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Bullish Shillism: The Larry Kudlow Stock Bubble Fraud
Conspiracy

by Al Martin
(6-20-05) Now we live in Fantasy Land America, Home of
the New Stock Market Bubble. So, as we say at Al
Martin Raw.com, the lies you get for free. The truth
you have to pay for.

Like many others, I have become upset about the
ever increasing amount of Bullish Shillism we are
seeing on CNBC and BBN. Not only does it anger me, but
it angers many in the nation. I can tell by the number
of people that call into my radio shows and comment
about the expansion of Bullish Shillism, particularly
on CNBC, led by Larry "The Dow's Going to 50,000 under
Bushonomics" Kudlow and his erstwhile gang of
never-endingly bullish retail institutional shills.

Last Friday, Larry Kudlow was on his evening
show, the all-American bull market show, wherein Larry
and the gang of shills are now predicting a summer
rally that will take the Dow to 12,500. The S&P
current price earnings will expand to 23.5, he said,
with the future P/E at 27.5. What he is saying is that
price earnings multiples will expand beyond the peak
of the dot-com bubble of March 2000 because that's
what would be required for the Dow to rally to 12,500.

And I was thinking how irresponsible this is --
to tell this to the unwashed and to recommend the new
line, understanding that Bushonomics has drained the
liquidity and savings of the Joe Sixpack 300-share
retail sucker buyer.

Kudlow and Co. are now recommending, for the
first time (and you've never heard this before, and it
shows you how desperate the bullish shills is) that
it's okay to load up and to buy stock on margin. They
are further recommending that consumers, already
carrying record debt levels, further expand debt
levels to buy stock.

This is very irresponsible, and it is dangerous,
particularly since Kudlow is so widely listened to by
the unwashed. And what evidence does he give? The
evidence is that the markets continue to rise despite
growing negative economic fundamentals.

Thus, according to Kudlow, we are in a new
paradigm. Just as the dot-com bubble pushers claimed
that the new Internet paradigm of dramatically reduced
cost could sustain dramatically expanded price
earnings multiples, more than twice the 50-year market
average price earning multiples (we saw anyone that
bought into that concept lost their shirts.), now
there is a new paradigm coming from the White House.
This is exactly where it comes from because Kudlow is
nothing more than an Bushonian shill.

The new paradigm is that stock prices should
move higher because economic fundamentals under the
scourge of Bushonomics continue to deteriorate; that,
somehow, falling industrial production, falling
consumer spending, record debt levels are all good for
stocks.

According to Larry, it's all a function of
interest rates, with the 10-year bond at 4% and
possibly even going to fall, or the yield curve
actually inverting later this year, as the Fed
continues to push up short rates. This proves that
there is no inflation in the pipeline. And it proves
(get this!) that stocks will get ever cheaper to hold
because of falling rates, that the earnings of these
companies will not be negatively impacted any longer
by falling production, falling consumption, falling
retail sales, increasing debt levels; that none of
this makes any difference anymore.

This is the ultimate in specious reasoning. This
is the ultimate in what passes for thinking in Fantasy
Land America. You can see that this is popular because
CNBC's ratings are at all-time highs.

This is a popular concept, and he's hit a nerve
among the Bush supporters, which are still 50% of this
nation, that it is patriotic to go into debt to buy
more stocks and that we need to buy more stocks to
support the market as Bushonomics creates economic
circumstances-i.e., deterioration at the manufacturing
and consumer level-that would normally be harmful to
stocks. But this can be overcome -- falling earnings,
falling retail sales, falling industrial production,
etc., and rising debt levels can all be overcome,
according to Larry, as long as corporations continue
to buy back stock at record levels, which is what they
are doing, and as long as patriotic citizens do their
part by increasing their purchases of shares.

Therefore, what is happening, according to
Larry, is that stock prices can continue to rise even
though earnings may fall because there's less stock
available because stock is being taken out of the
market through buy-backs, and is being salted away
through tighter hands of patriotic citizens buying
that stock.

So, what Larry is saying is that it is a race;
that the corporations can now repurchase and retire
stock-because it is true that corporations have the
highest cash balances ever-that, as long as
corporations continue to repurchase stock and retire
that stock faster than their earnings fall, then
earnings actually rise.

This is the most perverse bullish logic, mixed
in with patriotism. It is dangerous. In fact Larry
Kudlow and Co. should be prosecuted for the commission
of fraud against the people of the nation. Because
that's what they're doing.

When you have Larry Kudlow and a gang of retail
institutional shills, on CNBC every day, who have a
direct financial interest in the markets continuing to
go higher, peddling this wanton nonsense to the
American people, they are effectively conspiring to
defraud the people.

This is the Larry Kudlow Stock Fraud Conspiracy.

And this is the way it should be fostered,
despite the fact that some of their old guard that
they have on CNBC all the time, like Bill Seidman, has
even tried to throw out notes of caution.

When he does so, he is talked down. Here's the
venerable Bill Seidman, who is talked down by Larry
Kudlow every time that Seidman tries to throw out a
note of caution.

According to Kudlow, there is no speculative
bubble in real estate. And, as Kudlow touted the fact
yesterday, the American people know this. Because
Kudlow was touting the National Association of
Realtors report which said that 73% of the American
people did not know, didn't understand what
speculative bubbles in real estate were, and they
didn't believe there was one. And (get this) this is
dangerous and a record number -- that 73% of Americans
believe that home prices will continue to appreciate
at double-digit rates per annum forever. When 73% of
the American people believe that they can continue to
use price appreciation in their homes to rely on for
their own consumer spending via equity loans forever,
this is again a danger sign.

Professional investors are angered by this.
Knowledgeable professional investors are increasingly
angered by what they're seeing on CNBC and BBN.

The average Joe Sixpack investor wouldn't
understand this or realize it, but you will notice
they do not have individual interviews with Warren
Buffet or George Soros anymore, like they used to, or
the renowned short-seller, Bill Fleckenstein.

Note that they do not have those interviews with
professional investors that have made billions. Why?
Because the professional investors keep wanting to
speak the truth on CNBC. That's why they're not
invited on.

You can also note how, even when Warren Buffet,
who has made as much money being short as he has long,
says that something is overvalued or a particular
class of securities or a certain investment vehicle is
overvalued, that even Warren Buffet, who is praised as
the "Oracle of Omaha" on CNBC, will be roundly
criticized on the very same CNBC when he says that
something is overvalued.

In 40 years of observing the markets, I've never
seen an environment like this. This rampant Bullish
Shillism has led to a speculative bubble in the
market, which is being justified through something
that is absurd and ludicrous: that markets can
continue to rise, the price earnings ratios can
continue to expand as manufacturing and retail sales
continue to fall and debt continues to increase and
real wages, ex of inflation, continue to fall.

And yet stocks can continue to rise, not over
the near term, but forever; that, indeed, the
environment we are in constitutes a whole new paradigm
wherein corporate earnings can fall by 10% a year.
This is a quote from last week: Corporate earnings can
fall 10% a year, yet prices of stocks can rise 10% a
year forever.

That's the new paradigm. Because corporations
can continue to take stock off the market, thereby
reversing dilution quicker than will their earnings
fall.

Did he make this up? No. He is not smart enough
to do this. This is coming from somebody in the White
House who has made up this entire line.

Fortunately, to counter this, at least to some
degree, we have seen a record number of public
appearances by the normally reticent Comptroller
General, David Walker, who has now appeared before
some Congressional committee or some other forum once
a week for the last 17 weeks. For a man that usually
doesn't put out much public comment, this is
unprecedented.

Now, any coverage of him, of course, will not be
carried on the mainstream networks but is, at least,
now carried on C-SPAN 1 and 2. You can get copies of
what he says in its entirety on C-SPAN-3, but you
actually have to pay for it. Once again, another
example of what AlMartinRaw.com keeps telling you: The
lies you get for free. The truth you have to pay for.

Bill Seidman attempted, in his last few
appearances, to point out some simple facts. Seidman
looks at the same information that AlMartinRaw.com
does, information put out by the NAR, National
Association of Realtors, the NCCI, National Credit
Counseling Institute; the ABI, the American Bankruptcy
Institute; the OCC, Office of Comptroller of the
Currency; the FHA, the Federal Housing Administration.

What Seidman tries to point out and has been
roundly shouted down, or they quickly go to a
commercial break, is the danger that the speculative
bubble in real estate represents to stock values.

That is something that is under-appreciated. You
will notice how CNBC goes to great lengths to try to
keep the two separate. They try to maintain the line.
Even Larry Kudlow will not say that real estate prices
will go up forever. Even Kudlow says there could be
some contraction but that won't hurt stock prices, but
it is absurd to say that that won't hurt stock prices.

The Federal Reserve pointed out in its study
last Thursday, which Greenspan referred to in his
testimony before the joint economic committee,
although he didn't refer to it in detail and I could
understand why-that the current speculative bubble in
real estate, even if it were to unwind in the same
manner as all other speculative real estate bubbles
have unwound in this nation, wherein there was
experienced, over a 3-year period, an average 17%
decline in median home prices, which is the average
for the unwinding of a speculative bubble and is,
indeed, the decline we saw from the 4th quarter of
1989 to the 2nd quarter of 1991 when the real estate
bubble of the late 80's unwound-even this unwinding,
would, according to the Federal Reserve, lead to 20
million mortgage defaults in the nation.

To put this into comparison: the speculative
bubble of the late 80's, when that unwound from `89 to
`91, there were 3.6 million mortgage defaults.

What the Federal Reserve is now saying is that
there would likely be 20 million mortgage defaults.
Because in the unwinding of the speculative bubble in
property from `89 to `91, the debt-to-equity ratio was
still 37% -- meaning the people had 37% of equity.

Now, the median debt-to-equity ratio of property
in the United States is only 14%, a record low, due to
the $3 trillion that has been taken out of property
equities since 2001 in order to sustain consumer
spending.

What the Fed pointed out is that even an
unwinding of this speculative bubble to the extent of
the historical average would wipe out $2 trillion of
equity of the GSE's: Ginnie Mae, Fannie Mae, Freddie
Mac, more specifically.

How would that happen? Because of the enormous
amount of mortgage defaults, which are going to occur
in an unwinding of the speculative bubble because the
debt-to-equity ratio is so low.

What the Fed is saying is that $2 trillion of
capital would be taken out, would essentially
evaporate within the GSE's. Further, the nation's
commercial banks and mortgage lenders, which are
indirectly guaranteed by the U.S. Treasury through
various pools (FDIC, FSLIC, FSCL and so on), would
potentially be exposed to a $2 trillion hit, if, and
this is only assuming, if this current speculative
bubble in real estate only unwinds to the extent of
the national average of unwinding of speculative
bubbles in property, a la 1989 to 1991.

This is the scenario as opposed to what others
believe, including the Economic Policy Institute and
AlMartinRaw.com. Remember Fed Governor Susan Beis
remarks about a potential 40% loss in the national
median home price average over 5 years when the bubble
begins to unwind. A 40% loss, which is privately
calculated by the General Accounting Office and the
Office of the Comptroller of the Currency and the
Federal Housing Administration. That is what those
three institutions actually believe is going to
happen. A 40% decline over 5 years of the median home
price in the United States would collapse the economy
of the United States, to use Walker's words.

It would be an unprecedented debacle, and the
only remedies are (and, unfortunately Alan Greenspan,
I think, is the impediment) for the General Accounting
Office, the OCC and the FHA to take action now to
begin to pressure the speculative bubble in real
estate by ending the availability of interest-only
mortgages in what they call hot zones, where there is
the greatest depreciation, in regions like California
and Florida.

You know the reason why Alan Greenspan is
against this? According to the Federal Reserve, real
estate hot zones now include 68% of all of the
transacted real estate in the nation. That's how
widespread the speculative bubble has become.

Thus the Fed is in yet another conundrum of its
own creation. The Fed is literally frightened to go
along with the OCC and other government agencies in
imposing regulation that they know would lead to the
collapse of the speculative bubble. Because they don't
want to be blamed for the economic consequences of it.

Everybody knows that whoever it is that pushes
the idea to collapse the speculative bubble by
government action has, not only ended their political
careers, but God knows what would happen to them. What
did the Director of the OCC say -- The OCC has the
power to control this. We want to step up and end
interest-only mortgages and hot zones. We want to
prevent speculators from owning too much real estate.
We want to begin to force recapitalization of
interest-only loans. And we want to stop
over-capitalization of mortgages through mortgage
companies, wherein Dytech will lend you 125% of the
home property value. They want to stop that.

After that, the Director of the OCC said that
she had to ask the FBI for protection because of death
threats she had received. From whom? She didn't know.

But the assumption is that the threat would come
from professional real estate companies and
speculators, most of whom are well-heeled. Everyone
knows in Washington that the speculative bubble has to
end because the longer it is allowed to persist, the
more severe the consequences will be, the more
unmanageable the consequences will be, as it starts to
bleed air.

Therefore a prudent government would act to
begin to force the bubble to bleed air under the
belief that, if government action forces the bubble to
bleed air, then government action could, perhaps,
control the fallout.

That's what any prudent government would hope to
try to do. But as for the Bush Cheney regime, you
listen to John Snow: We don't want to interfere with
the process of capitalism.

If you listen to John Snow, you would think that
everyone who buys a house in the United States is a
'professional real estate speculator that understands
the risk.' That is the administration's line as spoken
by John Snow, that those buying real estate at today's
lofty levels understand the risk and understand that
they may lose all of their money. "We don't want to
interfere with the process of capitalism."

But is it true that all those purchasing
property today, those who are purchasing the $800,000
house that was $300,000 five years ago truly
understand the risk?

Are they professional real estate investors? I
don't think so. And the administration uses this great
guise because they know it's politically popular.

This is the ever popular 'laissez-faire'
argument. Oh, no, we can't interfere with the
capitalist process. We have to let the speculative
real estate bubble shake out for itself. And even John
Snow says. "Yes, people will lose money." Even Snow
says that.

According to Snow, under this argument, the only
people that are going to lose money are professional
real estate speculators and investors who understood
the risk going in. But of course, it is absurd to say
that.

This is the way the market works: the stupid
money loses out always. They do have a point.

The Secretary of Treasury under Roosevelt,
Bernard Baruch used to say-this was based on the
economic theorem that had been developed by Thomas
Malthus. People overlook Malthus. They think of his
population studies, but they forget that Malthus did
extensive market studies as well.

Baruch, in the 1930's and 40's was always famous
for pointing out that in any capital marketplace that
people look at as an investment-stocks, bonds, , land
- 83% of all of the investors must receive a sub-par
return in order for 17% of professional investors to
make a living.

Baruch used to say that 83% of the wannabe
investors, people that just throw money into mutual
funds every month (Of course, 401k's, IRA's didn't
exist.) must believe Of course, Baruch was a
speculator himself. That's what he was famed for.

As Baruch pointed out, 83% of the people wearing
their hats as investors, must always believe the lie
that prices and the value of investments will always
increase over time.

This is the shearing-the-sheep principle. That
was Jesse Livermore's famous expression, the
shearing-the-sheep principle.

The famed speculator Jesse Livermore, who made
all of his fortune by selling short, by the way. He
was the great short-seller, and he accumulated the
greatest fortune ever selling short, as did John D.
Rockefeller. Did you know that 3/4 of all of
Rockefeller's 5 families' wealth was accumulated on
the short side of the market, as was most of the great
dynastic wealth made in the stock market throughout
the 19th and early 20th centuries in the nation?

So Livermore talked about the concept of
shearing the sheep, how he would go into his office on
Number One Wall Street every day-this was in the late
20's-and he would see the people lined up outside to
buy stocks. He had a painting in his office that he
had had commissioned by a friend of his, the renowned
Danish artist Emil Carlson. Carlson's works were worth
a lot of money. He had a painting done by Emil Carlson
which showed the investors dressed up as sheep lined
up in front of Number One Wall, at the corner of
Broad, and money in their hands to buy stocks. It
showed this giant picture of Jesse on the inside
taking their money in his right hand, and in his left
hand he's got orders selling stocks short.

This article ends as abruptly as we believe the
US economy will end...

* AL MARTIN is an independent economic-political
analyst with 25 years of experience as a trader on
NYMEX, CME, CBOT and CFTC. As a former contributor to
the Presidential Council of Economic Advisors, Al
Martin is considered to be a source of independent
analysis for financially sophisticated and market
savvy investors.

After working as a broker on Wall Street, Al Martin
was involved in the so-called "Iran Contra" Affair as
a fundraiser for the Bush Cabal from the covert side
of government aka the US Shadow Government.

His memoir, "The Conspirators: Secrets of an Iran
Contra Insider," (http://www.almartinraw.com) provides
an unprecedented look at the frauds of the Bush Cabal
during the Iran Contra era. His weekly column, "Behind
the Scenes in the Beltway," is published weekly on Al
Martin Raw.com, which also publishes a bimonthly
newsletter called "Whistleblower Gazette."

Al Martin's new website "Insider Intelligence"
(http://www.insiderintelligence.com) will provide a
long term macro-view of world markets and how they are
affected by backroom realpolitik.


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