make money available and it will be spent

  1. 95 Posts.
    I thought this was an interesting artical from Larry Swing



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    a MUST read...






    Beeing Street Smart


    by Sy Harding - October 25, 2003

    MAKE MONEY AVAILABLE AND IT WILL BE SPENT!

    Once again, the Four-Year Presidential Cycle is working out as it has for several generations of politicians (and investors).

    The economy and stock market tend to suffer declines in the first year or two of each Administration, with little concern expressed in Washington about it at the time. Then around mid-term all the stops are pulled out to make sure the economy and stock market have recovered in time for the next election. They can’t have investors unhappy when they enter the polling booths.

    Washington ’s manipulation of the economy for election purposes is so consistent that from the low in the 2nd year of every Administration since 1914, to its high the following year, the market enjoyed a substantial rally in which the Dow gained an average of 50%.

    Last October proved to be the market’s low in the second year of the Bush Administration, and the market has certainly staged a substantial rally from that low. The Dow, up 36% at its recent high, hasn’t hit its average gain of 50% in such rallies, but the Nasdaq was up 75% at its recent high.

    What has been different this time is the amount of effort that has been required by Washington to achieve that result, with the possibility still there that the results won’t last until the election. The Bush Administration has undertaken the most massive economic stimulus effort the world has ever seen, including tax rebates, tax cuts, 13 cuts in interest rates to the lowest level in 40 years, and staggering increases in government spending that reversed previous budget surpluses to huge budget deficits.

    In the process it has produced a worrisome bubble of consumer, corporate, and government debt that may have solved a short-term problem, but created a much larger problem for the not too distant future.

    It began in the aftermath of the terrorist attacks on 9/11/01 , when the Bush Administration let the nation know that it was our patriotic duty to spend the economy out of the recession that was then underway, even if it meant going further in debt, to prove to terrorists that they could not destroy our economy. That provided the initial excuse for consumers to pile up even more debt. Washington provided additional incentives with what became a string of 13 straight interest rate cuts, last year’s unusual tax ‘rebate’ that put instant cash in the hands of consumers, and this year’s large tax cut and refunds.

    And consumers showed big time that they will spend as much money as they are given, plus as much as anyone will lend them, especially if encouraged to do so by their leaders.

    Auto manufacturers jumped on the bandwagon by offering zero-percent financing and cash rebates. The banking industry jumped in with easy mortgage re-financing, encouraging consumers not only to refinance mortgages to get lower payments, but to take cash out of the equity in their homes, some providing mortgage refinancing of up to 125% of a home’s value.

    Washington led the way by demonstrating how it’s done, spending hundreds of billions more over the last two years than it took in, turning its own balance sheet from large budget surpluses to record deficits. Whatever it takes to hold the economy up until the elections.

    Yet, after almost two years of such massive stimulus efforts, they have managed to produce only a mild economic recovery, and a jobless recovery at that. However, it’s obvious where the economy (and stock market) would be had they not undertaken such efforts. So they did a good job with the immediate problem. Having already used up most of their ammunition, they must be wondering what they’ll do next if the economy turns out to still not be able to sustain itself on its own. But I’m confident they’ll come up with something. After all the election is only 13 months away.

    Longer-term, by enticing consumers who were already burdened by record levels of debt, to keep borrowing and spending, Washington and the Fed have produced a huge bubble of consumer debt, with loan defaults and bankruptcies already on the rise.

    You can be sure the economy will again pay the price for this artificially produced, temporary, election-timed jobless recovery. Because the other side of the Presidential cycle is that the economy and market do tend to suffer their hits in the first year or two of the next Presidential term.

    For now though, such is the ability of Washington to manipulate the economy and market that I don’t expect the new bull market will end quite yet, even though it’s likely to stumble.

    After issuing a ‘buy signal’ on March 17, very near the market’s significant March low, I subsequently issued a sell signal on June 20, and have been expecting a market correction of some degree since. It hasn’t happened yet. If it does take place, I’m expecting just a significant intermediate-term correction to work off the market’s very overbought condition, and the dangerously high level of investor euphoria, not the end of this bull market quite yet. The ability of Washington to manipulate the economy and market short-term is just too powerful.










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    Sy Harding is president of Asset Management Research Corp., Meredith, NH, publisher of The Street Smart Report Online at StreetSmartReport and author of 1999’s Riding The Bear – How To Prosper In the Coming Bear Market.

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