DJIA…6000 in 2003?

March 5, 2003


I believe we are currently in a recession that will deepen as the year goes on. This current recession is not being publicly acknowledged as the U.S. government is redefining (cooking the books!) the Consumer Price Index (CPI), Producer Price Index (PPI), Gross Domestic Product (GDP) and other index numbers to imply there is no inflation and no recession.

One definition of governing activities is included. This is followed by eleven governing activities/policies/practices as reasons for a declining Dow Jones Industrial Average (DJIA).


The following is not the only definition of government activities. Is this good governing while pronouncing freedom, security, and claiming the governing is for the good of those governed? Is it happening now?

"To be governed is to be watched, inspected, directed, indoctrinated, numbered, estimated, regulated, commanded, controlled, law-driven, preached at, spied upon, censured, checked, valued, enrolled, by creatures who have neither the right nor the wisdom nor the virtue to do so.

To be governed is to be, at every operation and at every transaction, taxed, stamped, registered, numbered, counted, noted, measured, assessed, authorized, licensed, admonished, prevented, forbidden, corrected, reformed, punished.

It is, under pretext of public utility, and in the name of the general interest, to be placed under contribution, fleeced, drilled, extorted from, exploited, monopolized, squeezed, hoaxed, robbed;

then, at slightest resistance and first word of complaint, to be sacrificed, betrayed, harassed, repressed, disarmed, hunted down, clubbed, abused, fined, sold, and, to crown it all, to be outraged, ridiculed, mocked, derided, dishonored. THAT is government; that is its justice, that's its morality.'' -Pierre-Joseph Proudhon ----------


The first government effect is that of increasing regulations (laws and paperwork expenses) that reduce profits and lower earnings per shares in future quarters. The costs of complying is an increasing cost and not insignificant. The most notable of the new laws are the "Homeland Security" mandates which has not been read by 90% of the elected congressman legislators who passed it. More draconian mandates for 2003 legislation under the guise of Patriot Act 2 is now before U.S. Congress. Environmental regulation law mandates are equally notable. These laws and regulations deter start up companies from going forward, force businesses into bankrutpcies, and export jobs to other countries. This lowers U.S. economic activities and government revenues. This does not mean all laws are bad or have negative impact on economic activities. However, I believe more than 50% do discourage good business activities.

The second government effect is that 49 of the 50 U.S. state governments face deficit budgets in 2003 with a combined deficit total over 60 billion dollars. Wyoming is the only state facing a budget surplus due to increased revenue from natural gas earnings. Most state constitutions mandate balanced budgets. I think the state governments will not succeed in getting federal money to cover the states budget deficits. State governments being unable to print money and unwilling to cut or control spending will be introducing unpopular new taxes and/or tax increases and significant benefit reductions. This new tax revenue will cut into earnings of existing companies and discourage business growth. For the investor, it means a lower earnings/share. The Joe Six Pack investor will have less money for investing into the stock market or any other market.

The New York Times reports that, "State and local tax hikes and reduced spending are not recipes for economic recovery. Demanding more money from federal government just means higher eventual federal taxes."

The third government effect is that Federal government "War on Terrorism" program is discouraging people to spend money. The most notable market sector being driven into bankruptcy is the travel industry. In wars, higher returns are demanded by investors as investment risks are substantially greater. Hotels and airlines are most seriously effected.

Those in fear are so very easy to manipulate. Things are being done to make the people full of fear. Of all the investments being made by the US Government, it is an investment in fear.

A fourth government effect is dealing with foreign banking default bombs. Countries with banking loans in near default category affecting U.S. banks and the stock markets include:

A fifth government effect is foreign countries repatriating U.S. assets including U.S. stocks. A net outflow of stock purchases will only cause stock prices to decline. It has been reported that the U.S. being a debtor country owns less foreign assets than foreigners own U.S. assets. Countries most likely to repatriate or transfer elsewhere assets include:

Just remember that old quip about the "real" Golden Rule: "He who has the gold makes the rules!" The wise investor will be a ruler, not a debt slave to already overburdened companies.

Richard Russell, editor of the Dow Theory Letters quotes Bill's Gross's (PIMCO) January 2003 comment as to foreign holdings. "Foreigners now hold $7 trillion of US assets, and they will not take kindly to a devaluing of their investments. 13% of the US stock market, 35% of the US Treasury market, 23% of the US corporate bond market, and 14% direct ownership in US companies are now in the hands of foreign investors."

John Hathaway of The Tocqueville Funds reports that "Foreigners now hold on a net basis $2,000 billion of US assets which is equal to 20% of the $10,000 U.S. GDP. Foreigners own 44% of the liquid treasury market, and 23% of the US corporate bond market, and 12% of the US equity market."

The following table shows discrepancies in numbers given above, but is intended to show the size of dollars involved until these numbers can be better defined.

Central Banks in Asian countries have been reported to hold over half of the overseas U.S. treasury debt. The reserves for the following nine countries total $1,390 billion. Countries and $US reserves are:

The long running current account deficit is over 450 billion dollars and now exceeds 4.5% of GDP. The current account deficit is increasing by about 1.25 billion/day in February 2003. This current account deficit growth rate is unsustainable." Markets traditionally become nervous when a current account deficit exceeds 5 percent.

A sixth government effect is the continuing practice of the U.S. government stealing from the past with inflation, the present with taxes, and the future with bonds. This theft is accomplished by income tax withholding, fiat, and banks.

The trick is to keep Joe Six Pack from suspecting anything. One trick is to tell them the truth when it is too late. An example of this is the Enron demise. When the news came out, 401k's were long gone. A political trick is using a great excuse without taking blame that almost always works. This is the statement, "It is unfortunate this has occurred." Another favorite excuse in the political arena is, "I have no recollection of that, Senator."

When economic problems arise, or any other problem takes on national attention, government will be expected to "do something." One likely response will see the U.S. Federal Reserve and U.S. government attempting to reflate the banking systems in an attempt to avoid a deflationary period. The usual counterproductive government answer is to interfere and regulate. In economic circles, it is a well-established fact that when anything is government regulated, soon, there are detrimental market distortions and illegal activities. Often a black market is created.

A seventh government effect is the growing corporate welfare programs. These are government programs to subsidize corporate activities without any significant government return on investment. These programs are often called Government Sponsored Enterprises GSE's. These programs are in practice made unavailable to Joe Six Pack and procured by special interest lobbying groups for their group special interest benefit. Benefits for the special interest group may include a financial bail out (LTCM and U.S. Savings and Loans fiascos are examples), reducing competition, rewarding incompetence, and blackmail. These programs include mortgage loans, agriculture subsidies, foreign aid, and many so called "think tank" organizations. These government programs often result in scandal, failures, and negative revelations which causes lower investor confidence (trust) in the stock market. There is a belief that governments have two primary goals. The first is to protect the government. The second is increase the size of government. Program failure is often the justification for bigger and more expensive government programs to fix the failures.

Fannie Mae, Freddie Mac, and Federal Home Loan Bank are GSE's. The total value of these have tripled from $800 billion to $2,400 billion within the past decade (Source: Doug Noland - Prudent Bear Funds). These GSE's own the mortgages of 25% of the nation's $9,600 billion mortgage market and have an implied government guarantee in case of default. Freddie Mac and Fannie May combined mortgages increased by $870 billion in 2002.

An eighth government effect is disregard for "charity to begin at home." The recent 15 billion dollar give away to African countries AIDS treatment is a recent example. The government could have put that amount towards the so called 80 billion dollars total said to be owed in back child support for children of U.S. citizens. Many claim that these children from lack of this money are forced to live in poverty. In future years, these children will be less productive earn less, produce less tax revenue than their parents, and be less likely to invest in anything including stocks.

A ninth government effect is the "smoke and mirrors" approach to dealing with problems. One number effecting the U.S. economy is the ongoing redefining (different calculation methods) of major indexes such as the CPI, PPI, and GDP to portray a desired number. This is deceiving many investors. Increasing investors are having doubts and distrust with government reports. This distrust is causing many investor to move their investment capital (selling stocks, bonds, and so forth) from U.S. to foreign markets. The U.S. government uses cash accounting methods for smoke and mirrors which is illegal for corporations and citizens who must use accrual accounting methods. The accrual accounting method is also called the Generally Acceptable Accounting Principals (GAAP).

Some examples in which the cooking of books of Gross Domestic Product (GDP) numbers include:

  • GDP violates basic accounting principals and common sense by treating the depletion of national resource capital as income instead of asset depreciation.
  • The GDP accounting system does not reflect depletion or degradation of the natural resources used to produce goods and services. the more the nation depletes its natural resources to produce goods and services, the more the GDP goes up.
  • GDP does not account the increased spending by borrowing from abroad.
  • The present GDP treats crime, drug abuse, property damage, resource and financial speculation costs as economic advances.

Tax rebates to stimulate the economy is another example of government smoke and mirrors. The amount is too small to have much of an effect when related to the federal government deficits, other federal tax increases, and new taxes (permits. licenses, fees) being implemented.

The hidden tax of inflation has already exceeded these tax rebates and tax breaks for the majority of the people.

The federal government practice of returning to deficit spending (560 billion in 2002) is another example of smoke and mirrors. These deficits show up within a few months or years as inflation. Federal government, state, and local elected representatives seem to spend most of their time at raising campaign money to get re-elected, blaming others to shirk responsibility, solving non problems, and seemingly almost no time for the purposes they were elected. In my opinion, the purpose of politicians include taking fiscal responsibility, preventing economic problems, and ensuring balanced budgets.

A tenth government effect is stimulating the economy by government spending. This is having a less effect on the economy. During the 25 year span from 1957 to 1982, total government + business + household debt increased by $5 trillion dollars while national income increased by $3 trillion dollars. In the past 20 years, from 1982 to 2002, total debt has increased by $22 trillion dollars while national income has increased by the same $3 trillion. Is the entire boom of the 90's a house of cards built on a mountain of debt? (Sources: Fed Reserve, U.S Treasury Dept., Bureau of Economic Analysis) Argentina has recently demonstrated greater government spending can reduce the size of the economy in real terms when inflation is taken into account.

An eleventh government effect is not enforcing the laws in the financial world. Almost no one has been prosecuted in the major corporate bankruptcies and scandals. Similarly the fines are just pocket money for the brokerage firms which include: Solomon Smith Barney, Merrill Lynch, and others. This does not improve confidence in the stock markets including the DJIA.

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