A METEORITE THROUGH THIN ICE?

As I write this early in the morning in Florida, world stock markets have plummeted overnight, and it looks as if it will be the same in the U.S. -- at least at the opening.

I am not an investment advisor, and anything I write about stock markets is strictly for my own amusement and the entertainment of my readers. I do not suggest that you act on what I say.

I rely on a “technical” approach involving charts based on price and volume, and on various technical indicators, especially the MACD and the William%R.

It looks as if the U.S. market will plunge in panic selling this morning, which could be so extreme that it will lead soon to a “reversal” day, followed by a strong bounce up in prices.

The most likely level for the Dow Jones Industrial Average to find temporary support is around its low point of 2001-2002 -- about 7100. It closed yesterday (October 23) at 8691.

For the S&P 500 the support level is around 770. It closed yesterday at 908.

The rebound will not necessarily mean that we've seen the bottom of this bear market, but it could mean a vigorous rise in prices for awhile – probably setting an even bigger bear trap than the one I pointed out a few days ago.

Of course stock prices could go straight on down through those support levels like a hot meteorite through thin ice, but if so, don't despair. No matter what happens to stocks and banks, we'll always have plenty of politicians!

"YOU COULD BUY A CAR FOR $10, BUT NOBODY HAD $10"

Will prices go up or down as we head into a recession or depression?

Should we prepare for inflation or for deflation?

In deflationary times, cash is king. In inflationary times, we want to own things like gold whose price will rise. My mother told me that in the Great Depression of the 1930's, “You could buy a car for ten dollars, but nobody had ten dollars.” On the other hand, in hyperinflationary times, a gold coin may be worth a fortune.


German Children Play with Money During the Great Inflation of the 1920's. Employees were paid daily or several times daily so they and their families could rush out and buy things before the money lost most of its buying power as prices skyrocketed.

Having cursorily researched expert opinion on the relationship between recessions and inflation and deflation, I can summarize the results as follows:

A recession may see either inflation (rising prices), or deflation (decreasing prices). Brilliant! Wikipedia: 'Recessions are the result of falling demand and may be associated with falling prices (deflation), or sharply rising prices (inflation) or a combination of rising prices and stagnant economic growth (stagflation).'

Armed with this lack of knowledge, I predict that despite the example of deflation during the Great Depression, we are entering a period of increasing inflation.

Logically, the economic collapse the United States is experiencing will result in loss of jobs, loss of spending power, and a surplus of goods over demand, which will lead sellers to slash the prices of refrigerators and television sets and automobiles in order to find buyers. So, prices will go down, right?

Yes, right in the near term for some items, but wrong in the longer term. The increase in the supply of money (combined with eventual decrease in production of cars, refrigerators, etc.) is the giant fly in the ointment. During the Great Depression the government let the money supply go down, but at present the government is creating money by the ocean-full and pumping it into banks virtually without limit. To my amateur eyes, this certainly looks like an unprecedented increase in the money supply which will drown any deflationary tendencies of the recession/depression.

The government's panicky efforts to make us borrow our way out of a crisis caused by borrowing will most likely result in a long-term tsunami of inflation. If production is decreasing, as we hear every day, then how can the supply of goods keep up with the supply of money? And when money supply grows in proportion to things for sale, the prices of things for sale go up. Even with the current financial malaise, most grocery items are “on sale” for far more than they were a year ago.

I would really appreciate some comments on the issues raised here. I want to know whether to buy a new refrigerator or a new car now, while desperate sellers are offering price-cutting sales, especially leading into Christmas, or whether I can get even better deals next year. I want to know whether to prepare for inflation by buying gold or gold mining stocks, or whether to prepare for a deflation in which “cash is king” by putting cash under the mattress.

I am betting on inflation and will be closely watching those sale prices to see if they go down or up.

HORROR MOVIE 2008

Come, Igor. We must stop this financial Frankenstein monster before it destroys the world.

Photo: Reuters (Candidates leaving debate, Oct 15.)
Caption: Fleming Lee

BEAR TRAP

I'm betting that the tremendous stock market gains of the past couple of days do not mark the bottom of this bear market, and that the current rally will turn into a “bear trap” for those who buy stocks and don't get out quickly.

I was shocked to read in interviews with several investment "experts" that they are as heavily into the market as ever (which means they must have lost 40% of their stake already), and are buying more now -- because stocks are "cheap." Well, $20 a share compared to $60 is cheap, but so will $8 a share be in comparison with $20.

As the market cliché goes, you can't turn an ocean liner around on a dime. Bear market rallies have a tendency to be swift and strong, but not to have staying power. I'm betting that the current hoorah of relief doesn't carry the Dow Jones Industrials up much past 11,000, if that. Then we shall see.

MUST BORROWING MAKE THE WORLD GO ROUND?

'Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.'*


Revolutions bring revelations, and the first revelation which the current financial revolution brought to me was that the United States economic system is based on borrowing money.

As we've watched the economic system collapse, and heard of failing banks and panic selling of company shares, we've repeatedly been told that without a healthy banking system we, the people, could essentially do nothing: We could not go to college because we couldn't borrow the money to go. We couldn't buy a house because we couldn't borrow the money for a mortgage. We couldn't buy a car because we couldn't “finance” it. We might not even be able to buy clothes if things got so bad that banks wouldn't lend us money via our credit cards. And if business owners couldn't borrow payroll money, their employees would go unpaid.

I got the impression that few Americans have actual money and pay for things. All most people have are debts -- and their right to borrow money from “lending institutions” was equal to their right to life and liberty. The most drastic emergency actions were needed to preserve the right not to live within one's means!

I oversimplify, but simplicity is needed here. A secret of control of societies by huge financial institutions interwoven internationally is a camouflage of complexity which gives most people the helpless feeling that there is no possible way they can understand the system. For many intelligent people I've talked to, the mysteries of quantum physics are at least as fathomable as the workings of monetary and financial machinery.


Banks Hide Reality Not Only Behind Impressive Facades, but Also Behind a Smokescreen of Complexity

Here's one simple question: Is it really to the advantage of society to encourage everybody to live on borrowed money? Can the answer be anything but “no” in light of the crash brought on by U.S. banks lending mortgage money to “subprime” borrowers (people with such bad “credit histories” that the odds were against their paying the money back)?

Why did banks loan massive amounts of money to “subprime” people who predictably might not repay it? A major reason is that America was excitedly inflating a housing bubble in which real estate rose in price weekly, and a house bought for $120,000 in March would sell for $200,000 a year later. Thus the banks enabled a subprime person to “buy” a house which the bank could take and sell at a profit if the mortgage payments weren't made. Meanwhile the bank could collect fancy fees as well as interest payments.

If a society based on borrowing is bad for society, then who benefits from it? The banks, of course. Never forget that your local banks make their living from renting out money at “interest”, plus various “costs”. The picture of a lady saying gleefully, “I'm so lucky! I got the loan! The bank gave me a loan!” should instead be the banker saying gleefully, “I sold a loan! I sold a loan!”

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*Shakespeare, Hamlet. “Husbandry” in Shakespeare's time meant domestic management, thrift, or frugality.

PAINFUL PALIN

TODAY'S PHOTO QUIZ: Can you find the brain in this picture?

The selection of Sarah Palin as candidate for what could well be the presidency of the United States was akin to entering a poodle in the Kentucky Derby, but her goofy ramblings when interviewed by Katie Couric leave me scrambling for more extravagant similes.

That interview is available in a million places, but I can't resist a choice quote which convinces me that no sane person would trust this bubblehead to be assistant manager of a backwater Burger King, much less President of the United States. In comparison with Palin's incoherent interview as a whole, the typical “I'm for world peace” mewings of a beauty pageant contestant sound like an address by Henry Kissinger.


"COURIC: You've cited Alaska's proximity to Russia as part of your foreign policy experience. What did you mean by that?
PALIN: That Alaska has a very narrow maritime border between a foreign country, Russia, and on our other side, the land-- boundary that we have with-- Canada. It-- it's funny that a comment like that was-- kind of made to-- cari-- I don't know, you know? Reporters-- [Finally breaks down and gives up groping for words.]
COURIC: Mock?
PALIN: Yeah, mocked, I guess that's the word, yeah.
COURIC: Explain to me why that enhances your foreign policy credentials.
PALIN: Well, it certainly does because our-- our next door neighbors are foreign countries. They're in the state that I am the executive of. And there in Russia--
COURIC: Have you ever been involved with any negotiations, for example, with the Russians?
PALIN: We have trade missions back and forth. We-- we do-- it's very important when you consider even national security issues with Russia as Putin rears his head and comes into the air space of the United States of America, where-- where do they go? It's Alaska. It's just right over the border. It is-- from Alaska that we send those out to make sure that an eye is being kept on this very powerful nation, Russia, because they are right there. They are right next to-- to our state."


After posting this I received such a witty comment that I decided to rescue it from Comment obscurity and post it here:

From Adriana in Romania

'I was as astonished after I read what "brilliant" Sarah said in the interview as I was when she said that the war in Iraq is a task of God. I had the feeling I was reading the geography homework written by a kid who lives on the border with Russia. And I'm asking myself the same question: Should I laugh or should I cry?

Poodle at Kentucky Derby?! Ohhh, no, you're too nice! I'm wondering who put these "single-neuron" heads to be candidates for leading a nation? Poor Sarah! Soon her single neuron will die because of too much loneliness.

I tried to make the picture bigger using Photoshop and I found a weird pixel there. I think it was Sarah's neuron!'

OF BUBBLES AND BAILOUTS

In the cacophony of a collapsing economy we're hearing from Republicans the perennial cry of the guilty: “This is not a time for finger pointing!”

Well, it is a time for finger pointing. The loud crash of the economy was preceded by another sound -- the “POW” of a bursting bubble which took years to form. The people who were entrusted with the care of the country during that time can't claim that they were suddenly overtaken by catastrophe in the manner of a meteor flashing into the atmosphere without warning and smashing to Earth six seconds later.

The bubble which portends a financial crisis like this one is very visibly blown bigger and bigger over months of wild speculation in something – Dutch tulip bulbs in the 1630s (the price of a single bulb reaching many times the annual income of a skilled artisan), the South Sea Bubble (worthless stock rocketing from 100 to 1000 pounds a share in a few months), the Florida land boom (and bust) of the 1920's, the U.S. stock market bubble leading to the crash of 1929, and the Internet “dot-com” stock market bubble of 1995-2000.



The pattern repeats now as then: Enthusiasm for a “get rich quick” investment spreads to people all walks of life. Stories of quick profits lure more and more people into the frenzy until even the most unlikely speculators, from shoe shine boys to drugstore clerks, are telling tales of incredible gains.

The media are only too happy to trumpet the sensational growth of wealth. The certainty that one can put a little money in and take a lot out encourages people to “invest” money they can't afford to lose – and to borrow gambling money from banks. Buy a house or tulip bulb today on borrowed money and sell it soon at a 50% profit from which you can pay back your bank loan. Guaranteed!

The South Sea Bubble

The banks love it. Banks make their living renting out money for a fee called “interest”. By the time a speculative bubble approaches the bursting point the banks are practically begging people to rent money – including people who ordinarily would be turned down as bad credit risks, as demonstrated in the most recent housing bubble.

What happens, of course, is that the inevitable limit is reached and for the first time sellers outnumber buyers. Prices falter, borrowers can't make their mortgage payments, and a chilly breeze of fear sweeps through the land as stories of foreclosures and losses replace the “New Golden Era” headlines. When it is recognized that the rainbow glistening bubble has disintegrated into insubstantial mist, there is widespread panic as borrowers default in hordes and the banking system is stuck with “toxic” loans which will never be repaid.

The Dot Com Bubble -- From 5000 to 1000 in a Gasp, But Plenty of Warning Before the Top

Meanwhile, for months before the “bust” there have been plenty of wise heads warning publicly that frenzy is leading to a predictable crash. Those warnings, citing the lessons of history, mean that even as low a form of intelligence as an American politician – not to mention political appointees like the Secretary of the Treasury, the Chairman of the Federal Reserve, and the heads of regulatory agencies -- had to know that the recent housing bubble was expanding to an unsustainable point long before it blew up in their faces. No wonder they are crying, “Now is not a time for finger pointing!”

Ah, but there is one happy bit to all this for one class of participants: The bankers have learned in modern times, and are being taught once more by the government's actions during the present week, that they are “too important” to be allowed to fail and go bankrupt. No matter how irresponsibly they behave in blowing up a bubble, they will be bailed out by the government taking what you and I have paid in income taxes to “buy” the worthless mortgages and IOU's from the bankers – readying them for another round of Blow up the Bubble after everybody catches his breath.

For the financial institutions, it's like going to Las Vegas with a guarantee that Uncle Sam will pay them back all the money they lose at the roulette table.

For the taxpayers it's like Robin Hood in reverse – the government robbing the poor to bail out the rich.

It's definitely time for finger pointing.

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NEWS BULLETIN: As I wrote the last sentence this morning, Saturday, September 20, 2008, a USAToday story arrived in my email:
WASHINGTON (AP) - The Bush administration is asking Congress to let the government buy $700 billion in bad mortgages as part of the largest financial bailout since the Great Depression.