Posts Tagged ‘financial markets’

The red line in the graph below represents borrowing to buy corporate shares. The blue line represents the growing value of the S&P 500 stock index. Notice the growth in the financial markets is being fueled by record amounts of debt. The growth of both clearly mirrors each other.

Eight months ago, I wrote, “The latest in a long line of stock market bubbles is being fueled by record amounts of debt according to the New York Stock Exchange. This debt is called “buying on margin” (BOM). Notice the acronym of BOM, which is pretty close to bomb, and this current bubble is going to explode. Total BOM hit a record high of $528.2 billion in February 2017.”

By November 2017 (the latest data that is available), total BOM hit nearly $581 billion. Stock prices, in other words, have been bid up with borrowed money, like at an auction.

Once the lunatic Trump tax cuts were passed, the already dangerously obese stock market bubble began expanding even more in anticipation of more after-tax cash going to the rich and corporations, to whom the vast majority of those tax cuts were targeted. This has given corporations and the rich the leverage to borrow on margin even more in anticipation of future increased after-tax earnings.

That is not necessarily always a big problem early in a business expansion when the market is going up, but it’s now late in the ball game. Our economic expansion is 103 months old (as of January 2018), making it the third longest in US history. In terms of numerous indices, such as job, GNP, and wage growth, this is one of the weakest expansions in US history. The vast majority of new income and wealth have gone to the top 1 percent, and not to the 99 percent.

All of this suggests the coming crash is long overdue. When we hit this soon to arrive recession, it should be a train wreck worse than the so-called Great Recession of 2007-09.

November’s total BOM was nearly $80 billion more than twelve months before. This increase is a sign of optimism or foolishness. People and institutions like hedge funds want to get in on the action while the stock markets are rising. What is going to happen when the bubble pops?

Suppose you have $10,000 to invest, so you purchase 100 shares of Home Depot at $100 per share. The market crashes and the share price drops to $40. Now your investment is worth $4,000. That is not a good result, but your investment is still worth something, and can potentially recover if you hang on to it in the long run.

Let’s say you borrow an additional $20,000 from your broker to buy another 200 Home Depot shares at $100 each for a total of 300 shares and at a total cost of $30,000. The market crashes and the share price quickly drops to $40. Now all 300 shares are only worth $12,000 — but you owe your broker $20,000 (plus interest) for borrowing money to buy the stock. The broker calls in his loan. You are forced to sell your shares to get the funds to pay your broker but at the lower share price. You lose $18,000 of your $30,000 investment. But your broker wants the rest of his $20,000 plus interest. You only have $12,000 remaining of your original $30,000 investment, so you owe more than $8,000 to your broker.

So your original $10,000 is wiped out, your loan of $20,000 is annihilated, and you need to come up with $8,000 plus interest to pay back your broker.

During most recessions, it is much more difficult to get credit to pay your broker back, so you may both be out of luck, although you’ll likely be in court defending against him, her or it.

On a massive scale, say trillions of dollars of investments, that’s a recipe for absolute disaster for the whole economy. Corporations of all types (which often borrow to purchase their own shares in order to jack up their share prices), as well as hedge funds, governments, investment banks, commercial banks, small businesses, other wealth management firms, etc…, will likely need to lay off employees in order to pay back the money they owe.

Side Notes

***Let’s also get something straight which the corporate media doesn’t want us to know; tax cuts for corporations are the same as tax cuts for the rich since corporations in great measure pass on their tax cuts to the wealthy via higher after-tax corporate profits, rising share prices and surging dividends.

***As an aside, your government has allowed a conspiracy in restraint of trade in the housing market to be the primary fuel that ignited this current stock market bubble. See The Big Banks Are Manipulating the Housing Market–JohnHIvely.wordpress.com.

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The answer to Senator Warren’s question is simple. The $14.75 has been redistributed into the pockets of the 1 percent mostly via legislation, which is a product of the corruption of government, which is a product of tax cuts for the rich.

That’s $14.75 per worker, per hour, per week, per month, per year, for years and years, that has been redistributed into the pockets of the rich via the votes in congress of such politicians as Wall Street senators Ron Wyden, Mitch McConnell and Orrin Hatch. That’s why the latter two are against raising the federal minimum wage. Principle has nothing to do with their stand on this issue. It’s purely a case of redistributing income from the middle to the top class, and they know this.

All three senators have been generals of the 1 percent in their war against the middle class, and have consistently voted to ship millions of American jobs overseas via corporate trade treaties. The difference between the old higher US wages and the new lower third world wages go into to the pockets of the rich for every third world worker, for every hour they work, as well as every week, every month and every year.

That redistributed money goes into the pockets of the rich, who then use it to purchase more legislation in the political markets, all with an eye to sending the US middle class into extinction. But it all bids the Dow Jones higher, and higher, and higher, into a financial bubble. So that redistributing more and more income from the 99 to the 1 percent increases the paper wealth of the 1 percent.

However, failure to redistribute this income will result in a collapse of the financial markets, in much the same way as during the Great Depression.

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Former Clinton Labor Secretary Robert Reich asked the following on

“Why has America forgotten the three most important economic lessons we learned in the 30 years following World War II? Before I answer that question, let me remind you what those lessons were:

First, America’s real job creators are consumers, whose rising wages generate jobs and growth. If average people don’t have decent wages there can be no real recovery and no sustained growth.

In those years, business boomed because American workers were getting raises, and had enough purchasing power to buy what expanding businesses had to offer. Strong labor unions ensured American workers got a fair share of the economy’s gains. It was a virtuous cycle.

Second, the rich do better with a smaller share of a rapidly growing economy than they do with a large share of an economy that’s barely growing at all.

Between 1946 and 1974, the economy grew faster than it’s grown since, on average, because the nation was creating the largest middle class in history. The overall size of the economy doubled, as did the earnings of almost everyone. CEOs rarely took home more than forty times the average worker’s wage, yet were riding high.

Third, higher taxes on the wealthy to finance public investments — better roads, bridges, public transportation, basic research, world-class K-12 education and affordable higher education – improve the future productivity of America. All of us gain from these investments, including the wealthy.

In those years, the top marginal tax rate on America’s highest earners never fell below 70 percent. Under Republican President Dwight Eisenhower the tax rate was 91 percent. Combined with tax revenues from a growing middle class, these were enough to build the Interstate Highway system, dramatically expand public higher education and make American public education the envy of the world.

We learned, in other words, that broadly-shared prosperity isn’t just compatible with a healthy economy that benefits everyone — it’s essential to it.

But then we forgot these lessons. For the last three decades the American economy has continued to grow but most peoples’ earnings have gone nowhere. Since the start of the recovery in 2009, 95 percent of the gains have gone to the top 1 percent.

What happened?”

Then Reich explains a lot of true stuff, while leaving out a ton of things the Clinton administration did to bring about our current state of massively unequal income distribution.

For starters, instead of defending the middle class, President Clinton joined his Wall Street masters in redistributing income from the middle to the top via free trade treaties, such as NAFTA. Take a look at the graph below.

The US free trade regime began during the 1980s, during the regime of President Ronald Reagan. Jobs, however, had been exported from the US since the 1950s. Under Clinton, and Wall Street Congressmen, such as Ron Wyden, the exportation of jobs accelerated with NAFTA, as anybody with half a brain can see from the graph above, though not Wyden, who apparently still clings to fulfill the desires of his Wall Street masters.

In this case, the financial markets are a Ponzi Scheme. They need to increase steadily in value over the course of time. Otherwise, they’ll accelerate downward. That’s the primary purpose of redistributing income from the 99 to the 1 percent, that is to keep the Ponzi scam known as Wall Street from collapsing, as it did during the Great Depression.

Furthermore, free trade treaties also pave the way for US corporations to create jobs overseas. Millions have been created over there rather here because of NAFTA, the South Korea free trade treaty and more.

And finally, with all the jobs begin shipped away, or created away, from the United States, that meant downward pressure on wages, benefits and salaries. And the difference between the old higher wages and the new lower wages have been redistributed from the pockets of the middle class to the already fat wallets of the 1 percent.

This is precisely why the stock markets tripled in value, more or less, during the last four years of the Clinton regime.

It’s accurate to conclude that the primary purpose of the regime of free trade is to redistribute income upward, and to lower wages, salaries and benefits.

The result of all this has been to diminish the middle class by redistributing the tax bases for our schools and social safety nets to the 1 percent, increase poverty, and corrupt democracy in the USA. And that’s just a few of the negative things this inequality has done.

Now Wall Street Ronnie Wyden wants to continue this process of redistribution via the Trans Pacific Partnership, the biggest income redistribution scam of all time in favor of Wall Street and the 1 percent.

As for the Clinton regime, there were plenty things President Clinton did to redistribute income from the 99 to the 1 percent, but Reich has no intention of letting you in on this, like the free trade scams.

In other words, the political and economic game has been rigged, and Bill Clinton and his labor secretary Robert Reich played big roles in creating this inequality, and now Reich is trying to pretend that his boss and he played no role in creating this rigged game.

For the rest of Reich’s semi-accurate story, click the link below.

Why the Three Biggest Economic Lessons Were Forgotten–BillMoyers.com

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Obamacare has been designed to redistribute income from the 99 to the 1 percent. We should have expected this since the legislation was written by executives of publicly traded health care corporations whose stocks and bonds are bought and sold in the financial markets.

Take the case of a family of four in which the policyholder is fifty years old. We’ll call this family the Smiths. Say Mr. Smith is a college graduate. So is Mrs. Smith. Let’s assume they earn $93,699 a year in 2014, when all parts of Obamacare becomes the law. After taxes, that’s not a whole lot of money. The Smith’s might be in the lower middle class, maybe solidly middle.

The government is going to force them to purchase a health insurance policy whether they want to or not, or they’ll be penalized and compelled to pay a tax on something they don’t want to buy, which is ridiculous and clearly unconstitutional, as the insurance industries corrupt Chief Justice John Roberts of the US Supreme Court clearly knows. The Smiths, however, decide to purchase the policy to avoid the hassle.

The cost of that policy will be $16,858 a year, but the government will subsidize the family and the health insurance industry by paying $8,901 of that policy.

The Smiths, however, have neighbors, the Thompsons. Mr and Mrs Thompson have no insurance coverage and they too will be forced by an unconstitutional law to purchase a health insurance policy from a publicly traded, limited liability, corporation. The Thompsons earn $93,700 a year, which is one dollar more than what the Jones earn. Their insurance policy also costs $16,858 a year, but because they earn one dollar more, they’ll need to pay the entire premium under Obamacare.

This will suck the Thompson’s dry, but it will also push health insurance company profits higher, and send their share prices and dividends for the 1 percent surging. The rich will get richer, but what will it do for the Thompsons? After they pay their taxes, the Thompson’s aren’t going to have a ton of money to spend after the insurance industry (and the 1 percent) financially rapes them via Obamacare. The economy might even contract because of the Obamacare income redistribution scam since 70 percent of the economy is consumer driven and the consumers are going to get financially raped big time. The rich, however, will get richer by sucking the middle class dry with another piece of legislation. That’s precisely why Wall Street Senator Ron Wyden voted for the bill. He’s always looking for ways to redistribute income from the 99 to the 1 percent.

Don’t believe me? Click the following link. It’ll you take to Kaiser Permanente’s Health Care Reform Calculator. Plug in your numbers and see. http://healthreform.kff.org/subsidycalculator.aspx

By the way, this new law may encourage employers everywhere to opt out of providing their employees with health insurance. Target and Walmart have already cut employee hours to opt out of the law.

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At an annual meeting for shareholders of Berkshire Hathaway in Omaha, Nebraska, Warren Buffett, the world’s third richest person said, “When we are asking for shared sacrifice from the American people, I would at least make sure that the people with these huge incomes get taxed at a rate that is commensurate with the rate they got taxed at not long ago.”

That makes a ton of sense. Low tax rates on the rich are job killers. That’s because CEO’s are under more pressure to cut jobs and ship them overseas in order to jack up profits to attract all that excess money. That’s why the Bush tax cuts have been a total disaster. They were the straw that broke our economic back in the USA. You’ll notice job creation since these tax cuts is negative and even worse than that when only private sector job growth is analyzed. This issue is more fully elaborated on in The Rigged Game: Corporate America and a People Betrayed.

Warren Buffett on Shared Sacrifice

Bill Gates and Bono were among the 35,000 people attending this meeting.

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