|UNCOMMON COMMON SENSE
For People Who Think
HOW LOW CAN WE GO?
Aubie Baltin CFA, CTA, CFP, PhD.
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.
In 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 answer the USA who spends by far more money/per student on public education than any other country, would have the best instead of the worst education system. In order to decipher the problem, we will have to go back to the very basic principles of economics.
KARL MARX & J.M. KEYNES VS ADAM SMITH & HENRY HAZLITT
The 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 Israel to Cuba, to the USSR and all the way to China, Socialism has failed miserably. However when it comes to academia, Socialism has taken over completely. So much so that all of the original bastions of Free Market Capitalism, led by the freest society ever to grace our planet, the USA, has finally succumbed to the Socialist disease.
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:
- Savings is always equal to investment and if there is NO Real Savings, there can be NO real net new investment.
- 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.
On 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 Iraq war should do wonders for our economy. What is better than War to destroy things?
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.
Let us examine Japan (the world’s 2nd largest economy) and see if we can learn something the easy way, by observing the mistakes of others instead of repeating those same mistakes on our own. Japan has been in recession for more than 20 years (I am using this as an example instead of our Great Depression which was too long ago for most people and too fraught with lies and misconceptions). In 1990, Japan’s Real Estate Bubble, which was as large if not larger than ours, Burst for exactly the same reasons - 1%, zero down loans. Their government, in an effort to stave off a recession, went about doing exactly the same things that we are doing today (0% to 1% interest rates, bailing out the banks and starting huge construction projects to create jobs). After more than 20 years of doing exactly the same policies, they are still mired in recession. Even though, unlike us, the Japanese have a personal savings rate of 40%, their government is in just as deep in debt as we are. Do you think that Japan has a different set of Economic Laws than we do? The Real Laws of Economics that the world must live by, whether they like it or not, has been set in place by the Creator and given to us in the Bible. If we don’t heed his advice; we end up suffering the consequences: Recurring Recessions and Depressions, all of our own making. It only took man 3000 years until Adam Smith in 1776 wrote his book, The Wealth of Nations which is taken straight out of the bible, where he set forth in plain English what these laws are and how they work. Thomas Jefferson tried his best to have these laws be set into our Constitution and that resulted in 13 agrarian colonies growing into the most powerful economic force the world has ever seen. in less than 100 years WHY? Because Capitalism is synonymous with FREEDOM - individual freedom and capitalism is the only system that works. Unfortunately our politicians, like the clergy, think they know better than GOD and one by one attempt to set aside his laws for their own greed, aggrandizement and their burning desire to increase their personal power...
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.
SPECIFIC TRADE RECOMMENDATIONS ARE RESERVED FOR SUBSCRIBERS ONLY
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
Aubie Baltin CFA, CTA, CFP, PhD.
2078 Bonisle Circle
Palm Beach Gardens FL. 33418
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.
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