Good Reason for Doom and Gloom

By Doug French, Contributing Editor

Predicting the future, like getting old, ain’t for sissies. Questioning the bull market is even more treacherous.
Howard Gold, writing for MarketWatch, makes fun of seers who made what he calls “the four worst predictions to gain traction over the past few years.”

Gold says the last six years have been a disaster for those who stayed out of the stock market. He claims there’s a bull market in doom and gloom, referring to a column by his colleague Chuck Jaffe, who points out, “The fortune-tellers … know that the more outrageous the prediction, the more attention they get. They can highlight any forecasts they get right, knowing that their misfires are forgotten quickly. Thus, calamity and catastrophe sells. Right now, it’s a bull market for bearish forecasts.”

If such a bull market in doom were really happening, the market wouldn’t be hitting all-time highs. Besides, no one ever went broke being out of the market.

But more importantly, there is a very good reason people respond to gloomy forecasts. Behavioral economics pioneer and 2002 Nobel Prize winner Daniel Kahneman explains in his bestseller Thinking, Fast and Slow that when people compare losses and gains, they weigh losses more heavily. There’s an evolutionary reason for this: “Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce,” Kahneman explains.

Most people, when given the opportunity to win $150 or lose $100 on a coin flip, decline the bet because the fear of losing $100 is more intense than the hope of gaining $150. Kahneman writes that the typical loss aversion ratio seen in most experiments is 1.5 to 2.5. Professional stock traders have much higher tolerance for risk, but most people investing their retirement accounts are not pros and have little fortitude for losses.

The average Joe can’t just sit tight while his retirement account drops 40%. He’s not wired that way. His retirement savings represent safety, and a market crash is the modern equivalent of a flood, a bear, or a warring tribe. When stocks start falling, survival mode kicks in. He or she sells and runs for cover.
So when someone makes a compelling case that stocks might crash, the average person rightly listens. Otherwise they don’t get any sleep.

Gloomy Forecasts

Economist and financial newsletter writer Harry Dent predicted the DJIA would crash to 3,000 and told investors to bail out between early 2012 and late 2013. Some people likely took him up on it. In July 2010, Robert Prechter of Elliott Wave fame predicted the DJIA would fall to well below 1,000 over the ensuing five or six years.

“I’m saying: ‘Winter is coming. Buy a coat,’” Prechter told the New York Times. “Other people are advising people to stay naked. If I’m wrong, you’re not hurt. If they’re wrong, you’re dead. It’s pretty benign advice to opt for safety for a while.”

While Prechter sees massive deflation on the horizon, Marc Faber, editor of the Gloom, Boom & Doom Report, says Zimbabwe-style hyperinflation is on the way. Gold calls this “the single worst prediction of the past five years.” Gold calls Faber wacky for telling Bloomberg in 2009:

I am 100% sure that the U.S. will go into hyperinflation. Not tomorrow, but the problem with the government debt growing so much is that when the time will come and the Fed should increase interest rates, they’ll be very reluctant to do so and so inflation will start to accelerate.

Peter Schiff’s call for $5,000/oz gold also has Mr. Gold laughing. Schiff sees the Fed printing more to stimulate the economy, which will send the yellow metal soaring.

“Back in the real world,” sneers Gold, “new Fed Chairwoman Janet Yellen is actually winding down the Fed’s extra bond buying (quantitative easing, or QE), and she’s on pace to finish by fall.”

Europe’s economic problems had establishment news outlets like The Economist saying in November 2011, the euro “could break up within weeks.” President Obama’s former chief economist, Austan Goolsbee, said “there probably isn’t” any way to hold the eurozone together.

And the ultimate establishment voice, Alan Greenspan, told CNBC the divergent cultures using one currency “simply can’t continue to work.”

So it’s not just wackadoodles wearing tinfoil hats missing the mark, as Mr. Gold implies. He writes, “But too many people have lost precious time and a chance to make real money by listening to these fear mongers. They’re probably kicking themselves now, or should be.”

However, nearly all of the gloomy prognostications Gold makes fun of are in response to the actions of central bankers, who have been at least as wrong as anyone else in their predictions.

Big financial-services companies should be kicking themselves for paying Greenspan $100,000 a speech these days. The Maestro reportedly hauled in an $8.5 million advance for his book, The Age of Turbulence. That’s a lot to pay for someone who whiffed on the housing bubble. In 2002, Greenspan said, “Even if a bubble were to develop in a local market, it would not necessarily have implications for the nation as a whole.”

Ben Bernanke, who used to make $200,000 a year, now makes “that in just a few hours speaking to bankers, hedge fund billionaires and leaders of industry,” the New York Times reports. “This year alone, he is poised to make millions of dollars from speaking engagements.”

He hasn’t exactly been an accurate predictor either. In 2005, Ben Bernanke was asked if the housing market was overheated. “Well, I guess I don’t buy your premise,” he replied. “It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis.”

Even former Treasury Secretary and ex-New York Fed President Tim Geithner is getting in on the action, receiving $100,000 to $200,000 per talk. Plus he likely received a large advance for his book Stress Test.
Geithner admits he didn’t see the financial crisis coming. In his review of Geithner’s book, Flash Boys author Michael Lewis writes, “The story Geithner goes on to tell blames everyone and no one. The crisis he describes might just as well have been an act of God.”

They Warn for a Reason

Mr. Gold believes that economic catastrophes have natural causes. “Bad things happen in life,” he writes. “Hurricanes and tornadoes destroy communities. Nuclear war and climate change are big long-term dangers. And there will be bear markets and deep recessions in the years ahead.”

Inflation to any degree is not an act of God. Neither are currency nor stock market crashes. Central bankers create these calamities and then ride off into the sunset, earning six-figure speaking fees and multimillion-dollar book deals. The positive reinforcement they receive ensures they’ll repeat the same mistakes over and over again.

Thus, warnings must be issued constantly. Bad things are going to happen to the finances of individuals who aren’t prepared.

It’s not a matter of if, but when. Better scared than sorry.

(Editor’s Note: How quickly a crisis can creep up on you is demonstrated in our Casey Research documentary, Meltdown America. If you haven’t watched it yet, you should. Click here to watch this free video.)

The article Good Reason for Doom and Gloom was originally published at Casey Research

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Is It All A Scam?

There quite a few of us folks out in the blogosphere that do no live in the Financial Matrix. We all "took the red pill" a long time ago and see Fraud Street and Congress for what it really is, and a great deal of it are scams. Karl Denninger is one man who most certainly isn't trapped in The Financial Matrix. As evidence, I give you one of his recent pieces on Bank of America.....

One has to wonder, when you start hearing of things like this....

In a $2.8 trillion municipal bond market that more than doubled in just over a decade, public corruption, officials' mistakes and lack of disclosure cost taxpayers as much as $6 billion a year, according to data compiled by Bloomberg.

What's going on here?

Nov. 2 (Bloomberg) -- At the end of a March 6, 2000, conference call with the financial adviser David Rubin, city of Atlanta officials disqualified the winning bid for a $453.3 million investment-management contract.

The decision shaved $58,000 off what Atlanta taxpayers would have earned from the $13.5 million high bid and awarded the account to runner-up Bank of America Corp., according to a copy of city documents obtained under the Georgia Records Act.

Only after the Internal Revenue Service investigated five years later did local officials learn that Rubin's firm, CDR Financial Products Inc., had entered into a secret side agreement with the Charlotte, North Carolina-based bank. CDR's share would be worth as much as $340,000, based on city and federal records.

This, ultimately, is the sort of result that one can expect when we refuse to stop the looting and start prosecuting.

There have been many over the last two years who said that the "subprime (and stated income) borrowers deserved it" - referring to the loss of their houses, of course.

Perhaps they did.

But the bigger issue here - the societal issue - is how crooked the entire marketplace has become for securities in general. Not just for end-user mortgages but also for securitizations, municipal bonds (as outlined in this article) - virtually everything!

"We need a worldview change about transparency and that includes municipal finance," said Elizabeth Warren, chairwoman of the Congressional Oversight Panel for the Troubled Asset Relief Program, in an interview with Bloomberg last month.

Indeed. But so far we see zero indication that we're going to get it. Municipal finance is just one tiny piece of the scam-ridden world of financial back-room deals.

Witness the mortgage-backed bond business, where firms such as Goldman Sachs have admitted shorting the very mortgage-backed securities they were packaging and selling! McClatchy ran a story this weekend on the matter which I opined on this morning; the salient factor here being not that McClatchy picked this up, but that it took two years for the so-called "mainstream DC media" to do so!

We continue to see the fraud-and-pony-show throughout Wall Street and Washington DC - and there is no indication anywhere that anyone gives a damn. Amnesty, as given to Bank of America in this case, is an outrage. Remember that the allegation in the instant case is that:

"IRS believes that CDR, Bank of America and possibly others may have colluded to fix pricing," an unidentified Atlanta employee wrote in an undated internal memorandum after city authorities met with IRS investigators in September 2005.

Got it? Fix prices, and if you're a big bank you get amnesty. Even though what you did is under black-letter law felonious, you will not be prosecuted so long as you are one of the favored few.

How much more of this is hidden under the rock of bribes, er, "campaign contributions" and lobbying? The answer is likely to surprise, but what's also likely to surprise is exactly how little of this we the "little people" will ever hear about.

Sustainable economic growth does not come from scams - it comes from honest deals. So long as the way Wall Street "makes money" is to rip someone off, and those who engage in such activity are given "amnesty" instead of losing their corporate charters we will simply continue robbing the common man for the benefit of the few banksters among the "privileged elite."