The great market bubble goes on as cheap credit, blinkered managements and greedy investors continue to power markets higher to levels that can’t be sustained.

A half a per cent rise in retail sales in the month is suddenly greeted as good news because it wasn’t as bad as first thought; ignoring the fact that consumer spending, wages, credit and employment is still getting worse; JPMorgan Chase reported a surge in profits, thanks to record revenues and gains from fixed-interest trading and other dealings, all using the very cheap money from the Fed.

Investors ignored another $2 billion in provisions for consumer credit bad debts and a surge in losses, but focused on the plaintive hope of the bank’s management that they might have seen a stablisation in the terrible credit problems among their credit card, home loan and consumer businesses.

So the Dow pushed over the 10,000 point mark for the first time since before Lehman Brothers failed 13 months ago and closed at a new 2009 high, gold jumped to an all-time high of $US1072 an ounce (and settled at $1064 an ounce). Oil popped to its newest 2009 high of $US75.40., The last time they traded above $US75 a barrel was a year ago this week when the then futures price was $US78.38 a barrel (and was falling).

Driving much of the action was a sustained sell-off of the US dollar by investors searching for higher returns: the Australian dollar remained over 91 US cents overnight, ending at 91.44, close to a new 14-month high. The greenback fell to its lowest level since August last year against major currencies, such as the yen and the euro.

Traders are using the cheap funds provided to banks by the Fed, the European Central Bank, the Bank of England and other groups to speculate against the greenback and bet that the American economy is in the midst of a major recovery. They are treating results from JPMorgan as sustainable, and those from groups such as Intel (which reported better sales figures for the September quarter) as a harbinger for a return of a consumer boom); ignoring that unemployment is still rising in the major consuming markets of the west such as Europe and the US.

The Chinese economy is giving heart with its best export and import performance for almost a year: imports of iron ore soared to more than 64 million tonnes, a record, and much of that came from Australia. As a result, Rio Tinto boosted its 2009 iron ore production forecast by between 5-7.5%. Earlier in the year that was not on the cards as Rio was locked in a major dispute with the Chinese Government, steel mills and business over abandoning Chinalco and the Stern Hu affair.

But now for the reality check, starting with the Financial Times Lex column, which pointed out:

“Apart from investment banking, a corporate unit boosted by trading funnies and a bounce in markets that flattered asset management, pre-provision profits fell in every other division compared with last quarter.”

And that’s the real story: investors were comparing it with the miserable third quarter of 2008 and, of course, the 2009 result was better: it was always going to be thus. The better comparison was with the first and second quarters of 2009 and they were not as flattering.

During the quarter, the bank added another $2 billion to its consumer credit reserves, which dragged down results within its mortgage lending and credit card businesses and both divisions reported bigger losses compared to the second quarter of 2009.

Non-performing assets, or loans that are at least 90 days past due, more than doubled in the third quarter from the year-ago period to $US20.4 billion, consumer-managed provision for credit losses was $US9 billion, compared with $US5.7 billion in the year before, reflecting higher net charge-offs and an increase in the allowance for credit losses in the home-lending and credit card loan portfolios.

Net income at the firm’s investment banking business almost doubled, to $US1.9 billion from $US1 billion because conditions are not so fraught in markets. This is also due to the Bear Stearns’ impact.

Profit in the corporate and private-equity business was $US1.29 billion, compared with a loss of $US1.78 billion last year, because of trading gains on investments. That’s not going to last and profit in this business is projected to plunge to about $500 million for each of the next couple of quarters, according to the company.

But no one focused on this detail: it was buy on the headline, then chase other stocks higher when retail sales surprised, and then keep chasing as they again sold off the dollar and bought more commodities; all using cheap money from the American taxpayer.

Bernie Madoff might be in jail, but his spirit lives on and continues to infect financial markets and the American economy.

Peter Fray

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