimates. Companies earn more money in two ways: 1. Raise Revenue 2. Cut costs.

Here is a little secret: Revenues are not rising, the key to true growth. Companies are beating estimates by slashing costs and downsizing. The best way to do this? Fire employees. This is what is leading to the massive unemployment.

The question is, can companies continue to cut costs forever to grow their business? No. They need revenue growth.

Second is the housing market.

Mortgage rates are currently at all time historical lows. They have no where to go but up. If mortgage rates rise, it costs more to own a home. This pushes prices down.

Second and more important; the only loans being made right now for residential real estate are the ones being purchased by Fannie and Freddie. That is now the government. Think about what would happen if the government could or would no longer lend for mortgages? What if Fannie and Freddie's balance sheet rose to ten trillion and they started taking trillions in losses? Impossible? This is coming.

If the free market had to determine the price they would lend money for homes, then homeowners would have to put down 20%, they would have to have very strong credit, and they would have to make enough for the mortgage to be only 28% of their income.

Do those lending standards seem ridiculous?

Those were the lending standards before the year 2000 and every year before that in history.

If those lending standards came back, then home prices would have to collapse for Americans to afford them. The entire housing market is being artificially held up by the government.

Even with this artificial crutch the market is falling. There is a monsoon of pent up foreclosures waiting to hit the market.

Buying or selling a home is a personal decision based on many factors. However, if I owned a home I would view this current market and media euphoria as a gift from above and put my home on the market in hopes of catching a buyer stupid enough to believe it.

The last topic is the thought that we are currently ending the recession.

Brace yourself, I think this one could be true. A recession is measured by GDP growth per quarter. There is a strong possibility that we could see one to four quarters of GDP growth taking us through the summer of 2010.

This is what happens when the government runs a deficit of $2 trillion. This is what happens when the Fed injects $1 trillion in freshly printed dollars into the economy. This is what happens when they nationalize the entire banking system to remove all risk, when they nationalize Fannie and Freddie, and interest rates are lowered to 0%.

When you do this it will cause an economy to bounce. Think of it as injecting 50 shots of morphine into a patient in the hospital. He wakes up, looks around, and feels good. He talks about green shoots and Goldilocks. He smiles.

But what is really happening under the surface? Is the morphine sustainable in the long run? What happens when it wears off? Will they inject 100 shots of morphine?

The truth is that we do not have an economy. We have smoke and mirrors. We have the belief from people around the world that the United States is the most important part of the world economy.

The truth is the exact opposite. We are the cancer. We are the subprime loan. By lending us money, it is throwing away what could be productive capital elsewhere. There is no borrowing without saving. The rest of the world works and saves, and we borrow that money and spend.

This will end, and it will end badly. The government's actions in the year 2001 were the equivalent of injecting 5 morphine shots into the patient. It blew up the housing bubble and brought the financial system to its knees. But what happened during 2002 and 2007? The patient sat up, smiled, and talked about green shoots and Goldilocks. The inflation felt so good.

In my mind, the longest the morphine will last this time is 18 months, but it could end tomorrow.

The final dose will be the last, and the patient may die before we even get a chance.

For more information on the end of the recession see the next post below.....