dstewart.org

Are stock traders stupid people?

Posted on 17 August 2009

There was an article posted today on the Toronto Star’s website (http://www.thestar.com/business/article/682152) about how the Toronto stock exchanges took a dive today based on a “sharp falloff in the Reuters-University of Michigan consumer sentiment index, which followed a surprisingly weak July retail sales report”.

Apparently, the brilliant insight that “the American consumer won’t be much help in building a strong economic recovery” has caused many other stock indexes around the world to also take a hit.

Where have the stock traders been for the last 6 months? They seem to have missed a few crucial facts which would have forecast this radical realization.

Let’s see;

1. American banks in an effort to gain greater profits begin lending mortgage money to people who can’t afford to repay it based on the premise the property values will never decline.
2. They then roll these “sub prime” mortgages into mutual funds and other investment vehicles and sell them to investors who have always believed mortgage backed investments are very safe. Like Insurance companies and retirement plan managers.
3. Then the real estate market crashes, property values start dropping like a stone, mortgages holders can’t make their payments or sell their properties to repay the mortgages they couldn’t afford in the first place and all of a sudden the investments held by insurance companies, retirement plans and other investors are worth a fraction of what they paid for them.
4. So now the insurance companies are under-capitalized, the retirement plans have a huge loss of capital and other investors see large portions of their investments crash and burn.
5. AIG Insurance, apparently the largest insurer in the world and underwriter of many other insurance company’s policies, is so badly affected that they are on the verge of bankruptcy.
6. The US government now steps in with many hundreds of billions of dollars to prevent the imminent demise of AIG and many of the other companies who are dependent on them.
7. Now the banks have stopped lending money and are worried about their own solvency due to bad loans and loss of capital in the investment vehicles they own which were backed by their bad mortgages.
8. The US government now steps up with many hundreds of billions of dollars to purchase these bad mortgages and take the pressure off the banks. The theory being that the banks will stay, or become, solvent if they don’t have all these bad mortgages hanging over their heads.
9. It really doesn’t work. The banks make it harder to get loans, they raise interest rates, they lower credit limits on credit cards and they increase service fees. The tax payers are paying for the banks’ mistakes with bailouts and their customers are paying with higher interest rates and fees.
10. So now American consumers are not buying things because they can’t get credit, or it is too expensive, or they are worried about their financial future and their investments for a future rainy day, or retirement, are a fraction of what they were before.
11. Two of the big three auto makers realize that people don’t want to, or can’t, buy their their products and end up laying off thousands of workers, causing their suppliers to lay off thousands of workers and declaring bankruptcy.
12. The US government now gives hundreds of billions to GM and Chrysler to enable them to get back on their feet following their bankruptcy.
13. So the US government has now realized that saving the butts of the insurance industry, the banks and the auto manufacturers the economy still sucks, is getting worse and no one is going to spend a cent on anything further worsening the effects of this recession.
14. So they put together a stimulus package worth somewhere in the neighbourhood of a TRILLION dollars to stimulate the economy. This stimulus package seems to have slowed the downward trend of the recession but not really improved the economy much.

So, the US dollar is losing value, the banks are raising interest rates and fees, millions of people have lost their jobs, the values of investments are terrible, the American government has had to throw so much money at the problems that the US taxpayers’ great grandchildren will still be paying off 2008/9 spending deficit, people have lost confidence in their futures and job security and their property values are at their lowest level in a decade.

And just today, the stock traders became aware that “the American consumer won’t be much help in building a strong economic recovery”.