Why a Higher Stock Market Will not Help the Consumer

It seems like Thursday has become the big breaking news day lately. There is plenty of ground to cover tonight, and perhaps more than most nights, some real food for thought.

Cognitive Reinforcement
In my last two posts titled "Silent Liquidity" and "The Solution to the Recession" I highlighted two major themes:
-Banks have plenty of cash to put into play, they need cover to make it happen (via a rising stock market, lending standards relaxation)
-Fannie Mae is a black hole that will never cease to astound to the downside and the hilarity of keeping it running

As if to show that I am not totally making things up as I go along (well, mostly) there are two stories I would point you towards as addendum's.

First up, the sad state of Fannie Mae:
Fannie Mae to Tap $10.7 Billion in Treasury Capital
Fresh off an almost 15 Billion dollar 2nd quarter loss, FNM has to tap further government credit lines to facilitate more losses. Naturally, the penny stock is up huge on the news. Here is 60% of the mortgage market folks, and you and I own it.

The second additive piece is this one via Clusterstock:
A Return To "Innovative" Lending
Payday loans and credit default swap linked credit lines are the latest fractal iteration of predatory lending by the banks using their new found money.

Both items are surreal.

Putting it All Together
Here at Economic Disconnect we have discussed why confidence is so important. We have covered in detail why debt fueled consumption is really not in a sane person's best interest. We have tried to explain that the music has to stop at some point, and many will not find a chair. Spread out across posts over time, the message may be diluted or lose it's coherence. Luckily, we have a writer that has put it all together.

Tim Iacono, author of the site The Mess That Greenspan Made, has been a regular read of mine for over 3 years. The content quality has always been top notch. Today Tim has a post that ties all the elements we have been discussing together in a way that made me step back and say "I wanted to say that, but could never put it together!".

I will not excerpt such a work, it needs to be read in its entirety. Make sure you set aside 30 minutes for the thought provoking article:
Confidence Games and Ponzi Schemes
A must read, and there may well be a quiz!

It is Only a Conspiracy Theory if there is no Proof
A late developing story has emerged that has major implications going forward.

Us Bond auctions used to be boring affairs that only staffers at bond desks noticed. As the US has to place debt issuance never seen before, these activities have become very important to a American universe unable to function without ample, cheap money. Perhaps the added attention is not welcomed at this juncture.

Last Thursday (yes another Thursday!) I had made an observation on the 7 year bond auction:

The 7 year sale went just fine, though one would have to wonder why 5 year notes were less than chased, but 7 year notes were a hot item. What's two years between friends? This kind of disconnect is hard to figure out.

I left the thought at that, as I had covered many times that it was my position (amongst many others) that the US Axis Powers (FED/Treasury) were in cahoots to buy debt issuance should bids not surface, or even to buy them should yields become unattractive. This kind of thinking was tolerated by some, and called part of the "tin foil hat brigade" by most market observers.

Tonight we may have final evidence of our own government's explicit play with the bond auctions.

Let may state up front, this is not the end all of the question. There may well be(and I would expect an attempt) to make some kind of innocent explanation of this information. It might even be true. At this point I think the data and facts stand on their own, so I will present a quick summary.

Chris Martenson has done all the legwork, and for that his original article should be your first stop.

Through published record sleuthing, and amazing cross record matching, Mr. Martenson shows:
-Primary Dealers were the bulk of the "indirect" bids at the auction
-The Axis powers coordinated a buyback of EVERYTHING they purchased a mere week later
-This is monetization of debt, if you are interested

This story is very big and has ginormous ramifications for many aspects of the markets going forward. For more information I would point you to Zero Hedge and Market Ticker, who both have summaries up which should help further study of this event.

Why a Higher Stock Market Will not Help the Consumer
It is funny. All day I had planned to write about the following topic, and then I was hit with items that fit with my recent posts, a work of real significance, and a breaking story that needed attention! Oh well, I will go on with a shorter option of my idea. That is the real time information world, and I love it!

It should be obvious by now that the stock market is THE vehicle by which the confidence game will be manipulated. Headlines of "DOW over 9000", "S&P up 40% in 3 months" and "Nasdaq on 30% tear" are eye catching. After the very recent real estate bust, a resurgence in property prices may well be impossible (but the stock market is not? I digress..), so a Wall Street led rally in stocks is seen as an avenue for growth in confidence.

I think there are a bunch of problems with that line of thought, but I will limit it to one item only:

401K's

In the late 90's boom, which led to the tech crash in 2000, there were indeed many regular people that were knee deep in stocks. I have covered why the stock bust then did not require a full on response from the government, it was the small retail investor that took the losses, the banks and Wall Street had off loaded all those stocks on the public, so no reason to help.

And this is a key point.

You may see a stat that states "70% of Americans own stocks" and I have no issue with that number at all.

But how do they own them?

Through a brokerage account they actively manage?
Through an online account they are in and out of daily? Weekly?
Through a managed account by a Wall Street firm?

While there will be some number that can answer "yes" the answer for the majority will be "No".

The major stock holdings of most Americans are held through company 401k's and pension plans.

I would like to focus on 401k's in this discussion.

It is my contention that a renewed stock market bubble will have little to no effect on consumer spending.

The reason for this is twofold. After getting burned for something like 30-40% over the past year, many will not see a rise in 401k value as beneficial. Just closing the gap as it is.

The second reason is that plenty of any 401k appreciation is already spoken for, and thus will never enter the economic cycle.

Here is what I mean.

The real estate bubble sucked in many. Money flowed into homes in a way never seen before. Faced with price competitions (seems silly now) and a feeling of "losing out" many looked to a source of capital they normally would not touch.

The 401k.

From Wikipedia:

Many plans also allow employees to take loans from their 401(k) to be repaid with after-tax funds at pre-defined interest rates. The interest proceeds then become part of the 401(k) balance. The loan itself is not taxable income nor subject to the 10% penalty as long as it is paid back in accordance with section 72(p) of the Internal Revenue Code. This section requires, among other things, that the loan be for a term no longer than 5 years (except for the purchase of a primary residence), that a "reasonable" rate of interest be charged, and that substantially equal payments (with payments made at least every calendar quarter) be made over the life of the loan. Employers, of course, have the option to make their plan's loan provisions more restrictive. When an employee does not make payments in accordance with the plan or IRS regulations, the outstanding loan balance will be declared in "default". A defaulted loan, and possibly accrued interest on the loan balance, becomes a taxable distribution to the employee in the year of default with all the same tax penalties and implications of a withdrawal.

So what happens when someone borrows from their 401k to buy home and;
- The home is now 30% cheaper on the market
- A big tax hit is coming, or a payback of the full amount?

Personally I know three couples that are in this boat. Anecdotal, I am aware of about 10 others.

I think the consumption the FED/Treasury/Keynesian's are looking for from a rising stock market was used up in the last debt expansion salvo.

With so much to digest, I leave it at that. Be sure to get your Friday Night requests in (anything goes) and I will comply to the best of my ability.

Have a good night.