Optimism Is Back

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What an amazing rebound it's been: The S&P 500 is up 50% since March. JPMorgan Chase (NYSE: JPM  ) and Goldman Sachs (NYSE: GS  ) are now both up over the past year. Wells Fargo (NYSE: WFC  ) isn't too far behind.

It's like the crash of 2008 never even happened.

Everything is fine, people. Everything is fine!
That's the general takeaway from Merrill Lynch's Survey of Fund Managers for August. And it's a frightening one, really.

The survey, consisting of 204 fund mangers controlling more than half a trillion dollars in assets, shows that market optimism is now about as high as it's been since 2007.

Among the survey's findings:

  • Average cash balances have shrunk to 3.5%. That's the lowest level since July 2007.
  • Thirty-four percent are "overweight" equities (stocks). That's the highest level since October 2007, when the Dow Jones topped out above 14,000.
  • Seventy-five percent expect the global economy to strengthen in the next 12 months -- the highest percentage since November 2003, and up 63% over last month.
  • Seventy percent expect global corporate profits to rise in the next year. That's up 51% over last month.
  • Confidence in corporate health is the highest it's been since January 2004.
  • Merrill's "Risk and Liquidity Indicator," a gauge of investors' appetite for risk, is at the highest level in two years.

Ready for the survey's most telling finding? "[W]ith four out of five investors predicting below trend growth for the year ahead, a nagging lack of conviction about the durability of the recovery remains."

I don't necessarily disagree with the fund managers. We've avoided the abyss, and bargain stocks can still be found. But a situation where deep-pocket investors are giddy, optimistic, and lacking conviction about the durability of recovery is dicey. It's a sign that people are expecting the best, yet ready to jump ship at the slightest hint of anything less.

This doesn't mean we're about to run off a cliff. In fact, November 2003 -- the last time we were this optimistic about the global economy -- was a great time to invest (the S&P 500 gained 50% over the next four years).

And I'll say it again: Bargains are out there. As fellow Fool John Rosevear pointed out yesterday, high-quality companies like Procter & Gamble (NYSE: PG  ) , Johnson & Johnson (NYSE: JNJ  ) , and Total SA (NYSE: TOT  ) still trade at attractive valuations. Heck, Allstate (NYSE: ALL  ) trades at just over seven times forward earnings. All isn't lost for patient, bargain-hunting investors.

But the sudden surge of optimism and market activity will be seen by some as a sign that we're back at the same unquestioned confidence that brought us down in the first place. The past decade -- no, all of history -- has been underlined by wild swings in investor emotion where, in hindsight, the masses run too far in extreme directions. Think about that.

This isn't market timing. No one's saying that stocks can't and won't go higher from here. But a lot of people are now counting on everything to go right. And that's a scenario more likely to end in tears than triumph with an economy as fragile as it is.

This is especially true now that, as my colleague Alex Dumortier has shown, the broad market indices aren't cheap by historical standards.

What do you think? Is the market getting ahead of itself at these levels? Take a moment to weigh in with our Fool poll below.

Fool contributor Morgan Housel owns shares of Procter & Gamble and Johnson & Johnson, but none of the other companies mentioned in this article. Nor is he short anything, so hold off on the hate mail, m-kay? Johnson & Johnson, Procter & Gamble, and Total SA are Motley Fool Income Investor selections. The Fool owns shares of Procter & Gamble and has a disclosure policy.

Read/Post Comments (41) | Recommend This Article (43)

Comments from our Foolish Readers

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  • Report this Comment On August 21, 2009, at 10:55 AM, catoismymotor wrote:

    Honestly the market is high, as in "charred and toasted." There are too many shoes left to fall before we can breathe easy. Mortgage defaults are hitting traditional loans, unemployment numbers for this month increased, a largely ignored commercial property default tsunami is just months away from washing hundreds of small local banks out to sea and our dollar continues to be undermined by our own government. Inside of six months I expect a new round of panic and despair.

  • Report this Comment On August 21, 2009, at 10:57 AM, catoismymotor wrote:

    This rally is supported by unicorns and rainbows. Buy or sell accordingly.

  • Report this Comment On August 21, 2009, at 2:21 PM, ozzfan1317 wrote:

    Hey Negative Nancy my unicorn tells me that we are about to start a new bear market and since my score I think his advice is worth a

  • Report this Comment On August 21, 2009, at 2:22 PM, ozzfan1317 wrote:

    score is shot I

  • Report this Comment On August 21, 2009, at 5:14 PM, atlasnyc69 wrote:

    I had listened to your advice I would have missed most of this run in the last quarter. You guys don't stop with the persistent drum beat that the market is overvalued yet it's going up. I hope you're covering your shorts...

  • Report this Comment On August 21, 2009, at 5:41 PM, LessGovernment wrote:

    Loan money to the banks at 0% and remove mark to market rules and presto - they show a profit using ficticious financials. Nothing has changed.

    Run the debt to 12 trillion, add in the 2 trillion hiding on the Fed's books, the five Trillion guaranteed on Fannie and Freddie, the Talf, the Tarp, and the 80 or so Trillion for unfunded Medicare, Social Security and Federal retirement and the stock market does not even flinch.

    None of this matters. We are nearing 100 trillion dollars of debt and unfunded entitlements and getting ready to add yet another entitlement that no one knows how much it will cost nor how it will be funded and it still makes no difference. Our stock market is still OK. Ya know why?

    Becasue we can borrow all we want from future generations and wreck their economy to prop up ours. We may be the children of the greatest generation, but we have become the most selfish generation.

    Bottom line is this, The stock market (not the economy) will rise until it falls. The economy is still in the tank. There is a total disconnect between the stock market and the economy.

    And we should be ashamed of ourselves, but hey. Nothing has changed has it?

  • Report this Comment On August 21, 2009, at 6:02 PM, Dannysea wrote:

    Only by thinking the gov't $$-to-spend is it cheery. No thought for higher taxes, new controls set in motion, or by thinking the amount of people with 2+ Social Security numbers with $$-to-spend, is this the recovery.

    Oh, and these gov't blunders are showing us a better way on how healthcare economics will be the silver lining to the bright future!

    LessGovernment, everything you say, is sad to say, true.

  • Report this Comment On August 21, 2009, at 6:12 PM, dbbfool63 wrote:

    It sure was a close one though, man, If the government could of made this scam with the Market a little more obvious we just might of missed something.

    Makes me feel real good to know that Militia Groups and Individuals are stock piling Guns & Ammo, I have been ready for a long time.

    Did you see 60 minutes 2 or 3 weeks ago about people legally able to buy Machine Guns and all kinds of goodies right out of the trunk of a strangers car in front of the police, it's legal in Virginia, check it out, but don't think you'll get anything cheap.

    Oh, and the Osama ratings slipping, or is that Obama, it's all the same.

    I know there is a few other things, oh, have you noticed the Protesters standing outside the places where Obama Bin Ladin has been making speeches holding there AR-15's and carrying guns.

    You starting to get the picture? I hope the government is because I am on the side of the people like many others who are sick of the government giving all this bull information like we are in the greatest times economically so be bullish and put all your money in the market so the rich can take what you had left.

    Best Investment you will make in your lifetime is right now and they are my 2 best friends, "Smith & Wesson". It's a sure bet at least through til the next election, maybe longer.

  • Report this Comment On August 21, 2009, at 6:27 PM, LessGovernment wrote:

    With all the talking heads and government cheer leaders proclaiming the end of the recession as some bit of great news, I simply offer this:

    Recession equals negative economic growth, going down, as in an elevator. So if you start out on the 100th floor of a tall building, and go down in a slow elevator and stop your descent at the ground floor, your downward path (the recession) has ended. That is the supposedly good news. However, you are also now on the ground floor, not floor 100. This is the reality of the situation.

    The problem I have with all the minions using gibberish (green shoots and the like) instead speaking in clear financial terms reflecting factual economic data, is that they make the end of the recession sound like everything is somehow fixed. It isn't. And it wont be for a long, long time meaning years or even decades.

    Think About It - Billions to Trillions

    Our National Debt first topped $1 billion in 1863

    87 years after declaring independence from England.

    1 billion per 87 years = $0.0149 billion per year

    Our National debt topped $1 trillion 1982.

    It took 119 years to go the remaining 999 billion of debt to reach the magic number of 1 trillion dollars of National Debt in 1982. Average debt added per year during this 119 year period = $8.4 billion per year.

    From 1982 to the present, our National Debt has increased to a whopping $12 Trillion not counting the $2 trillion hidden on the books of the Federal Reserve (a stinking money cartel). Average debt added per year during this 27 years = $407 billion per year.

    2009-2010 Deficit alone is now projected to be somewhere around $1,250 Billion

    Do you see a pattern here?

    We will all be dead before this is repaid. Does anyone care what we are doing to the future? I'd rather live in a shack and wear rags than steal from the future like we are doing. Honestly, I think we have lost our moral compass.

    It is seemingly all about us and screw the future that will have to deal with our irresponsibility.

  • Report this Comment On August 21, 2009, at 6:28 PM, nosodog wrote:

    No actual recovery for the bottom 98% but the financial sector if feelin' fine.

    Once everyone sees retail is having a disappointing fall and Xmas is dismal then the financial sector and the top 2% can join the rest of America in the freefall into a full blown depression.

    The bright side? Even the gun toting, head banging tea-baggers will realize we need practical progressives in Washington to reform our markets.

  • Report this Comment On August 21, 2009, at 6:45 PM, NoMoeMoney wrote:

    >The bright side? Even the gun toting, head banging tea-baggers will realize we need practical progressives in Washington to reform our markets.<

    Yes, as an earlier poster stated, that will be Mr Smith and Mr Wesson.

    The market is smoking crack and everyone who believes is high-hi..

  • Report this Comment On August 21, 2009, at 6:54 PM, automaticaev wrote:

    I dont call them progressives i call them statists.

  • Report this Comment On August 21, 2009, at 7:45 PM, Dannysea wrote:

    Nosodog, what you got happening up the noso?

    A true oxymoron: "practical" and "progressive" when speaking the same?

    I live in a balanced budget lifestyle. Drive my work trucks to dinner and church. Okay I finally bought a 7-year old car for play after 25 years.

    Been through excruciating times, no $$, medical costs beyond our control, vehicles on the edge of being repo'ed, and worse. And yet we worked 6+ days a week, friends went on vacation, and we went without except what we could pinch.And then we paid everything off possible, and learned to be very benevolent to those less fortunate.

    We have watched all around us people living in houses they paid 3-5 times what we live in, and make a third what we do. The same policies our gov't has been instructor on being irresponsible, has taught the public at large, that their complacency of responsibility is okay.

    With an ever-growing base of non-responsibility, will this country be willing to all of a sudden take up the mantle to pay any debts? Or is it now "not fair" for this generation to pay the price?

    What is money, but a numerical currency to make for goods and services to have a ledger value. And yet it sedates the masses. For I can go out this evening and have supper that was flown in from across the world, drive a vehicle that was assembled and built in another sector of the globe, and have running water, fuel in my tank, toilet paper at home next to the water closet, and make comments on forums about the times we live in.

    But as we escalate our nat'l debt, everything finally becomes vulnerable to self destruction. Everything can be reduced to survival, S&W self protection, finding enough to sustain warmth in the winter and enough to eat.

    And all from this bratty, I deserve the best, and it is everyone else's fault and responsiblity.

    Good things and responsibility still give back the same. And selfish still gives back the same. One leads to good things and the other to destruction, and every facet inbetween.

  • Report this Comment On August 21, 2009, at 7:53 PM, aamire wrote:

    I've spotted 4 reasons for the disconnect between market and economy:

    1. Investor anxiety: investors were out of market for too long. With there $ earning nothing to negative in cash, they started moving in to the stock market.

    2. Govt. Directly buying stocks: Well not so directly, but out of trillions, some hundreds of billions trickling down through the system into stocks

    3. Market is a penny stock right now: after the pump, wait for the dump!

    4. We all are WRONG!: the economy is infact recovering; something only hindsight could prove.

  • Report this Comment On August 22, 2009, at 11:49 AM, eekthecat wrote:

    If you notice, it is always conservatives who are the most worried about this debt problem, and thinking life as we know it is going to fall apart completely and society will be reduced to a Hobbesian state of nature simply because of debt. This makes perfect sense, as conservatives feel so comfortable clinging to the myths that have shaped their conception of reality, that they will actually let themselves be enslaved by and taken down by these myths just for the sake of preserving them. This is more comfortable to someone of the conservative mentality than is accepting a paradigm shift.

    The reason we need practical progressives to run things is because they will see reality for what it is, and will not allow us all to suffer and perish because of something that is largely imaginary. Life has to go on, actions need to be taken, work done, goods produced, etc., and these things will happen regardless of any imaginary numbers, so long as we do not allow ourselves to be enslaved by our own ideas. Yes, the debt is a problem, in that it complicates things, and it will be difficult to work out a scheme that will work to get things moving properly. But life will go on, one way or another.

  • Report this Comment On August 22, 2009, at 1:53 PM, LessGovernment wrote:

    Oh for goodness sake eekthecat. Is this your best effort at comprehending what is happening?

    At the current 12 trillion dollars of national debt, every one percent of debt service cost equates to a drain on the system of 120 billion dollars annually. In ten years, the deficit is expected to grow by another 9 trillion dollars pushing the national debt to 21 trillion dollars (nearly one half of all current personal wealth in the country) making that debt service cost for every percent of bond yield an incredible 210 billion dollars.

    What this means to you and others that are mathematically challenged is that once the average cost of debt service exceeds 5%, we will have a drain on the system of 600 billion dollars which makes any chance of balancing the budget without added debt nearly impossible. And in 10 years, that amount will swell to a mind boggling 1.5 trillion dollars just for interest on the debt.

    That is more than we pay for defense. It is a budget buster and at that point, our national debt most likely spirals out of control. The rest of the world will either stop buying our debt, or they will insist on risk adjusted returns that are much higher than 5% which will only make the matter worse.

    I am not much on labels because I find they are usually used by morons to try to make a dumb argument sound intelligent. It is therefore interesting that your post singled out "Conservatives" as though this was some evil group of people. And if you are implying that "Liberals" don't worry about the national debt, then I can only assume that you have never really talked to a Libertarian.

    Real "Liberals" worry deeply about the debt because higher debt means a loss of freedom which is something Libertarians care deeply about. In fact it is only the members of the camp labeled Fools that I suspect you will find a group of people that think as you do that somehow things will work themselves out.

    If that is your plan for life then I suggest you learn to speak Chinese or Spanish. English will not be needed.

    I don't know what camp you call home, but you obviously don't understand math, government, finance, debt, and how too much debt can deprive you of your freedom. If you are proud to wear that on your T-shirt then you must be a fool.

    Our national debt is getting to a crisis level where taxes will deprive everyone of more and more of what they are working for and actually deprive the very people we are all trying to help of the opportunity to stand on their own two feet. When the debt becomes too great a burden, do you really think it will be the wealthy that is harmed the most?

    If you do, then you remind me of the PETA lady I met some time back that was protesting a farmer for shearing the wool from his sheep. PETA thought this was cruel. I mentioned to the lady that if the sheep lost their current occupation of being a wool supplier, all they had remaining was the opportunity to supply mutton.

    Such it is with the nation's poor. If the debt becomes too much a burden, as it is doing, it will be the nation's poor that are deprived of opportunity the most, and whose lives will be harmed the most. This is what wrong thinking idiots are bringing to these people in the name of not being an evil "Conservative".

    Please. Grow up.

  • Report this Comment On August 22, 2009, at 1:56 PM, eekthecat wrote:

    You totally missed the point.

  • Report this Comment On August 22, 2009, at 2:04 PM, eekthecat wrote:

    It may be that this debt is never paid off. And it may be that everyone realizes that previous generations made mistakes, and that we do not necessarily have to be bound by these mistakes. It may be that old paradigms are found to be unworkable, and scrapped in favor of something new. It only requires open minds and creativity.

  • Report this Comment On August 22, 2009, at 2:13 PM, LessGovernment wrote:

    Oh, I get it. You and your secret society have created a new paradigm that replaces debt and debt service cost and frees us all, both rich and poor, from the economic penalties that are coming as a direct result of our exploding national debt.

    Please explain. I am all ears.

  • Report this Comment On August 22, 2009, at 5:01 PM, eekthecat wrote:

    Debt can easily be erased. It isn't real. All that is necessary is for everyone involved to agree on a mutually beneficial arrangement. So we owe a lot of money to China, for instance. Are the young Chinese of today going to wage war on us tomorrow, knowing full well that the better life that they were able to live, in comparison to their parents, was a direct result of our willingness to go into debt, because they insist on adhering to a system of imaginary numbers that a previous generation created? Don't forget that these are people who don't have nearly the religious allegiance to the "free market" that Americans do; these are a people who "artificially" keep their currency exchange rate low, because they realize that they can and that it's beneficial to them. Our biggest creditor is a pragmatic country that realizes the imaginary nature of finance.

    Here, imagine this. Let's say the wave of foreclosures were to never abate, and the economy of the country continued to deteriorate, ad infinitum, so that eventually, everyone had been evicted, no one had a job, and no one could afford to buy any of the houses. So now there are millions of vacant houses, with no possible buyers, and everyone is sleeping on the street. No one works in the factories, because the companies have no money to pay them. No one sleeps in the houses, because they can't "afford" them. Would this ever happen? Of course not. People would realize this was ridiculous, and go back into the houses. There would be no motive to preserve the original market that had resulted in everyone being evicted.

    It isn't in anyone's interest for these "economic penalties" to be born out, and so they need not be.

  • Report this Comment On August 22, 2009, at 5:52 PM, eekthecat wrote:

    Right, which is why it is important for practical progressives to be in power, rather than people with rigid views about how things have to be.

    That story about your child support was really frustrating to read about. That's really ridiculous that you had to go through that.

  • Report this Comment On August 22, 2009, at 8:06 PM, dibo528 wrote:

    It does make me nervous that there is so much optimism, but, during every correction, the optimism fades. I'm pretty heavily invested, but I have a lot of reserve cash to invest when there is another correction.

  • Report this Comment On August 22, 2009, at 8:30 PM, LessGovernment wrote:

    Debt can easily be erased? It isn't real? That's your plan eekthecat?

    If you are syaing that all we have to do is default on our debt and then we don't have any debt, and that is your plan, then I guess we really have no need for further debate.

    You win. What an imaginative and intelligent argument. I am defeated.

  • Report this Comment On August 22, 2009, at 8:35 PM, LessGovernment wrote:

    Just one more thnkg eekthecat. China is holding less than 1 trillion dollars of our debt. Japan a little less. Most of our national debt isheld by Americans. So I see how your plan works. All you have to do is confiscate their wealth like Castro, or some other third world dictator in direct violation of our Constitution and then voila, there is no more debt. The only problem with this brilliance is that there is no more America either.

    Have you ever actually read the Constitution? Or is that something that is also to be interpreted by your new world order?

    People like you scare me. Deeply.

  • Report this Comment On August 22, 2009, at 9:05 PM, NOTvuffett wrote:

    LessGovernment, can't you see the big picture? Debt is an illusion!, lol. Nobody really worked and saved to loan money to other people, it all came from the magic money fairy. Wait a second, now that I think about it all the social security trust funds are in T-bills. She must have worked really hard on those, but what are you going to do?

    Like a fool I have been cutting up all those pre-approved credit cards when I could have had free stuff compliments of the fairy.

  • Report this Comment On August 22, 2009, at 9:24 PM, LessGovernment wrote:

    Yeah. Debt is an illusion. LOL.

    I think I'll buy a nice power boat - maybe a 50 foot boat. I always wanted one. And when I have to pay for it, I'll just take the money from eekthecat, because I am a practical progressive myself.

    I'll just take everything eekthecat has because, "All that is necessary is for everyone involved to agree on a mutually beneficial arrangement." I'll take everything Eekthecat has and allow Eekthecat the privilege to continue to work and give me more.

    Rules and even the constitution are probably just an illusion too.

    Be very careful what you wish for Eek, you may get it.

  • Report this Comment On August 22, 2009, at 10:09 PM, NOTvuffett wrote:

    truth, you are wrong about me if you think I had a silver spoon in my mouth at birth. I know what it is like to work hard and still be poor. But it is beyond ignorant to say debt can be erased on a whim.

  • Report this Comment On August 23, 2009, at 4:42 PM, Broken196 wrote:

    My how this flame war has provided a laugh.

  • Report this Comment On August 23, 2009, at 9:10 PM, NOTvuffett wrote:

    broken, you have provided me with a laugh with your asinine opinion.

    truth, you are right that I make the mistake of confusing the way things should work with the way they really work, and the market has punished me for it. I know you are a hard working guy that does his best with the money he has, and that you are focused on dividend stocks. When the market becomes less volatile, I would really like to see you write a blog on good dividend stocks, i may move much of my money there. It seems that the high yeild dividend stocks basically track the S&P. Not really good for the caps game.

  • Report this Comment On August 24, 2009, at 6:23 AM, thisislabor wrote:

    you know what the problem is with eekthecat, he has never had personal debt to climb out of. to say life goes on when repaying debt is a falsehood.

    life doesn't go on, it *****in ends as you know it tell the debt is repaid. You become an indentured servant to your past debts you have to pay back.

    and I personally think that when the gov't goes to renew it's current debts the rates it will find will be a lot higher then 5%. but that is just me.

  • Report this Comment On August 24, 2009, at 6:28 AM, thisislabor wrote:

    "If you do, then you remind me of the PETA lady I met some time back that was protesting a farmer for shearing the wool from his sheep. PETA thought this was cruel. I mentioned to the lady that if the sheep lost their current occupation of being a wool supplier, all they had remaining was the opportunity to supply mutton."

  • Report this Comment On August 24, 2009, at 6:42 AM, thisislabor wrote:

    to think, at my young age I am an indentured servant to the interest accrued by my parent's generation.

    huh. I guess I should just instead be jealous of the wealthiest 1%, huh? that makes sense, jealousy will find me a better job and make me more productive by stealing from the rich and bewitching the peasants.

  • Report this Comment On August 24, 2009, at 11:30 AM, LessGovernment wrote:

    My Dear Thisislabor,

    You have convinced me that you have seen the light. Debt will make all of us servants of a larger power, and that is not what this country was designed to be. The problem comes from a Congress too willing to spend and too willing to borrow from the future to do so because they know their spending can not pass the political test of being supported with tax increases in the here and now. So they spend and borrow from the future instead becasue the future has no representation. This is a new version of no taxation without representation, and it is real.

    The same idiots in Congress keep talking about how the economy is getting better, when in fact, we are wrecking the economy of the future to prop up the economy of the present.

    I am not so concerned about the current recession as I have lived through many. This one too will end when it ends. Of that, I have no doubt. But I am concerned that our future citizens will not have economic opportunity if we continue to enslave them with massive amounts of debt as we push the pain of our selfishness and arrogance to their shoulders.

    We are not accomplishing anything with the reckless spending of any significance other than creating a debt burden that will strangle the next generation and probably the one after that. And the time to do something about this is now, before we add another 9 trillion dollars to the already too high debt. Waiting and wishing is not a plan. Hoping that debt is an illusion is also not a solution because debt is real and will bury economic opportunity if not managed. Allowing the current administration a spending "pass" is also not a plan. We either change the spending now or condemn the future to horrendous debt burdens that will last a lifetime. There is no happy face to put on this irresponsibility, and hopefully, there are not so many people that will go willingly into debt oblivion like Eeekthecat. If their numbers are sufficient, then we are already lost. There really is no other way to look at this.

    I also agree with you that going forward, it is going to be difficult for the government to keep the cost of borrowing under 5%. I chose that rate as an example since we are almost there on the 30 year bond now and about a percent away from this level on the 10 year bond. But even at 5%, we can count on coughing up 1.5 Trillion dollars per year (about $5000 for every man, woman and child in the country per year) in the future to just pay interest on the debt without reducing the debt one penny. This is money that could be better spent by the future, but alas, we are squandering it now and giving them the bill and they will have to pay it. They will have no recourse, becasue unlike what Eekthecat thinks, debt is real.

    We simply should not let things go that far. The only solution I know of is to fire Congress and bring in some new folks that pledge on their honor to reduce the debt. We need a Congress that respects a debt ceiling, not one that raises the ceiling every time we get close to it. If that is all you do, then there is no debt ceiling, and yet another effective control mechanism has fallen to the politically correct socialist mandate to continue to socialize current living expenses at the expense of those that will follow us.

    This unfortunately is the supreme idiocy that is Congress circa 2009. Fire them all. Fire the Republicans. Fire the Democrats. Fire them all. Grab the government by the neck and shake it until it's teeth rattle and then shake it some more.

    If we can agree on that, then we can agree to wrote our idiots in Congress and tell them enough is enough. Either stop or be fired and then fire the bums anyway by never voting for an incumbent.

  • Report this Comment On August 24, 2009, at 11:44 AM, jason2713 wrote:


    I'm so glad you see the light my friend, the gov't is playing a very, very dangerous game. I've commented on several of these blogs.

    Guys/Gals, how in the world do banks make record profits within 3-4 months after almost sheer collapse? It doesn't happen! Period. They are cooking their books.

    Furthermore, how do you still post these profits when foreclosures are at record numbers month after month? How are they making money? They aren't!

    It's a dangerous game, another bubble being created in the market. Even though I don't think the market is going to completely collapse, I can foresee a huge correction in the near future. Once people see what I'm describing, money is going to exit the market in a hurry.

  • Report this Comment On August 24, 2009, at 12:46 PM, LessGovernment wrote:

    Jason2713, you are welcome.

    I am getting old. I care about the future. I have worked for over 35 years in accounting and computer systems that manage accounting.

    I know something about debt and its ill effects. I have seen it on too many balance sheets in too great a proportion to assets. And like I said, I care deeply about the future generations. I served my country and am still bound by my oath to protect and defend the Constitution of the United States from All enemies, foreign and domestic. What we are doing to the future is simply irresponsible. Accordingly, I researched and then wrote what follows in an earlier post. I think it should be read here, again, as it has a bearing on this optisim of today, and serves as a warning to what is to come tomorrow.


    Is it Time for Revolution?

    Following the last great depression, Congress met and discussed the root causes of what killed the economy way back there in 1929. The result of their findings was that reckless behavior and speculative buying on wall street created a bubble that was not supportable by balance sheet assets. Stocks, banks, and life savings crashed as a result.

    In 1933,

    to keep this problem from occurring again, Congress created some support for the bank depositor in the form of the FDIC (Federal Deposit Insurance Corporation) and also mandated through the Glass-Steagall Act that banks that were federally insured would not be allowed to engage in insurance and other high risk businesses. If the government was going to insure your deposits at the local bank for your benefit and security, the local bank was going to behave and not engage in risky activities. We had learned a lesson in 1929 at great cost for the education, and this legislation was going to prevent the depression from happening again.

    In 1971,

    Congress passed the Federal Election Campaign Act which permitted Political Action Committees to make larger contributions to Congressional candidates than what was allowed by law for individuals. In short, Congress passed their own version of campaign finance reform that created the ability to have unlimited funding since there is no limit on the number of PAC's that can be created and nothing to prevent multiple PAC's from contributing to the same candidate. This (bad) legislation was intended to give the incumbent a definite edge over any challenger and help insure political dynasties. In effect, this legislation put Congressional votes up for sale.

    In 1974,

    Congress passed legislation called ERISA (Employee Retirement Income Security Act) through which the taxpayer would guarantee retirement expenses for any defined benefit plan that went into default. With this legislation also came the mandate for Congressional oversight through sub agencies that would require businesses to fully fund their plans. Well, oversight did not occur and plan administrators were allowed to use wildly optimistic assumptions to show the plans were funded when in fact they were not fully funded. These assumptions went something like this "The assets in the plan next year will earn 18% in the stock market, so we don't have to invest earnings into the plan and in fact, can remove money from the plan because based on our assumptions, the plan is over funded". As a result of the lack of oversight and enforcement, under funded retirement plans are now common. The Pension Benefit Guarantee Corporation (the fund now guaranteeing these plans that was created under ERISA) lacks sufficient funds to perform its function of guaranteeing these under funded plans. As a result of the lax oversight and the regulators allowing the use of the wildly optimistic assumptions as to funding needs, this Act will claim more and more taxpayer monies as more and more plans that have not been funded as required by law will have to be funded by the government (taxpayers). What has been set in motion is taxpayers with drastically reduced discretionary incomes for now and well into the future will now be the source of funding for the under funded plans that have on average much higher benefits than anything the average taxpayer now providing the funding will ever receive. Just another of the many unintended consequences of government run amuck as government drives headlong into socializing corporate losses to the taxpayer.

    In 1977,

    The Community Reinvestment Act (CRA) was passed. This act, as stated in its own words, "intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low and moderate income neighborhoods, consistent with safe and sound banking operations". What was intended, and what occurred through enforcement are two entirely different results. This Act would later become instrumental in the economic disaster of 2007, some 30 years after passage of this act, because this Act enabled Congress and at least one President to "manage" (socialize) banking, mortgages, and credit which directly caused an overall lowering of quality of the mortgages used to back securities sold around the world. This was especially true during the Clinton administration from which pressure was applied to Fannie Mae and Freddie Mac to lower the credit restrictions on the mortgages they were buying. This was done to allow those without sufficient credit to still have access to a mortgage with only a slight increase in the interest rate to be paid. In other words, under enforcement of this act, the higher risk of loaning money to less credit worthy applicants was not to be offset with higher interest rates. In fact, the interest rate differential for the much higher risk of default was only 1 percentage point and even then for only two years if the loan was paid on time.

    This "socialist" approach to the mortgage industry was obviously dangerous, and accordingly, the alarm was sounded by New York times writer Steven A. Holmes in an article entitled Fannie Mae Eases Credit To Aid Mortgage Lending dated September 30, 1999 (Google it to read it). Unfortunately, few if any of those that read the article (including all members of Congress) understood the ultimate scope and horrific impact this credit easing would eventually have. Few if any also understood how this very credit easing would ultimately lead to a major problem in the banking industry due to the failure of derivatives based on the mortgages created using these lax credit standards. This act, as enforced and regulated, actually lowered the mortgage standards for the entire mortgage industry and helped create the atmosphere of lax enforcement that also allowed shoddy appraisal work, little or no verification of ability to repay the loan, sloppy ratings of collateralized debt instruments, and what later became known as "predatory lending". In addition, enforcement of this act time and again caused banks to pay what amounted to extortion in order to gain regulatory approval for a new branch or an acquisition of another bank. This Act, and its socialist enforcement severely weakened the banking and credit industries.

    In 1997,

    Congressional oversight allowed Citi Bank to buy Travelers Insurance even though this transaction was in total violation of the Glass-Steagall Act passed by Congress in 1933. Thus the illegal birth of the era of "Financial Services" in which banking businesses insured by the government through the FDIC and other agencies were now to be allowed to get involved in the riskier aspects of financial services such as insurance and investment banking while still being federally insured.

    In 1997,

    Congress granted the illegal new business entity now called Citi-Group an exemption to the Glass-Steagall Act so it could operate in the temporary legal status of violating the Glass-Steagall Act but do so with permission from Congress. This is about as close to a Congressional "Get out of jail Free" card as you will ever see. PAC's were at the heart of this exemption being granted.

    In 1999,

    the Graham-Leach-Bliley Act was passed basically repealing the Glass-Steagall Act altogether. Citi-Group, as well as many, many others, could now legally operate without the Glass-Steagall Act exemption granted by Congress. The doors were now wide open to mix federally insured banking with risky investment banking, insurance, and "insurance like" businesses such as credit default swaps. Out the window went the knowledge and lessens learned from the great depression, and the stage was now set for a repeat of history as PAC's applied pressure to Congress for more and more deregulation in exchange for more and more campaign funds. The only thing now standing between loosely regulated banking and federal insurance and total banking failure is the requirement to hold sufficient amounts of capital to backup the "insurance like" promises of credit default swaps and debt instruments and derivatives. The exact wording in this legislation as to these important aspects follows:

    Repeals the restrictions on banks affiliating with securities firms contained in sections 20 and 32 of the Glass-Steagall Act.

    Creates a new "financial holding company" under section 4 of the Bank Holding Company Act. Such holding company can engage in a statutorily provided list of financial activities, including insurance and securities underwriting and agency activities, merchant banking and insurance company portfolio investment activities.

    Oddly, this act did ask for a study to be conducted on derivatives and their risk, but apparently, no one got the message or if they did, they either performed a bad study (surprised?) or they failed to share it with anyone.

    This act also shows that as early as 1999, there was growing concern over the Frankenstein "sort-of-banking" that this legislation was bringing to life. Frankenstein would later be known as "to big to fail". The exact wording in this legislation as to this important aspect follows:

    Provides for a study of the use of subordinated debt to protect the financial system and deposit funds from "too big to fail" institutions and a study on the effect of financial modernization on the accessibility of small business and farm loans.

    This piece of legislation, not yet harmful enough, also reinforced the Community Reinvestment Act (CRA) of 1977 in a couple of significant and harmful ways. This was done by withholding Federal Reserve permits for a new branch or to form a new bank holding company if the entity applying for the permit did not rate "high" enough during the latest CRA compliance exam. CRA compliance regulators now had the power to stop a bank's growth or even withhold its permit to operate. This provision is referred to in the 1977 CRA paragraph above as having "…caused banks to pay what amounted to extortion". The exact wording (and it is despicable) in this legislation that did this follows:

    The Federal Reserve may not permit a company to form a financial holding company if any of its insured depository institution subsidiaries are not well capitalized and well managed, or did not receive at least a satisfactory rating in their most recent CRA exam.

    If any insured depository institution or insured depository institution affiliate of a financial holding company received less than a satisfactory rating in its most recent CRA exam, the appropriate Federal banking agency may not approve any additional new activities or acquisitions under the authorities granted under the Act.

    My Explanation of the above- If any single branch of your thousands of branches (if you are a large bank) did not "earn" a satisfactory rating from the CRA examiner, the entire banking operation had a big problem. The CRA examiner at this point has too much power, the CRA exam is too suggestive, and the CRA exam has absolutely nothing to do with sound banking practices, and in fact, throws sound banking out the window as the CRA forces banks to be politically correct at the expense of sound banking.

    This is where the banks were forced to pay "extortion" in the form of knowingly making bad loans in order to survive and prosper under CRA. This is a world gone mad and the entire world will pay a dear price for this in 2007-2008-2009-2010-2011 and beyond.

    In 2000,

    The Commodity Futures Modernization Act was passed with support from Fed Chairman Alan Greenspan and mostly Republican support in congress. It and was introduced and supported in the House as H. R. 5660 by Thomas Ewing (R-IL), Thomas J. Bliley, Jr. (R-VA), Larry Combest (R-TX), John J. LaFalce (D-NY), Jim Leach (R-IA), and was introduced and supported in the Senate as S. 3283 and was sponsored and supported by Sen. Richard Lugar (R-IN), Sen. Peter Fitzgerald (R-IL), Sen. Phil Gramm (R-TX), Sen. Chuck Hagel (R-NE), Sen. Thomas Harkin (D-IA), and Sen. Tim Johnson (D-SD).

    This Act was signed into law by President Bill Clinton (the same president that had been pushing Fannie and Freddie to lower credit standards on the loans they would buy) in December 2000.

    What this Act did that was so bad was simply to make most over-the-counter derivatives contracts outside the regulatory purview of all federal agencies, even the Commodity Futures Trading Commission.

    With the new law on the books, the market for credit default swaps exploded 100 fold from $632 billion outstanding in the first half of 2001, according to the International Swaps and Derivatives Association, to $62 trillion in the second half of 2007.


    The reader should take note that Congress has at this point:

    Removed the banking industry safeguards put in place following the great depression

    Forced banks to make what amounts to bad loans

    Forced Fannie Mae and Freddie Mac to lower their credit standards

    Forced Fannie and Freddie to buy the bad loans banks and other loan originators were being forced to make under the Community Reinvestment Act

    Allowed Fannie and Freddie to securitize and sell to the world AAA rated securitized debt that used bad loans as collateral

    Forced (through CRA enforcement policies) the entire banking industry to become politically correct regardless of risk and potential cost

    Failed to regulate the banking industry adequately

    Placed regulation responsibility of international banks onto states for the insurance like activities of the banks (an impossibility)

    Failed to regulate and enforce ERISA law

    Failed to ensure pension plans were adequately funded as required by law

    Allowed government insured banks to get more and more involved in the riskier banking functions regardless of the risk being transferred to the taxpayer.

    In short, Congressional legislation and lack of oversight had at this point put the entire economy on a course to disaster. This disaster could still have been avoided, but people, especially those in Congress, had to listen to the warnings. They didn't.

    In 2002 and 2003, with the stage set as described above, Congress failed to listen to the testimony in Congress, on the record, from experts that Fannie Mae and Freddie Mac now represented huge systemic risk to the entire financial system through the "assumed" risk that the GSE's were backed by the government. Keep in mind that at this point in time, the GSE's were, by act of Congress, NOT backed by the federal government. All that was being asked of Congress in this testimony was to simply make that fact clear, that no government guarantee existed.

    Instead, Congress (under the leadership of Barney Frank and others) pushed even harder for the GSE's to increase home ownership through purchasing even more risky mortgages with little or no money down and other obviously bad practices. In the process, the balance sheet exposure (risk to the taxpayer) increased from 132 billion of exposure in 1990, to 1.5 trillion in 2005, to 5.2 trillion in 2007.

    When the housing bubble began to pop in late 2005 or early 2006, Fannie and Freddie immediately fell into desperate financial condition due to the accounting irregularities on their books and their low grade collateral that was being used to back the trillions of dollars of securitized debt. Now, with the stage completely set for economic catastrophe, that is exactly what America got.

    There is only one reasonable reaction at this point in time and that is to Fire Congress. Do not vote for an incumbent ever in the future. Do not re-elect anyone. This, and only this, will remove the power and influence of the PAC's.

    The beauty of Capitalism is you free the brain power of millions of investors, and workers, and decision makers to borrow, deploy, and invest capital and assume risk. The true oversight in a capitalistic system is the freedom to fail should the taking of risk become excessive. This failure then allows those that managed risk to acquire the assets of the failed businesses at cents on the dollar and re-deploy those assets for the betterment of all.

    The short coming of socialism is that a few government leaders and/or un-elected appointees take charge and attempt to "manage" the economy through central planning, legislation, social engineering, and agenda driven oversight or lack thereof. In trying to use socialism to help a few, the socialism employed has harmed nearly all of us and put those that the socialist policies tried to help in even worse conditions going forward.

    Socialism does not and never will work because true oversight does not exist in Socialism as the freedom to fail has been removed and the removal of the ultimate oversight (failure) encourages risky behavior and transfers the consequences of taking on excessive risk to the taxpayer and future generations.

    In other words, Socialism robs from the taxpayer the funds needed to bail out the excessive risks taken by individuals and businesses. Just open your eyes and you can see this happening on a daily basis as with each "socialist fix" comes yet a new set of problems that require yet another "socialist fix" all the while the economy is pushed deeper and deeper into the abyss of debt and possible depression. The common thread woven through all these "fixes" is the confiscation of more and more taxpayer funds, and the corresponding lowering of discretionary income which decreases economic activity and standard of living. It (socialism) ends with a collapsed economy.

    A recent good example is the collapse of the Soviet Union. The USSR no longer exists. The USA is not far behind if we continue this folly. We have now reached the point where the Federal Reserve Bank is giving IOU's to the Treasury for the Treasury debt it is purchasing. In other words, we are now at the point of selling our debt on credit. This is simply nuts.

    ERISA funds are over committed, the FDIC is running low on funds and will need more from the Treasury or will have to tap its member banks with higher and higher fees resulting in less and less lending, the federal highway fund is broke, Social Security is unfunded, Medicare is unfunded, federal retirement is unfunded, and now states are coming forward and asking to be bailed out of their own multi-billion dollar problems.

    We will most likely add over five trillion dollars of debt to our 9 trillion dollar November 2007 national debt before the end of 2011. Our unfunded obligations of Social Security, Medicare, federal retirement, and others now exceed 80 trillion dollars. And what is the government now trying to do? Are they cutting spending? Are they trying to get the financial house in order? No. They are trying to create yet another plan called government provided health care that they will also not be able to fund.

    If they want this plan, we should first insist that social security is put on a track of being totally funded first, and the same for Medicare, and the same for government retirement, and the same for the federal highway fund, and the same for PBGC, and the same for FDIC, and the same for FSLIC, and the same for all the others, or kill one or more of these plans if they can not be fully funded.

    Once all these unfunded obligations are totally funded or killed, then and only then should we proceed with any new entitlements. However, judging from the careless and reckless legislation from the past, and the speeches and promises of today, there is little hope that the new administration and Congress will be this logical.

    You have to look back at the government's ability to predict what these plans will cost to see how bad government's planning really is. For example, when social security was first introduced, it was funded with a 1% tax on the first $3000 of wages, or $30 per year. How has that funding mechanism stood the test of time and plan expansion? Well, today, the bite from payroll taxes is 15.3% of the first $102,000 ignoring the taxes applied above that point which are still substantial, but for arguments sake, I am keeping this simple. Plan expansion has resulted in tax expansion to the point that $30 per year has morphed into $15,606 dollars per year for higher compensated workers, yet these plans are still under funded.

    It obviously makes no difference how much the government takes in payroll taxes, these plans will never be fully funded because the government has not been able to save one thin dime in our 233 year history. And with the government tax bite growing all the time, the taxpayer due to tax creep is now nearing the position, or is already in the position of not being able to save. This is the quandary we now face. The government won't save and the taxpayer can't save so we borrow the money we need to run our lives from countries around the world and commit yet more tax dollars to debt service making the matter worse. This is ridiculous. What is even more ridiculous is the president wants to add yet another plan.

    We need debate. We need to recognize that buying everything you want on credit is a short cut to having nothing. This has to stop. And it will stop, either with a failed economy, or a ruined currency, or an uprising of the people, or all the above. Either way it will stop. The choice is yours as to how it stops.

    I prefer revolution as it is quick and gets to the point. The revolution I deem appropriate at this point follows the Constitution as I am sworn to follow as an ex military member. I am not referring to a revolution of guns and bullets, but a more powerful and more promising revolution. The revolution I prefer is simply this.

    Never vote for an incumbent. Fire Them All. One Term Allowed. Even for Presidents. One term allowed for federal, state and local officials. Don't let them stay in office long enough to become corrupt. And if they are corrupt, prosecute vigorously when they are fired from office in the next election cycle.

    This is our best choice. Hire them. Fire them. Break the back of PAC's and special interests. Get new blood, younger blood, older blood, school teachers, doctors, pilots, computer technicians, laborers, and others into the Congress and then fire them too after one term.

    It is only through this method that we can begin to lay the ground work to remove PAC's and the other bad legislation of the past. It is only through a method such as this that simple and effective election finance reform can be created such as only registered voters being allowed to contribute anything of value and if a candidate accepts anything of value from anyone other than a registered voter, he immediately forfeits the election and is banned from running in the future. Special interests and PAC's will be effectively neutered by this. They need to be.

    Start the revolution today. Pass this on. I beg for your support in this important matter.

    Our very future may very well be at stake.

    Please copy this and pass it on.

    Thank you.

  • Report this Comment On August 25, 2009, at 3:18 AM, fromAdistance wrote:

    Hi LessGovernment,

    You have a great perspective of things and things to come. Not that no one in position in the past and present government do not know the consequence of huge debts and huge deficits in balance of payment. It is simply one of the drawbacks of a democracy. No elected presidents will want to rock the boat too much. The likely outcome of the continuation of this situation is the substantial devaluation of the dollar. The worst but unlikely scenario is becoming a banana republic as Warren Buffet warned. We can only hope it does not happen in our lifetime! But if nothing is changed, it is likely we see it in our lifetime!

  • Report this Comment On August 26, 2009, at 11:23 AM, ryanalexanderson wrote:

    LessGovernment for President!

    Or whatever the position will be called, after martial law is declared.

  • Report this Comment On August 26, 2009, at 1:11 PM, MrManoeuvre wrote:

    Some interesting insights here. Being an American living in Canada myself, I am very curious/anxious/interested to see how this undeniable problem of American debt will effect countries that are closely tied to the US.

    The Gov't of Canada is running a deficit of $50B (ish) this year and the opposition parties are losing their minds about it. Can't imagine why the debt issue isn't a larger concern for your average American voter.

    Given, Canada hasn't felt quite the sting from this economic downturn as the US has, but still... you would think even a glimpse of the future or a thought about it would scare a good number of people into action.

    I guess not being able to put that second hot tub in this year is more concerning to most people these days.

  • Report this Comment On August 26, 2009, at 5:56 PM, stonebusted wrote:

    Some one earlier mentioned the US costitution. An out of date document, Jefferson suggested it might work for 75 years. Of course the judicial system, a group of fxxxing lawyers, tell us what the founding fathers meant. I wonder if they can read my thoughts about them.

    1st re-write a modern document to run the country by. Hopefully the federal judiciary system will be eleminated as a first step toward turning the country around.

    I really hate having lawyers looking out for my interests. I wonder if Shakespeare ever addressed this?

  • Report this Comment On August 26, 2009, at 8:12 PM, Dannysea wrote:

    With our technology, we could easily move from a republic to a true democracy. Have a pres for meeting dignitaries and reset how military is directed. Pres runs for a new length single term that has evaluations with rewards and consequences at several intermittent and final completion of term.

    Move away from petty crime laws that is making the public look like and treated like criminals. Set penalties for public servants that feel they need to penalize the public.

    And the wishlist goes on...

  • Report this Comment On August 28, 2009, at 4:51 PM, Velocity1986 wrote:

    I personally believe that the rebuilding of the national and global Frameworks should not proceed until the question, "What is the purpose of money?" is more clearly resolved.

    An honest clarification of that complex and bio-spiritual question will allow for a responsive and responsible updating process. It is likely that it will also necessity re-envisioning and re-writing the GATT 1994 TRIPS Agreement. That will take time, but it will be much safer in the very-long run than fantasy football with IP. Stocks do have a life of their own.

    Anyway, I would not lock in the UNFCCC until the re-conceptualising of money is a settled matter. Then do your Framework updates and the rebuilding of the Planet-for-Profit system.

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