Last week's big run up in the dow jones was remarkable. The market rose on the teeth of the news that UBS, a major euro bank, had declared a major write-down of american mortgage securities.
This write-down and the rise in american stocks that it triggered can be marked down in your economic diary as the last major exercise of the notion that perception is the basis of market valuation.
The 350 point market rise was a function of market psychology. The experts in the corporate media explained this rise as the market expressing the belief that the heart of credit market weakness, the credit crisis we are experiencing, had exposed itself through the UBD writedown.
This massive rise in the equities market indicated that the market believed that things would now begin to calm down and return to the endless growth in values and profits this generation of financial managers was raised on.
The problem with this scenario is that the perception does not fit the reality. The fundamental reality that drives the mortgage security crisis is that the value of the mortgage securities are based on the price of housing.
If that is true, then the continuing and deepening decline in housing prices and sales volume we are experiencing has already spread the threat of foreclosure beyond the holders of sub-prime mortgage, into the once secure paper behind the holders of prime and jumbo mortgages.
The drop in housing prices below the purchase prices that prime mortgage holders bought their property has now put into doubt the value of what I estimate to be trillions of dollars of mortgage securities held by financial institutions around the world.
The markets precipitous rise in response to this writedown, and the nature of the economic reality we confront can only be called a titanic act of almost evangelical faith that the never ending growth in values and profits, the good times, are right around the corner.
On the other hand, if my analysis is accurate, this means that the markets are just begriming to enter the deep end of the mortgage security and credit crisis, as their faith that the market will recover has risen to new heights.
There are other indications that market profits are headed downward. The serious decline in "consumer" (citizen?) spending that is following in the wake of the housing downturn and credit contraction are being seriously compounded by global inflation of commodity prices, especially in food and energy prices, triggered by devaluation of the dollar.
This massive decline in consumption is just beginning to reflect back into a serious decline in the profits of public stock companies. If public stock company's investments and credit are as leveraged as the banking industry's investments are, we have not even reached the eye of the storm.
If I am correct, we are coming to a moment in time where economic perception and economic reality will find a moment of parity. The market is coming to the harsh conclusion that the true value of american assets is not the same thing as corporate profits.
The debt to profit ratio of our country indicates that although corporate profits have reached historical levels, so too has consumer and business debt reached record levels. Despite the best efforts of our corporate political and business leadership, reviving the speculative bubble in housing will prove to be impossible.
At this point is is obvious to every player in the world economy that america's overall profits subtracted from our overall debt means that america's record corporate profits have been made at the expense of the american economy. This makes the value of the dollar, which is based on the overall health of the economy, uncertain.
Interestingly, the economic welfare of everyone in the country, from crimigrant to corporate banker, has been based on nothing more than a temporary misperception that life itself is a pyramid, and endless growth in values and profit was possible.
note: the draft above omitted the fact that the psychology behind last week's market upturn was substantially based on message that the fed's bailout of bear stearns and their opening the discount window to private banks sent to the equities market.
This move informed the market that the fed, and by proxy, the us government, was going to protect the capital of the big losers in the mortgage securities market with the full faith and credit of the us government.
This does not affect the conclusions of the above essay, as the credit that the Fed has extended to the private banks is the same as printing money. This action only pads private profit while damaging the economy, which is perpetuating exactly the same economic policies that brought on the housing and credit crisis.