On Monday, April 9th, 2007, the Dow Jones Industrials were roughly at the same level that they are today. (Approx. 12,700) What I would like to do is illustrate and contrast the absolute insanity between that overbought index back in 2007 and the ridiculous and overbought levels that we are seeing today, some four years later.
In April of 2007, I simply couldn't find any stock (although shippers and solars were hot) that I wanted to buy. To actually invest in- rather than trade. In fact, I saw equities as so over priced that they were just begging to be shorted. That's what I began doing. Builders, banks, suspicious little tech companies with no earnings visibility. I traded daily and that included a lot of put options. By July, I had a feeling the market was toast. I was going to be traveling for 2-3 months and I parked all of my money in cash and treasuries. I closed accounts.
In the next 18 months, the financial and economic world would implode. There were people that saw this coming. Leveraged debt and losses were incalculable. It is now known that the FED loaned 9 trillion dollars to banks (in late 2008) during that economic collapse.
I'd like to introduce a law of physics here. It is called the law of conservation of mass. The law implies that mass cannot be created or destroyed, although it may be rearranged in space and changed into different types of particles; and that for any chemical process in a closed system, the mass of the reactants must equal the mass of the products.
Think of mass as debt and know this. What we didn't know in 2007 was the scale of the economic collapse. We didn't know those losses would be socially redistributed. The losses did not magically go away. They were simply shifted from the balance sheets of financial institutions to a 16.3 trillion dollar federal deficit to be distributed among all of us. The debt was simply rearranged and socialized- we cannot do anything about that. Yet, there is a problem. Nobody is actually paying that debt. There are no jobs, there are no taxpayers, and therefore- nobody is paying down that principal. So the interest continues to build. In effect we are in far worse shape now, financially, than we were in 2007.
Nothing has changed...it has simply been rearranged.
One last thing. You must understand this. The United States equity and bond markets are an economic holy grail. Our entire capitalistic way of life is tied to those markets. Those markets have to be preserved at all costs. If those markets fail under any circumstances, quite simply, our American way of life will fail. Everything we have is dependent on those markets not collapsing. Do not under estimate the lengths that our government will go to prevent the implosion of our financial way of life. That includes lying, money printing, inflation, and war if need be.
So here we are 4 years later. There are 44.2 million people on food stamps. We have lost 15 or 20 million jobs that aren't coming back and 20 million workers that won't be paying taxes. Corporate America refuses to re-patriate the one trillion they have sitting in off shore bank accounts. The national debt accumulates at nearly 5 billion dollars a day in interest. Each days' interest is another new 5 billion created out of nowhere- that we are adding and paying interest on. We are out of time. We are in far worse shape financially than we were in 2007 and yet our stock market is at the very same levels we were when we thought we were healthy... in 2007.
How long can this charade continue? I'm not sure. It's already been four years. I am amazed at the resiliency of an American media that simply refuses to tell anything even slightly resembling the truth. Or an American public completely consumed with apathy. This is a brave, new world.
On Monday April 9, 2007, I closed out every long position that I held. Back then I wasn't worried about the dollar collapsing. We did not have a 14.3 trillion dollar debt accruing interest nor had we lost the capacity (jobs) to pay back that enormous debt. We are about to add 2 trillion to that debt ceiling along with some more interest and we still owe all of the liabilities of Fannie, Freddie. Throw in the one trillion in debt due and owing on student loans, Sallie Mae, and we can push that debt figure well beyond 20 trillion- rather easily. Those levels of debt represent 125% of annual GDP in this country.
We were better off in 2007. We might not have known the scope and scale of banking fraud but whether we were aware of it or not- doesn't change the fact that it exists. Our debt levels were far lower, inflation was contained, and we might have had the opportunity to let failed businesses fail.
So let the masters of the universe try to repeal the laws of physics and mathematics. I'm a betting man. I'm betting that they can't.