UNCOMMON COMMON SENSE
For People Who Think
HOW LOW CAN WE GO?
Over the last few days, I have received dozens of emails and phone calls asking for my projections as to just how low this market can go and in what time frame.
As all my loyal readers know that the markets, oil and the economy have been unfolding almost exactly the way I had been projecting them to act as early as two years ago (check my archives at gold-eagle.com). I don’t mind admitting that even I was surprised by the recent sharpness and ferociousness of the drop. But you ought to know me by now; I never just come up with numbers. That would be purely guess work and you can guess as good as I can. Before I attempt to answer your questions, as much if not more to clarify my own thinking, I will examine the reasons why and how we got here in the first place. Because it is only in understanding where we came from can one possibly have an Idea of where we are going.
an effort to find some good article on the subject, I read a great many pieces
written by individuals who I greatly respect, but was sad to learn that not one
had any idea as to what is really happening. Although every article was written
by experts in their respective fields, I discovered that most were not
economists and the few that were could not grasp the essence of the real
problem. All were experts like Jim Cramer, a Harvard Graduate who in his own
words is steeped in Keynesian, Galbraithian, economics; has no idea of how
Economics really works. They all center their focus on consumption (using that
tired cliché; the consumers are 70% of the economy) and their solutions always
end up with them throwing money at what they perceive to be the problem and
cutting interest rates. Another ½ point cut should do the trick Right? Or
inject a few more $trillion, that would do the trick. If that was the right
KARL MARX and J.M. KEYNES VS ADAM SMITH and HENRY HAZLITT
debate between Socialism and Free Market Capitalism raged on ferociously for
almost 100 years. It ended suddenly in 1972 when President Nixon, the leader of
the party that supposedly represented Free Market Capitalism, announced that
“we are all Keynesians now” while he set about fixing prices. Empirical evidence has clearly shown that
everywhere from the smallest socialist enclave, the Kibbutz in
Sounds like pretty harsh words, but true nonetheless, as economists from all sides of the isle focus their concentration completely on CONSUMPTION while ignoring savings and investment. The Western World is rife with economists from the Ivy League schools, London School of Economics and the Sorbonne University all seem to have forgotten two of the most basic and important principles. They are:
(1) Savings is always equal to investment and if there is NO Real Savings, there can be NO real net new investment.
(2) Without INVESTMENT, there can be NO improvement in the overall standard of living. Increasing the size of the pie with the free market determining who gets what, works. Having the government redistribute the pie ends up not only shrinking the pie (in real terms), but also saddles it with additional overhead so that no one is ever satisfied with their allotted share. The socialist’s excuses for failure are always the same: There was not enough socialism: We need to do more of it by completely eliminating first GOD and all other freedoms and concentrate on Socialism.
Instead of using just plain Common Sense, this very basic LAW of Economics has gotten lost in the universal concentration on consumption and the Consumer representing 70% of the economy. The fact that consumers are also first and foremost wage earners and that rising earnings and increasing employment can only come about by having strong and growing companies has been lost by the takeover of Marx and Keynesian anti-business philosophies and thinking.
SUPPLY and DEMAND, the foundation of all economic theory and the first chapters taught in every school (all of which have for 50 years been using text books written by Socialist professors) is completely ignored in the real world, especially when it comes to Investing and interest rates. How many rate cuts do you need when each cut is followed by a 1000 point drop in the stock market, before one realizes that rate cuts at this time are exactly the wrong thing to do? And yet the Media and the Economic mavens keep calling for more rated cuts.
Supply and Demand is the mechanism that achieves the ideal allocation of all resources scarce or otherwise. Interest Rates, if allowed to float freely and find their own level, are the mechanism that allocates our savings to the most productive investments so as to produce the highest possible standard of living. It is only when Interest Rates are manipulated artificially too LOW that we get a severe misallocation of investment that wastes our precious resources (Labor, Capital and Materials); so that we end up with the problem we have now -- a five year oversupply of over priced homes, bad loans made to unqualified people and an overall level of debt unsurpassed in the annals of human history, accompanied by rapidly rising inflation. To continue to lower interest rates is the obvious WRONG answer. If you dig yourself into a hole, common sense should tell you to first stop digging, and you should not need a degree in economics to determine that.
A STIMULUS PACKAGE
You can call it a stimulus package if you want, but if the majority of the money goes to consumers, it is a WELFARE Package plain and simple. AND it will do more harm than good not only to the economy, but especially to the very people who have been targeted as needing it most. Let us use an example for clarification purposes. Take an average, middle class, two income family of four who, after working two jobs brings home $50,000 and does not pay any Federal Income Tax. They received $600 each or $1200 total. If this money did not come out of savings, but was paid for by printing money and/or monetizing the debt, it caused Inflation to increase by an additional 3%; that would mean that this family saw a DECREASE in their purchasing power of $1,536 ($51,200 x 0. 03% or $1,536) thus leaving them with a $336 deficit. But the losses are much more far reaching than that. The same kind of action spreads throughout the entire economy infecting savings and investment. The worst part is, once we understand that the standard of living cannot increase without increasing investment, it becomes obvious that we have done much more harm than good not only to the middle or low income class families, but to the entire economy as a whole. Especially in destroying job creation..
another scary note, I recently heard a discussion on the Financial Channel centering
around the ideas of Bulldozing Homes to prop up the price of homes: Once more
confusing cause and effect, exactly as was done by FDR in the 1030’s. If
nothing else we could house homeless families in those vacant homes Using that
same argument the
It is a most oft heard phrase of mine, since it forms one of the cornerstones of any of my analyses and since I don’t have a crystal ball, I look to the past in order to attempt to pear into the future. According to the Bills that I have heard about working their way through Congress, there seems to me to be no way out of avoiding an almost exact reply of the 1930’s.
POLITICS AND RELIGION
These are two subjects that should never be discussed in polite company and if you don’t want to create a whole lot of enemies. Most of the time it doesn’t matter, but today is different, so at the risk of alienating half my readers, I am forced to discuss politics especially since it is one of the main reasons that I am calling for a Depression by 2009-10 at the latest.
While I do not think there is much difference between Obama and McCain, they are not the main source of my consternation: Pelosi and Reid and their solid Socialist Left majorities in both houses are. Let us just examine a few of the Bills that have been already working their way through Congress.
# 1 is the plans to void NAFTA and the refusal to ratify the 8 year Columbian trade agreement - we never seem to learn. That brings the Smooth Holly Trade Bill of the 30’s back to life, which was one of the main reasons for spreading the Depression worldwide only it will be much worse this time as trade is a much bigger part of the world’s economy.
2 The second and just as dangerous if
not more so is the Bill to strengthen the Unions by first eliminating the secret
ballot; another throwback to the 30’s. If you check your history, the
THE ECONOMY: WHERE TO NOW?
Looking back into the past to a similar place and time I am forced to conclude that we are at a time most similar to 1929 only in a much weaker position economically, if not militarily. With $12 trillion in debt most of it owed to Foreigners, We are also facing $60 + Trillion in entitlements and two Presidential Candidates promising even more spending, we are at war on two fronts and the American people are in deeper debt as a percentage of their income than they have ever been. There is also the obvious and there is no doubt in my mind that a DEPRESSION is already baked into the cake with the only question still to be answered being: When will it start and how long will it last? For over a year now, I have been projecting a Recession starting in the 4th quarter of 2007 or early 2008 that will sink into Depression by 2009 or early 2010 at the latest There is NO ONE on the horizon that even has a clue what our main problems are and there fore there is no possible way of not sinking into Depression. As far as the Recession is concerned, we are already in it. Unfortunately based on what I have seen and heard from the campaign, both candidates are Socialists and neither of them has any ideas as to what measures must be taken to get us out of Recession, If we are lucky their political promises are just that political promises and nobody really expects them to be kept. However they are just the beginning of our problems.
THE STOCK MARKET - WHERE TO NOW GREEN COW?
Now, for the bad news. We have already had two consecutive confirmed DOW THEORY SELL SIGNALS in less than 9 months in conjunction with two head and shoulder confirmed break downs and we are in the midst of a world wide financial crises, the likes of which have never been seen before, in which every attempt to solve the problem has actually made the problem worse. Going back to 1929, a similar place and time and in conjunction with USING ELLIOTT WAVE THEORY my initial downside target for the DJII is between 6000 and 7000 some time between the next week or two and the end of January 2009. We should know by next week which scenario will be unfolding. A fast 2000 point breakdown or we may have one more big suck in rally back to as high as 11,000 to destroy what’s left of the remaining buy and hold bulls. But, the coming LOW will not be the final low. Again, going back to Elliott wave and the lessons of history, the coming low will be similar to the 1929 LOW which was then followed by a large suck-in rally into the 1930-31 (2009-2010) correction and then a final crash down to below 4000 into 2010.
THE GOOD NEWS
The Stock Markets made their all time lows in 1932 before the Depression was at its worst. Even though the Depression raged on through WWII and did not end until 1946, there were tremendous opportunities to make money. So stay tuned - what is better than to be able to make IT coming and going? Although I WE cannot do anything about the crash and the Depression from occurring, it does not meant that we as individuals cannot protect ourselves and perhaps to even prosper.
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Markets have plunged despite the worlds Governments continued Manipulation (on a scale never seen before) in a complete abandonment of capitalism, with $ trillions of fresh “out of thin air” money -- none of it (despite the rhetoric) going to the people. This will not stop the slide or produce a Bull Market (not even in the short term). Instead, it will by definition produce Hyperinflation the Governments of the world throw more and more money at the problems in their attempt to avoid both a Depression and a Crash that will Match or even surpass the worst of crashes. Don’t you think it is imperative that you stay ahead of what is coming by subscribing TODAY and not waiting for two weeks to get my forward looking interpretation letters free but only after a 2 weeks delay? Do not delay in finding out ASAP how the coming changes will affect both the economy and stock markets , while there is still time for you to do something about it!
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GOOD LUCK AND GOD BLESS
UNCOMMON COMMON SENSE OCTOBER 17, 2008
Aubie Baltin CFA, CTA, CFP, PhD.
Please Note: This article is for education purposes only and is designed to help you make up your own mind, not for me to make it up for you. Only you know your own personal circumstances so only you can decide the best places to invest your money and the degree of risk that you are prepared to take. The Information on data included here has been gleaned from sources deemed to be reliable, but is not guaranteed by me. Nothing stated in here should be taken as a recommendation for you to buy or sell securities.