Wall Street WARZONE

Bull Market 2010? Warning, Trust No One! “Too-Greedy-to-Fail” Banks Will Be Broken Up, Says Michael Lewis … plus 12 Wall Street Gurus Predict a Collapse!

by Paul B Farrell, JD, PhD
| | 3/19/2010

Warning, the Wall Street bubble machine is spinning at top speed. Here’s the hype in USAToday: “Dow sets bull-market high … The quality of the stock market rally keeps getting better. In a sign that the year-old rally on Wall Street is broadening, the blue-chip Dow Jones industrial average hit a fresh bull-market high Wednesday, erasing all of the losses suffered in the brief winter swoon.”

But over at Reuters, “Liar’s Poker” author Michael Lewis wasn’t buying the propaganda. In an interview for his new book, “The Big Short: Inside the Doomsday Machine.” Lewis tells Reuters that a ”Wall Street reckoning is coming,“ a very different message for investors compared to what’s coming from Wall Street’s bubble machine. Here are a few quotes from Reuters and Lewis: 

Wall Street’s biggest banks could be broken up by the U.S. Congress in the coming year in an eventual reckoning over the financial meltdown of 2008. Lewis predicted a war will be waged in Washington as Senate Banking Committee Chairman Christopher Dodd tries to revamp U.S. financial rules. “Things can be busted up. I really think there is this collision coming that is just starting to happen with the Dodd bill,” Lewis said. ‘There is a war that is about to happen over not just who regulates Wall Street but what the rules are. … To put it in the crudest possible way, these firms have to be smaller and less profitable … If they were regulated properly and the rules of their game were sane, it would be less profitable to be a trader at a big Wall Street firm … It is really a war over money.’

The Big Short follows a motley group of outcasts who profited from the collapse of the subprime market. There’s the one-eyed doctor-turned-money-manager with Asperger’s Disorder and a penchant for reading regulatory filings and the lazy fund manager with a comic book obsession mourning the loss of a young son. There’s a bond trader with hair like Gordon Gekko in the 1987 film ‘Wall Street’ and a personality to match, plus two geeks working in a garden shed with a $110,000 brokerage account. ‘I could have picked others who were equally odd,’ said Lewis, noting nearly all of Wall Street was on the wrong side of the biggest trade of all time and the establishment failed to see disaster coming.

Yes, Lewis’ warnings not only run contrary to the “Wall Street Bubble Machine” hype, he’s echoing the warnings we reported on earlier about a coming collapse. Yes, 12 leading market experts warning that Wall Street won’t be able to “fake it” much longer. So for all you optimists who plan to actively invest in 2010 here’s some contrary input to factor into your equation. For a moment, take off your rose-colored glasses and listen to Shiller, Taleb, Faber, Grantham, Soros, Biggs, Stiglitz and others:

One. Faber: The “American Empire” has peaked, is on a decline
Hong Kong economist Marc Faber says “the average life span of the world’s greatest civilizations has been 200 years … Once a society becomes successful it becomes arrogant, righteous, overconfident, corrupt, and decadent … overspends … costly wars … wealth inequity and social tensions increase; and society enters a secular decline.”

Two. Grantham: Learned nothing, doomed to repeat past, only bigger
Money manager Jeremy Grantham warns that our irrational nightmare will repeat. A year ago we came dangerously close to the “Great Depression 2.” Unfortunately, we’ve “learned nothing … condemning ourselves to another serious financial crisis in the not too-distant future.” We had our bear-market rally. Next, historical cycles plus our irrational behavior guarantees another, bigger global meltdown. We “learned nothing.”

Three. Stiglitz: Wall Street creating “short respite’ before next crash
Nobel Economist Joseph Stiglitz recently warned: Unless Wall Street’s incentive system is drastically reformed, “the financial sector will only try to circumvent whatever new regulations we put in place. We will simply have a short respite before the next crisis.” Warning, nothing’s changed, it’s worse: Lobbyists run Obama, Congress and the Fed.

Four. Johnson: “Running out of time” before “Great Depression 2”
Yes, “we’re running out of time … to prevent a true depression,” warns former IMF chief economist Simon Johnson. The “financial industry has effectively captured our government” and is “blocking essential reform,” and unless we break Wall Street’s “stranglehold” we will be unable prevent the “Great Depression 2.”

Five. Ferguson: Fed’s “easy money” fuels new bubbles, meltdowns
In the 400-year history of the stock market “there has been a long succession of financial bubbles,” says financial historian Niall Ferguson. Who’s the culprit? The Fed: “Without easy credit creation a true bubble cannot occur. That is why so many bubbles have their origins in the sins of omission and commission of central banks.” Another bubble (and crash) is virtually certain, thanks to Washington’s $23.7 trillion explosion in debt, the Fed’s support for the $670 trillion shadow banking system, and Wall Street lobbyists getting super-rich thanks to Wall Street’s insatiable greed.

Six. Taleb: Fed haunted by ghost of Greenspan’s failed Reaganomics
When Obama reappointed Bernanke, Taleb warned of a new disaster: “The world has never, never been as fragile,” yet Obama reappoints an economist who “doesn’t even know he doesn’t understand how things work.” New proof? At last week’s American Economic Association, Bernanke was still shifting the blame: “The best response to the housing bubble would have been regulatory, not monetary.” Wrong: He conveniently forgets he was advising Bush earlier, did nothing. Now Obama’s stuck with a Greenspan clone and an insane ideology focused solely on saving a failed banking system by flooding the world with inflated dollars guaranteed to trigger another meltdown

Seven. Soros: Dollar dead as a reserve currency, nest eggs dying
Soros’ New Paradigm: America’s 25-year “superboom … led to massive deregulation … blindly chasing free markets … unleashed excessive greed … created the dot-com and credit meltdowns” and a “shadow banking system” of derivatives. “The system is broken. The current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency,” warns Soros. “We’re now in a period of wealth destruction. It is going to be very hard to preserve your wealth in these circumstances.”

Eight. Hedgers: make billions shorting stupid politicians, bankers
Soros isn’t alone. Lots of hedge fund buddies made hundreds of millions and billions betting on the stupidity of Washington with the Fed’s cheap money policies. Alpha magazine reports that four hedgers made more than $1 billion each in 2008. The top-25 “managers made $464 million each on average last year … a kingly sum, especially during a year of global recession, stock market wipeouts and vanishing wealth.”

Nine. Shiller: Dotcom, subprime meltdowns, “third episode” next
Shiller a “Dr. Doom?” Remember a decade ago with Irrational Exuberance? Now he’s warning: “Bubbles are primarily social phenomena. Until we understand and address the psychology that fuels them, they’re going to keep forming. We recently lived through two epidemics of excessive financial optimism, we are close to a third episode, only this one will spread irrational pessimism and distrust—not exuberance.”

Ten. Kaufman: Irrationality replaced reason, science, technology
Henry Kaufman was Salomon’s chief economist and “Dr. Doom” for 24 years: “Why are we so poor at managing our key economic institutions while at the same time so accomplished in medicine, engineering and telecommunications? Why can we land men on the moon with pinpoint accuracy, yet fail to steer our economy away from the rocks? Why do our computers work so well, except when we use them to manage derivatives and hedge funds?” Kaufman warns: “The computations were correct, but far too often the conclusions drawn from them were not.” Why? Selfish, myopic politicians and bankers.

Eleven. Biggs: Sell everything, buy guns, food, head for the hills
In his 2008 bestseller, Wealth, War and Wisdom, former Morgan Stanley research guru Barton Biggs warns us to prepare for a “breakdown of civilization … Your safe haven must be self-sufficient and capable of growing some kind of food … It should be well-stocked with seed, fertilizer, canned food, wine, medicine, clothes, etc … A few rounds over the approaching brigands’ heads would probably be a compelling persuader that there are easier farms to pillage.” Biggs sounds like an anarchist militiaman.

Twelve. Diamond: Nations ignore obvious till it’s too late, then collapse
The end will be swift. In our age of short-term consumerism and instant gratification, few hear the warnings of our favorite evolutionary biologist, Jared Diamond. Societies fail because they’re unprepared, will be in denial till it’s too late: “Civilizations share a sharp curve of decline. Indeed, a society’s demise may begin only a decade or two after it reaches its peak population, wealth and power.” The warnings were everywhere in 2008, but Greenspan, Bernanke and Paulson were in denial: It will happen again with Obama. Down-streaming problems will fail. Future bubbles get too big, crashes more deadly.

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