|UNCOMMON COMMON SENSE
For People Who Think
THE ECONOMY AND SECURITIES MARKETS
Aubie Baltin CFA, CTA, CFP, PhD.
“This, indeed, is an odd election: It pits a candidate who should have been president eight years ago against a candidate who should be president eight years from now,” Tom Gallagher in Abelson’s column, Barron’s.
IF YOUR HEAD HURTS, STOP BANGING IT AGAINST THE WALL.
When the pain in your head keeps getting worse from banging it against the wall, you would think that it would be obvious to any reasonable person to stop banging it. I was having difficulty figuring out why the politicians wouldn’t stop until it finally dawned on me that it was not their heads but ours that are being bashed.
I don't normally like to write all that much about politics because I have learned the hard way that no matter what I say 50% of my readers are upset with me. My skeptical nature leads me to mistrust a bunch of Pandering Liars and come to the conclusion that elections are never as meaningful as they would have us believe. More importantly, whatever promises do actually come to fruition usually do not come into affect until after the next President comes to power. I'm a Free Market Capitalist but not a Libertarian. I naively still believe that a Government that governs least, governs best but that we still do need some government however, not as much as the public demands.
Unfortunately this time it really is different. It does not make any difference as to who gets elected. They are both Socialists to varying degrees at a time when a return to free market capitalism is what’s really needed. The Congress today is controlled by far left Socialists and most probably will be even more so after the elections and therein lies the problem. The new initiatives that are already working their way through Congress with only Bush’s threatened veto holding up their passage, will have no such problem with the next President. I find all the pandering to be nauseating and I am perplexed that some of the ideas that come from the candidates seem completely void of common sense. Regardless of how we got here, the world’s economy as well as our own is in DEEP, DEEP trouble. The culmination of 80 years of monetary and fiscal socialist mismanagement (to be polite) is finally coming home to roost. I find there is so much ignorance coupled with dishonesty in much of what is being said, that there is no easy way to give any of it an unbiased analysis. So I will restrict myself to Bills which are already working their way through Congress, especially since it is so much akin to what had happened during the 1930’s that it’s down right scary. To make matters worse, history’s BIGGEST FRAUD is now being perpetrated upon the American People by Bernanke, Paulson and their Wall Street “frat” buddies - all made possible because the current Congressional Leaders are so economically illiterate that they cannot see the writing on the wall.
TAXES: WILL WE EVER LEARN?
The absurdity of our current tax policy is so far beyond rationality that discussion at this time would not make any sense and would take a book of its own to analyze it properly. Besides, how can one analyze an absurdity? Let me remind you that Marginal Income Tax rates were up as high as 93% during the 30’s, the Depression lasted for 17 years and did not end until 1946. It seems to me our Government is heading straight for a replay of the 30’s for exactly the same reasons, regardless of who becomes President. Our corporate taxes are the 2nd highest in the world. Does no one realize companies never pay taxes; they are always passed on to the final consumer and if they cannot do that, they go bankrupt. High tax rates hurt our competitiveness and forces our companies to build plants in other countries so that no taxes at all are paid to this country. Now you want to talk about Outsourcing!
THE $700 BILLION BAILOUT (more likely a $1 trillion +)
Take AIG, a trillion dollar company temporarily caught in a liquidity squeeze, due to the Giant Fraud perpetrated by the Wall Street’s Banks and Brokers in conjunction with their fraudulent Rating Agencies, on large investors which includes Insurance Companies and Pension Plans. The government took complete control of the company and stole most of the common stock equity by taking 89% and firing its chief executives, while leaving the preferred equity (held mostly by Brokers) in tact. The interest rates charged to AIG would make SHYLOCKS seem like Santa. Is not preventing a liquidity squeeze exactly what the FED was set up and designed to prevent? Yes, I know that it was designed to protect Banks. But since Clinton and Rubin gutted Glass Steagall, all those lines have been blurred. In this case, the taxpayers will not only get all their money back, they may even make a profit in the process. However, they will be destroying one of America’s finest Trillion Dollar worldwide company while liquidating it’s bevy of premier insurance companies at fire sale prices to their “Frat Buddies” that they will loan money to at 2% in order to steal these insurance companies. For whose benefit: Certainly not the people’s.
When it comes to Wall Street and the Banks, after exchanging over $500 billion of Junk Bonds for Treasuries (at no cost) and spending up to a $ trillion or more (open check book) bailing out FNM and FRE (which were forced to buy 100’s of billions of junk mortgage bonds from these very same Banks and Brokers, exacerbating their financial dilemma in the first place), they will now be getting another $ 700 billion + blank check to bailout out who? Wall Street, of course. Only this time, most of the equity will be left intact as well as the jobs of their senior executives, all of whom get to keep their outlandish bonuses based on the last few year’s phantom earnings (that did not really exist since their bonuses were based on self-serving model pricing). Since FNM and FRE will end up buying existing mortgages, not one red cent goes to the people, especially since their continuing business will be curtailed from here on. In no way, shape or form is this a bailout of the middle class and or struggling homeowner.
Prof. Jeremy Siegel
After listening to Professor Siegel of the Wharton School of Economics on MSNBC explain how the bailout will actually be a “win-win” situation with the Government probably ending up making money, it is no wonder that our economists don’t know what they are doing. Let us examine the situation by using a simple example.
The Government will buy a $400,000 mortgage on a house in foreclosure that was sold in 2006 for $450,000 ( with 10% down). That same house originally was sold for $200,000 in 2001. We are already in a Recession which will hopefully only last a relatively short 3 years (a pipe dream). Despite the huge oversupply of unsold homes, this foreclosed home will be able to be liquidated for the reasonable sum of $200,000 by 2012. Depending on what the Government pays for the mortgage will determine what the eventual loss or profit ends up being. Assuming that after all carrying costs, repairs, sales commissions, etc. the total cost after 3 years to the Government is only $400,000. Using simple arithmetic, that leaves a loss of $200,000 in 2008 dollars. If we assume a compound 4 year inflation rate of only 20% (5%/year) on the $400,000 or $80,000 that leaves $120,000 in 2012 money for a total loss of $280,000. That is some WIN WIN situation! Now who takes the $280,000 loss? The Government, the Bank or some combination of both depending on how much the Government pays for that $400,000 on the Books of the Bank. Sounds to me more like a LOSE LOSE than a WIN WIN. Using this very (simplified) same example, the $400,000 has a present value of $120,000 or 30% of today’s outstanding mortgage. WIN WIN Jeremy? Wish they would play that game with me.
An out of left field 1000 point rally in less than a day and a half of trading and then Paulson announces his bailout package and no one says one word about insider trading? I have been warning you all along that the media and politicians do not have one brain between them. But what about we, the people? Are we really the SHEEPEPPLE that they think we are? Do they only prosecute outsiders like Martha Stewart so they can be used as red herrings and thus keep our focus off of the truly guilty. Get off your duffs and get on the phones and send your emails. With the election less than a month and a half away, you can bet the politicians will be listening.
BAILING OUT INDUSTRIES
When it came to Chrysler, in return for the Government’s $500 million loan guarantee, the Government received options at $3.00 per share which they eventually sold at $50/share. What should we be charging today for our $ trillions of taxpayer money? We allowed TWA, PAN AM, BRANIFF, AMERICAN MOTORS (the makers of JEEP) and a host of other companies including E.F Hutton to go under and the economy didn’t even blink. So ask yourself should we bail out the car industry? Or would we be in effect only bailing out the Unions? Dare I say “Political pay back”?
STRENGTHENING THE UNIONS
Eliminating the Secret Ballot and other union strengthening proposals are already in the works: Without getting into an in depth analysis, just take a look at the US car industry. They have not opened a new plant in the US in more than 30 years and yet, for every plant they close, a foreign car company is opening 2 new plants (all in “right to work states”), at comparable wage rates but without union rules or interference. Illinois and Michigan are by far the most unionized and highest taxed states in the country (including a 10% sales tax.) Is there any wonder why they are the most depressed states in the Union. Bailing out the auto industry will not only be a waste of money, but will actually make matters worse. Private equity would never come in to salvage a unionized car company. Will We Ever Learn’? What ever happened to the fallacy that, “it was only because of their unfair, low wage rates” as the reason why foreign car companies are knocking our socks off but only here in America. GM and Ford are expanding their market shares abroad. The Unions have destroyed not only our car industry, but our public school systems as well. We now have the worst school system of any developed country. Sure, why not do more of the same; that should solve all our problems. Doesn’t everyone love to deal with our unionized public services?
FAIR TRADE, NOT FREE TRADE is another Anti-American, Socialist, Union slogan designed to enact anti-trade legislation which, like the Smooth Holly Anti Trade Bill of the 30’s, will surely usher in a world-wide Depression. Why is it so difficult to understand that you can’t have job growth and good wages without strong profitable companies? After all, are they not the ones that employ workers? Is that so difficult to understand? Sure, let’s have an excess profits tax that will positively produce more oil, (just like it did in the 70’s), create lower prices and produce more jobs. How dumb do they think we are? Bottom Up or Trickle Down are just meaningless slogans designed to confuse the electorate and demagogue any possible workable solutions.
Empirical evidence teaches us that Lower Tax Rates help create a stronger economy which in turn ends up producing a LOT more Total Tax Revenue for the Government, while at the same time, lowering welfare costs. Increased Income Tax revenue is especially true when it comes to lowering Capital Gains tax rates.
These, along with the ever worsening credit crisis, made worse with each nonsensical bailout plan as we move closer and closer towards Socialism, are the main reasons for my call for a Depression by 2010.
ANWR is another absurd debate - Claiming that it won't produce oil for ten years. That might be true if we didn’t already have an under-utilized Alaska pipe line with a new gas pipe line almost near completion. Experience has already taught us that the wildlife thrive wherever a pipeline or deep water drilling platform is built. But all that is neither here nor there. If we had started 7 years ago, we'd have all that oil and more available to us TO DAY!. Is it all part of our “Instant Gratification” mentality? Does it make any sense whatsoever that the wildlife would be displaced or otherwise harmed (spurious argument) by commencing drilling on just a speck of that massive, barren tundra. What if some wildlife is displaced - they can and do adapt and are they more important than the safety of the American economy? Besides, what about the $750 billion a year we send to our enemies? Oil would never have gone past $50 had we been pumping an additional 2,000,000 BPD of our own oil. Need I remind you how much money we would have saved, how much lower our trade deficit would be and how much stronger our dollar would be today? Can you imagine what 2 million barrels of oil a day at $100/bbl would mean to our balance of payments? What will we be saying in another ten years if no drilling is started by next year? “It’s no use drilling now; we won’t get any oil for yet another 10 years?” What shape would Iran, Russia and Venezuela be in today at $50 bbl oil? SURE, let’s pass a LAW mandating that alternative, renewable energy be the only energy that may be used by 2020. That will surely solve our energy problems.
The US pumps 8 million barrels per day of its own oil and needs to import an additional twenty million barrels per day. A few new sources of 500,000 to 2 million barrels per day seems like a good idea to me in conjunction with R&D for alternative energy as we commence building nuclear, wind & solar farms in addition to clean coal gasification (we have the world’s largest reserves of coal) and other forms of R&D that we don’t even know about yet. There are no simple immediate solutions. It’s time to put away the coke and marijuana pipes, stop dreaming and face reality. We can solve our problems if government just gets out of the way..
What is THE most important aspect of investing?
It’s not the ability to read a balance sheet. Nor is it recognizing trading patterns. In fact, this particular quality isn’t even specific to investing, it’s essential to any skill. I’m talking about PATIENCE AND SELF DECIPLINE. From an action standpoint, investing is boring. Unless you’re a day trader, it’s very much a waiting game (BUFFET’S STRENGTH). After all, buying or selling an investment requires nothing more than a click of the mouse. A couple of seconds and you’re done. The rest of the time (99%), you’re doing nothing. Well, not quite nothing - you’re actually patiently checking out and sifting through all the mis-information. that investors are bombarded with. Whether it’s the TV, internet, newspaper, or even radio, multiple media outlets spew forth theories and updates about what’s happening every second of every day. Almost all of which is pure noise. Financial journalists make their living reporting on events. Sometimes this entails making events appear significant… when they’re not. Or even worse, sometimes they get the entire story wrong—like the recent braying that inflation is under control because oil fell from $145 to $95. Sometimes, writing a story involves creating a narrative based on events that aren’t statistically significant. I’m talking about explaining why the market moved a quarter of a percent, for example. Your best bet, as an investor, is to ignore 95% of everything you hear and read. It sounds very simple. But it is not. We, as humans, are not designed to sit still. We want to be doing something, not sitting around waiting for our money to appreciate. In actuality, waiting takes tremendous discipline. The prices do not reflect reality, but manipulation in its highest form. There is no such thing as a free market anymore.
BANNING SHORT SELLING
THE OBVIOUS IS OBVIOUSLY WRONG - If you think banning short-selling will strengthen the Market, you are sadly mistaken. Let the evidence speak for itself. The biggest Bull Market in history 1984-2001 and 2003 -2007 has been accompanied by all time record high short positions. When you need buying the most (as a market is crashing) there will be NO BUYERS, since it is mostly the short sellers who are buying, when taking their profits by covering their short positions. They are the only buyers who have no fear of buying into a falling market. This pattern of looking to place blame without any thought to the UNINTENDED CONSEQUENCES is typical of the way business is conducted in a socialist fashion which, when it blows up in their faces, is then blamed on the failure of Capitalism. Capitalism never fails. It is always Governments meddling in the economy that causes all the dislocations and failures, since they think that they know best but are really only trying to buy votes by satisfying one or more of their constituencies at the expense of the rest of the country.
Did Gold really lose the war? Or is it that the manipulators were engineering one last downward thrust in Gold, while artificially stimulating the dollar so they sell their plan and load up at the best possible price. If you cannot see the manipulation of all of our markets, not just the bullion markets, then you cannot understand the price movements that are happening right now,
What is important to understand is that the price of Gold Bullion is way below its true market value. Or would you rather have an investment in one of the financial banks that are imploding each and every day. It's not just Bear Stearns, Lehman and Washington Mutual, then Merrill Lynch, then AIG and on and on. Losses in the financial industry have already reached over $500 billion. I expect credit but not liquidity to continue to tighten and the relative under capitalization will likely cause more dislocations before the system stabilizes. What kind of regulators would allow 30 to 70 times leverage? And we want these very same regulators to draw up a set of new regulations (after destroying the regulations like Glass Steagel, that worked for 50 years) and be the New Watch Dogs - that is tantamount to hiring the Fox to guard the Hen House.
WHERE TOO NOW?
The Dollar got spanked and Oil had its biggest one day rise ever, while Treasuries fell hard. But if you think about it, where else could they go, they are already yielding 4 to 10% negative rates of return. Gold had its explosive rally that I had forecasted was coming and the Metals also reversed their decline. But again, what else should be expected in the face of the hyperinflationary Paulson Bailout, which is doomed to failure from the start. Our Economy as well as the rest of the world’s is well past the stage of being able to be papered over by further increases in “out of thin air “ fiat money. The world has used up all its “REAL” savings and the only thing printing more money will accomplish is to accelerate inflation. Paulson, Bernanke and the Government are doing what has always been done; attacking the symptoms and ignoring the REAL PROBLEM. We are way past the point where stop gap Keynesian solutions can work. Mis-allocation and distortion of scarce resources are always the end result of government meddling in the Capitalist, free market economy. The only possible solution is to engineer a controlled Recession. We must learn to take our medicine; the sooner we take it the sooner we will recover. If we continue to attempt to fight it, we will turn what could have been a mild Recession into a full blown DEPRESSION.
The only thing I can see as the results of the solutions taken and contemplated thus far will be continued economic distress and severe economic hardship; all the evils associated with hyper inflation.
Bernanke and Paulson while NOT correct as far as their solutions are concerned, are correct in their concerns that this financial crisis is Real, and there is an ever present danger of a complete world wide financial collapse. Can these problems be papered over just one more time? Maybe, but at best it will be only a stop gap measure. We are now facing a very high probability of a 25 - 30 percent plus stock market CRASH. The problem is they and their political bosses refuse to take the right medicine, especially with an election staring them in the face. Socialist (Communist) solutions NEVER fix problems they always exacerbate them. The economy is suffering a severe cancer and the longer we refuse to take our medicine of Recession, the surer the cancer will grow into a worldwide Depression.
Although the fault of what seems to be our most immediate problem rests with Wall Street, it is only an effect of the Real Problem of 75 years of INFLATIONARY SOCIALIST policies by the Master Planners who have embarked on market manipulation strategies on a GRAND scale at the cost of hyperinflation.
We are facing a confirmed Head & Shoulders top in the DJII with a projected downside target of 7000. Is there a possibility of one more 500 to 700 point short/quick last ditch rally? Maybe Paulson and Bernanke can pull out all the stops and get their manipulation team in gear and muster enough money for one more manipulative push. But at best, it will be short lived.
If you require further assurance that the coming crash is ominous, the NDX also has a confirmed Head & Shoulders top pattern (the most reliable of all patterns) with a downside potential of 30 percent.. I cannot believe that both patterns will fail!