Stock Market Spells Boomer Trouble

A double top is a bearish signal. The above is the 23-year S&P 500 chart.

 

I am not a technical analyst. In fact, I do not know the first thing about it. But I do know that a double top spells trouble.  The above chart looks suspiciously like a double top. There is a struggle for a triple top, but if you've been following the stock market over the past six weeks, the Democratic stock market of '08-'11 seems to have followed the same pattern of the Democratic stock market of 1932-40: Keynesian policies and more government regulation have done nothing.  Like many stripes of ideologue, Keynesian economists say that their ideas are right, but reality is wrong. They say that nearly a trillion dollars in borrowed money is insufficient.  If Keynesian economists were physicians they would be in jail.

Keynesian economists do not mind their failure because they have tenured jobs in universities and so do not suffer from their own incompetent economic advice, which is helpful to big bankers and the Ochs Sulzbergers, the owners of The New York Times, but harmful to the average American.


I was just reading Murray N. Rothbard's Case Against the Fed.  The book was written in 1994, and Rothbard mentions (p. 23) Milton Friedman's use of the "helicopter" metaphor for printing money. Thus, "Helicopter Ben" simply talks as a good Friedmanite monetarist. Rothbard writes:

Milton Friedman's more modern though equally magical version is that of his 'helicopter effect,' in which he postulates that the annual increase of money created by the Federal Reserve is showered on each person proportionately to his current money stock by magical governmental helicopters.

The helicopter analogy is superstition. There is no uniform distribution of printed money.  The printed money is handed to hedge fund managers and Wall Street stock jobbers. The distribution of wealth, according to policies of both the Democrats (Paul Krugman) and Republicans (Milton Friedman, Ben Bernanke) is to print money, give it to banks, who give it to Wall Street and the Ochs Sulzbergers, and to Princeton's endowment.

That said, until now I have been optimistic about the stock market because new money boosts it. That is the only reason for long run secular stock market increases (and flattening real hourly wages) that we have seen since 1932 (in the case of wages, 1970). But eventually the inflation from the money printing awakens the public to their having been made poorer by the money printing's not having been distributed by a helicopter but by money center banks who have given it to wealthy Wall Street, real estate and corporate interests and stockholders.

A double top might be signaling that the market expects an inflation. That would force the Fed into tightening, with a resulting stock market collapse. The stagflation of the 1970s required a massive downturn, somewhat larger than the '08-'09 one in terms of unemployment and with much higher inflation. This time, though, after eight decades of economic mismanagement by Washington, by the followers of Keynes and Friedman, the downturn may be worse than the 1970s. 

The downturn will be enhanced by the medical system's failure. This will occur on two fronts. First, medical innovation has faltered because of misallocation of investment. Large pharmaceutical firms invest in drugs that have short run return, such as anti-erectile dysfunction drugs. New antibiotics are more difficult. Innovative scientists have much more trouble obtaining capital under Progressivism than under a free market system. Thus, innovation in new directions is squashed by the current monetary system and by Keynesian and monetarist monetary polices and by taxes and regulation.  The result is that the past 80 years' vacation from the worst results of infection is coming to an end. Thanks to Democrats and Republicans, thanks to Progressivism and big government, no innovation with respect to anti-infection drugs is on the near term horizon.  I hope you enjoyed voting for Democrats and Republicans because having done so will help cause you to die.  The baby boomers are the first American generation not to be wealthier than their parents. They will also be the first generation to die younger than their parents.

Second, the medical system has become mismanaged due to government intervention, which has accelerated since 1965.  The result is a system that rewards waste.  Additional federal intervention in the micro-management of hospitals and physicians' practices will add to the waste. 

The situation is as bad with respect to retirement. The boomers have not saved because of the federal income tax, high state property taxes, inflation, especially in areas like education and health care, and low wages.  Wages have been artificially low for the past 40 years because of the money printing in which both parties have engaged. The claim that deficit spending stimulates the economy has turned out to be pap. There has been deficit spending for the past 80 years, and the economy is crap.  The economics profession, a pack of frauds, and both parties are to blame.

Prior to the abolition of the gold standard real hourly wages went up two percent per year. Since 1970 they have not gone up.  But Wall Street has grown exponentially.  New York was a manufacturing center until the 1960s. After the abolition of the gold standard in 1970 it became, over 20 years or so, a playground for the super-rich.

So the stock market now shows a double top and the massive monetary expansion which monetarist Bernanke and his Keynesian colleagues believe will provide new antibiotics and an innovative economy has failed. The gold market has reacted predictably.  Gold has gone up six-fold in the past 11 years. Silver has gone up more than 10-fold.  They are not cheap and seem to be at a rational price given what has been done so far. There is a risk of a commodity market collapse, but there is also a risk of a dollar collapse. Take your pick.  Not that I am an advocate of increasing the stock market. The stock market is a measure of profitability, not of human welfare. Firms can be profitable for good reasons, such as innovation, but such reasons are fleeting in a free economy.  In general, the stock market goes up because of monetary inflation, that is, money printing.

How can boomers think about retirement when the Democratic and Republican Parties have screwed them financially? Putting your money into risky gold and silver or risky dollar equivalents is hardly an encouraging prospect. The stock market may not do much and may collapse altogether. Thanks to monetarists and Keynesians, the dollar is crap.   I hope you've enjoyed the Department of Education and the sub-prime mortgages, because they are ruining your life financially.

Morgan Stanley Smith Barney's On The Markets: A Forecast from The Belly of the Beast

Back during the late 1990s' tech-and-Internet stock bubble my wife noticed that whenever television broadcasters or their Wall Street puppet masters predicted that a stock would go up, it would go down, and vice versa.  Therefore, if an announcer said that a stock was going to go up, it might be a useful strategy to sell short.   If she had followed that idea over the ensuring few years she would have made a bundle. But in investing timing is everything.  (Incidentally, if you followed the advice of people who told you to invest for the long term rather than try to time the market, how have you been doing since 2001, a ten year period?)

That said, to quote a cliche, even a stopped watch is right twice a day.  My stock broker recently forwarded Morgan Stanley Smith Barney's (MSSB) "On the Markets", its monthly market commentary.  The pamphlet makes a few points.  The headline on its cover is "Getting Ready for Higher Inflation" and, seven years after I first became interested in gold they are advocating a 5 percent position in commodities.  That suggests that gold is into the supposed third leg of its bull market, the first being the period of limited awareness and the second being the period of smart money awareness.  Now, the retail investor is being told to invest in commodities. The last leg is the bubble leg.

Smith Barney recommends emerging markets stocks and consumer staples stocks.  They also recommend REITs and TIPS, inflation backed bonds.  All of these recommendations key off the Federal Reserve monetary policy.  The early November quantitative easing will inject $600 billion into the monetary base, which likely will over time have a bigger effect on the money supply.  I have been receiving numerous credit offers in recent weeks, much like the early part of the last decade.  That means to me that credit offerings are expanding.  The stock market in general also looks good as the quantity of money drives interest rates hence the stock market. Because of the insane credit easing consumer stocks seem like a reasonable idea.  I recently purchased the US Philip Morris (MO) and am thinking of the international Philip Morris (PM).  Also, a few liquor stocks might be a good idea.  As the Democrats and Republicans squeeze the public to subsidize the stock market, there will be plenty of drinking and smoking.  MO pays a six percent dividend right now, and my stock broker recommended it as an alternative to cash or bonds.

I don't necessarily like the idea of REITs because of the real estate problems but emerging market stock markets like the BRICs (Brazil, Russia, India and China) seem like a good idea.  I disagree with MSSB's recommendation for long term bonds.  That is, unless you are planning to trade.  Incidentally, the same caveat holds true for stocks and commodities.  When inflation starts to counteract the economic value of the freshly printed money (the Fed has more than tripled the money supply since 2008 and the ultimate effects might be greater) the stock market will fall because real interest rates will start to rise.  So markets are increasingly treacherous and you need to invest for the short or intermediate term, not for the long term.  I don't believe in day trading or anything like that.  Rather, invest when something is low or likely to increase and pull out when it is in bubble mode.  I don't think we're seeing any bubbles now, although commodities are heating up and I think the stock market will too this year.

Happy New Year.

Whither Gold?

Gold went up today just four days after I blogged that I was mostly in cash. I just wrote a column for a popular local newspaper called the Lincoln Eagle that should come out in a few days and I suggested that there are four scenarios that might evolve: (1) bank failures/inflation; (2) deflation/inflation; (3) inflation/stagflation and (4) steady course. Jon Nadler of Kitco had suggested that we were in for a higher interest rate regime like we saw in the late 1970s and early 1980s, but I do not believe that it will be possible for the Fed to successfully execute a deflation or regime of high interest rates followed by a moderate (by 2010 standards, not by 1950 standards) re-inflation as was done under the Carter and Reagan administrations. It is likely that interest rate hikes will lead to stress on banks and additional unemployment. I do not believe that Obama is naive as was Carter to appoint a Fed chairman with the discipline to raise rates. Paul Volcker was exceptional and has not been equaled in the Fed's history. Even there, he reversed his monetarist policy by the early 1980s.

This time around the scenario is much worse. We are at zero (negative real) interest rates and ten percent unemployment. If the Fed raises interest rates then there will be additional unemployment and the Honorable Barney Frank will blow his stack as well as some other things. Moreover, with less reserves the banks will be expected to earn money like everyone else, by working for it, and that will make them unhappy, and the American public cannot allow bankers to be unhappy. It is not part of the American way.

So which way is gold going to go? In situations like this I use the coin flip test. Heads market up short term, tails market down short term. It kept coming up tails, so I'm staying put for now. But not in the long term.

The time for Obama to demand that the Fed clamp down on interest rates was this year. The Fed could have triggered a recession, higher unemployment and higher welfare payments, and the economy would have had two or three years to improve after a year or two of high rates. Instead, Bush handed the banks nearly a trillion dollars, the Fed tripled the monetary base and the money supply is growing like bamboo. Obama added additional handouts, and the likelihood of any sort of fiscal and monetary discipline is now an impossibility for the Messiah of Bloat.

Although I remain in dollars this week, I am watching this closely as my strategy is not wise for the long term.

Peter Schiff: Ben Bernanke = Jack Madoff

This video is about investing in the current climate. The discussion of hyper-inflation spooks me. I've been waiting to get back into the stock market. My pension fund, TIAA-CREF, does not permit commodity or UDN (counter-dollar) investment. There is an international stock fund, though, but no commodity fund.

I missed the rally from May until now but I caught it from Thanksgiving until May. Schiff is recommending international stocks. I agree with his basic analysis. I'm not convinced it's straight up for the stock market, but it's suicide to hold bonds and dollars. I'd rather be in commodities and gold than international stocks. In my personal fund, I'm gradually getting back into gold and commodities and in TIAA-CREF gradually back into international stocks.

Also, I rode the dollar rally out in Euros and lost some money, but it's coming back quickly. In the stock market I'm down about 5-6% since June '08 (less since January '08) because of overly aggressive buying of gold stocks in fall '08, which was against my better judgment. But I was right on principle then and now. The dollar is going out the window, unless you trust the Republicrat Socialists to turn around and raise interest rates. That would cause the depression that is going to occur under any circumstances anyway. You can expect further dollar declines. The Republicrats are in a state of denial, and denial compounds pain.

The cause of these problems is the Federal Reserve Bank. Unless Americans decide to change the fractional reserve approach to banking, there will always be booms and busts. Unless they decide to eliminate the Fed, there will always be accentuated depressions. The Great Depression of 1930-1940 was entirely the result of Fed policy, compounded by dumb government fiscal moves by Roosevelt and Hoover.

The geniuses in the Republicrat Socialist Party are turning the United States into a third world feudal estate. The lords of the manor are George Soros, his Messiah, Barack Obama, and, most of all Obama's, Bush's and Henry Paulson's 12 apostles on Wall and Broad, who have been granted many, many trillions of dollars, not only in the recent "bailout", but via the Federal Reserve Bank for the past century.

You will note that the fundamental principle and theme of all academic and media left-wingers is the claim that Federal Reserve transfers to Wall Street are absolutely essential because of the threat of deflation and because they cannot imagine any other system than one in which large sums of money are counterfeited and handed to hedge fund managers. While advocating the Federal Reserve system, they simultaneously shed crocodile tears about income inequality, which is chiefly the result of the Federal Reserve System. Well meaning socialists, who would not be fooled by con men with their own money, happily believe the Ochs Sulzbergers' nonsensical claims of concerns for the poor, as the ideas that they advocate suck the nation dry.

What is the moral sense of people who fight to preserve a system that causes income inequality, and then claim that they hate income inequality? American universities and the American left are the intellectual class for the new feudalism, dictatorial rule by Wall and Broad and their puppet-king, President Obama.

Stock Market Volatility

Recently Warren Buffett said that if you wait until you hear the birds sing, it will already be spring. In other words, if the S&P 500 is forming a V formation, there will be a quick move back to the last ten years' usual price range. If the S&P falls back to 720 as it did a few weeks ago (actually 750), there's a good buy. Many people are saying that the Dow might fall to 5,000 which would correspond to an S&P of 500 (the Dow is currently 8924 and the S&P about 900 and at their heights the Dow was slightly over 14,000 and the S&P about 1480.) A number of my students are bearish. In contrast, in 2000 they were all buying Internet stocks. This is true at both Stern School of Business and Brooklyn College. Both student bodies were buying Internet stocks in 2000 and are many are talking bearish now. When I said that I bought some GE shares a number of my Stern students scoffed, saying the financial risk was too great. However, a Forbes writer, Ken Fisher, is bullish. Nevertheless, the majority of media hype has been very pessimistic. My mother, who does not invest in stocks, is extremely pessimistic. She believes that unemployment is at an all time high, forgetting that for most of my early professional life (from the time I graduated college in 1975 until the time entered the doctoral program in 1986) the current 6-7%unemployment rate was viewed as low. Howard S. Katz believes that this has been a rare, media-driven bear market. The vast monetary expansion of the past four months would seem to be a fundamentally bullish short-to-medium term phenomenon.

There is a certain illogic to the media's coverage of credit swaps. According to the media, the banks could not value the derivatives properly but invested in them anyway and now are losing their shirts. Now, they are experiencing unanticipated defaults and risk. But if they could not value the derivatives intelligently three years ago, why can they value them intelligently now?

I recently obtained a car loan for 6%. For much of my life car loans were above 10%. In 1991 I paid 11% to buy a Ford Probe. Now, I pay 6%. Does that suggest a massive catastrophe in the circulation of money?

It is difficult to grasp the current market downturn--is it purely a psychological panic, or is there something to the derivatives devaluing? Bears believe there is something, bulls (and they seem to be few right now) are skeptical. If the market decline is psychological as Howard S. Katz suggests, then spring may come in late winter.

I hold a fair amount of mining and gold stocks that have been hurt in this downturn but they went up very strongly today, about 10%. Overall, my portfolio is down about 11%, almost all of it due to the gold stocks and some commodities etfs. I have been buying stock during this downturn, though. It is possible that the Dow will fall to 5,000. In case, I am keeping some powder dry.

Savings Accounts in Foreign Currency

Jim Rogers was on Bloomberg radio on Sunday morning at 6:25 am and he was talking about the dollar declines, Helicopter Ben's humming propellers and the Chinese stock market. Two of Rogers's ideas that caught my attention were investments in agricultural commodities and in the renminbi, the Chinese currency. Unfortunately, it is inconvenient for small investors to purchase Chinese currency because of the Chinese government's low-valuation strategy. However, where you can invest easily is in various currencies through Everbank. The minimum deposits range from $10,000 to $20,000 (for the indexes). Unfortunately, Everbank does not offer renminbi cds, but they do have 15 other cds including Hong Kong.

Powershares has commodity index products including a DB agriculture fund.

It is unfortunate that I cannot trust the dollar now, but given the irresponsible history of the Fed, I would rather keep my savings in another currency and/or secure it through commodities tracking investments.

Needed: Across the Board Deregulation--And Fast!

My old friend Lenny Rann just forwarded a report that analyzes the proximate sources of the current dollar decline. The report argues that the investment banks had packaged sub prime loans with AAA loans when they sold mortgage backed securities to foreign investors. In turn, the foreign investors realized that they had been duped and this in turn eroded confidence in the ethics of the American dollar. They are now withdrawing money from dollar investments and turning elsewhere because of the erosion in confidence in the good faith of the American investment community and declining confidence in the dollar. I had put 1% of my portfolio in Powershares's dollar bearish fund, but it may be smart to put more as the dollar is declining daily. This is a massive phenomenon and will disrupt many of our expectations. A breakfast in Dublin runs close to $100 now. Your bank account is being turned into monopoly money by the Fed and the Bush administration.

The last 30 years has been a disappointment. I had hoped that the early gains in deregulation in areas like transportation would continue and that a trend toward greater freedom in economics would be matched with enhanced emphasis on the rule of law and markets. Instead, America has opted for a different course. Enhanced emphasis on whimsical regulation; the nanny state of Mayor Michael Bloomberg in New York; continued regulation and protection of big business; refusal to repeal tariffs in fields like sugar; continued incompetence in education and refusal to introduce curriculum reforms advocated by Diane Ravitch and others to improve primary education; continued emphasis on credentialism and college degrees as opposed to results and productivity in the marketplace; and a perverse Wall Street Capitalism facilitated by the Fed and high income tax rates that inhibit imagination and new business formation. The result is that more and more Americans work in stores and in pointless economic activity.

The regulated economy will not function when the dollar loses global support. There will be widespread poverty if the left's nostrums, more regulation, more taxation, more power to incompetent elites and more credentialism are put into play. Instead, what is needed to respond to the failure of Wall Street capitalism is a return to fundamentals. It is only through deregulation; hard money; lowered income taxes; and an end to the wholesale waste and corruption of big government that America will be able to return to a leadership position and improve wages.

Howard S. Katz's "Bad News"

Howard S. Katz has posted a fascinating blog entitled "Bad News" which I reproduce below:

>"I have bad news for all young Americans.

"You were born into what used to be the greatest country in the world. The Founding Fathers of this country fought for our liberty in the 18th century. They won, and they set up a government whose purpose was the protection of everyone’s rights. The first President of this country was known for being unable to tell a lie.

"In 1933, however, the country fell into the hands of a collection of scoundrels. They said, “Rob from the rich and give to the poor.” Then they set up a system which robs from the poor and gives to the rich. In order to win support for this system, they told a bunch of lies.

"Then when these lies had become accepted as commonplace, they made up more lies. Then more lies still. The whole structure resembles an onion. If you are smart enough to discover an important truth and peel off one layer of the onion, you think that you are seeing reality. But then there is another lie to be peeled off and yet another lie beneath that. Let us take the current issue facing America, the “interest rate cut” of Sept. 18, 2007. The phrase is in quotes because, while not literally a lie, it was a half truth, and a half truth with the intent to deceive. (See blog 9-24-07.)

"The argument in favor of the “rate cut” was that the country was on the verge of a recession. Please to define recession? Well, John Maynard Keynes argued that it was not having a lot of goods that made a country rich. Just the opposite, what made a country rich was having a lot of demand. It was necessary to have an intense desire for economic goods, and having this desire would in some way create the goods.

"Let us test this theory against the empirical facts. In North Korea, for example, they have unbelievable poverty. Ditto, ditto, Tibet, Albania and most of black Africa. Is the United States rich and North Korea poor for the simple reason that we have more demand? And anyway, how would you measure demand to prove whether this was true or false?

"In reality, a human being starts to demand economic goods almost from his first breath. He cries for food. Then he cries for a rattle, then a bicycle. Then he asks for a car. Then he gets a job so that he can get a better car. All of his life is spent demanding. The problem in an economy is not to create the demand. There is plenty of demand. What America (and Britain) did starting about 1790 was to figure out a way to increase the quantity of goods to satisfy that demand. That took a number of brilliant men. At that time, all of the world was demanding (and had been demanding since the creation of the human species), but only the Anglo-Saxon countries (and later a number of other countries which imitated them to a degree) figured out how to satisfy much of that demand.

"Now, what about recessions? According to the Keynesian theory it is bad to not have enough demand. But it is equally bad to have too much demand. And since there is no way to measure demand, we must depend on the economic authority figures to tell us whether demand is too high or too low. An economy with demand too low is said to be in recession or depression. An economy with demand too high is said to be overheating and suffering from inflation. And what the Keynesian economists are always searching for is a Goldilocks economy – one where the demand is just right.

"One thing is impossible under this theory,: to have demand too low and too high at the same time. Or to put it in their lingo, it is impossible to have a recession and an overheating (inflationary) economy at the same time.

"But two months ago, Ben Bernanke, the chairman of the Federal Reserve, said that the economy was in danger of inflation. Indeed, for the first 8 months of 2007 the official consumer price index has risen by 3%. If this continues for the remainder of the year, then 2007 will come in at a 4.5% rate. And this would be the highest rate since 1990. But just last week, in the twinkling of an economic eye, Bernanke said that the economy was in danger of a recession. (I should mention that most pieces of economic data are very erratic, and it is necessary to watch a given index for at least 6 or 12 months to even know whether it is going up or down. Indeed, all of the data issued over the most recent two months are labeled preliminary. They are often revised, and sometimes revised sharply. A piece of data which was reported two months ago might be revised away next month and discovered never to have happened.)

"If you want to understand what is really going on, then the U.S. economy did not suddenly go from too much to too little demand. There has been too much demand for every one of the past 52 years because prices have risen every year since 1955. And during this period there have been nine officially declared recessions. In every one of these, there has been too much demand and too little demand. Nobody cares that this is impossible. To be a Keynesian economist, one must, like the Queen of Hearts, “believe 6 impossible things before breakfast.” (To believe the impossible, it is helpful to give different meanings to the same concept. For example, sometimes demand means a willful desire, as when a baby cries; sometimes it means effective demand, i.e., demand backed up by the money to buy.)

"But the sad thing, dear young American, can be seen if we consider a line from Hamlet. “Though this be madness, yet there be method in’t.” Indeed, modern establishment economics is madness. Yet there is a method in it. The method is to rob from the poor and give to the rich. From 1972, real wages in America have been going down. From 1974, the stock market has been going up. (During the age known as the period of the robber barons the real wages of the working man went up, and the stock market went sideways.)

"The Federal Reserve does not have the ability to manage the economy. From 1836 to 1914 there was no central bank in America, and our economy was the greatest in the world. During this time prices remained stable. Today the bankers (government and private) have the privilege to create money, and the classrooms are filled with “economists” teaching that the creation of money out of nothing is the “road to plenty.”

"One of the rich people who made big bucks from the Greenspan issues of money in the 1990s was hurting this year because the creation of money slowed down. This gentleman, Jim Cramer, went on YouTube on August 6 and threw a public tantrum. (You can find it via a Google search on his name and then click YouTube – Market Meltdown.) The reason that the Federal Reserve “lowered interest rates” (meaning agreed to print money) on Sept. 18 was that it was trying to balance the rich people like Jim Cramer with the poor people who do not make any noise. The squeaky wheel got the grease. And all the pseudo-economics is a rationalization.

"This is the world into which you were born. The Government steals from the poor and gives to the rich. How much is to be stolen is decided by the method of the 3-year old who throws a tantrum in the supermarket. Paper money is the money of the bankers. Gold money is honest money. Gold is the money of the people."