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US Economy

  1. 470 Posts.
    HI Folks,

    As a new poster here on HC, I thought some of you might find this interesting reading.

    Anna P

    July 30, 2002

    - The American public has several fundamental problems. The Big One is that they have lost a ton of money in the stock market, and are angry and scared.

    Another is that they have watched in horror as their retirement monies disappear, money that they were counting on to bail them out of the quagmire of debt they are in.

    Another is that insurance costs such as health, dental, homeowner, etc. are rising explosively because the insurance companies invested the premiums in the stock market and the investment did not pay off. During the 90's, they allowed premiums to drop to insignificance since their investments were doing so well (whee!), so they decided to do a little predatory price-cutting to pursue market share. This was driven by both the natural need to grow, and to get some action on the financial reports so as to get those juicy stock options in the money. Now, policy renewal premiums are rising at mind-boggling rates of 50%, 80%, 100% and more, because they really, really desperately need the money just to break even.

    Another is that companies are slashing payrolls. Everybody knows someone who has been laid off or fired. They have heard the horror stories about what is now happening to these sad sack people, and how grown children are coming to live with parents again, grandchildren and all.

    Another is that now, in the typical household, both adults are working, both adults have spent all their income, both adults have tapped out their credit-cards, both adults have borrowed against all the equity in their home, and now they simply have run out of money and fresh sources of credit to go shopping. Or even pay the bills.

    The list goes on and on. But at least they still have their houses! And when housing prices start their precipitous decline, putting untold millions of people in the position of owing more on their house than it is worth, it may well prove to be the proverbial final nail in the coffin of the American Investor.

    On that very interesting topic, Ned Schmidt indicated that rising defaults and bankruptcies are starting to hammer the overheated housing market. Nothing definite yet. "The rumored tidal wave has not appeared, but all the water has disappeared from shore."

    - CEO's have until the August 14 deadline to "certify" the accuracy of their financial statements. Yeah. Right. For a decade executives and accountants swapped stories over drinks about all the oh-so-clever things they have been coming up with, taking advantage of little-noticed loopholes in rules and regulations, ill-conceived FASB changes, accounting tricks, off-balance sheet shenanigans, gaming derivatives, using pension funds of employees as an equity asset, etc. Each of them designed to do the one thing that they all wanted, namely to improve the apparent results of their respective firms and make them look good. The green-eyeshade types that didn't succumb to the lure were punished, as their corporate "results" predictably lagged those of their more "modern, creative" contemporaries. The careers of the virtuous few faltered as a result, and then they, too, saw the light. Those that got on board prospered, and those that stuck to the old-fashioned, prudish ways were ridiculed and replaced.

    Now they have until August 14 to certify that they did NOT do any of these things? Don't hold your breath.

    And what of the enterprise "results" that were thus reported on the financials but were bogus from the outset? And what will that do to share prices? Oops.

    - Speaking of housing prices, the housing market may, or may not, be doomed. If the dollar keeps dropping versus foreign currencies, that means that house prices denominated in dollars here in America will be relatively cheap, ex-forex. What is the immigration/visa status of the foreign owner of American real estate?

    - The current, out-of-nowhere abrupt rally is, according to me and my loud mouth, the biggest financial fraud in the history of the exchanges. Let's look at the evidence.

    - Exhibit A: the open interest on the SP500 futures has been exploding to levels unseen in the history of the market. Normally, as the quarterly expiration approaches, the rollovers cause open interest to rise quickly. Immediately before expiration, the combination of both the old, un-expired futures and the new rollovers cause open interest to rise exponentially. Then, after expiration, the expired futures are gone and open interest drops back to lower levels. This time, with a full month yet to go to expiration, only two-thirds the way through the cycle, the open interest has far exceeded anything seen before. On Tuesday, open interest went ballistic, adding 12,800 contracts, a huge number! Then more were added on Wednesday, more Thursday, more Friday, more Monday! Astonishing! The open interest phenomenon is now a three-standard deviation type thing. Then, mysteriously, wondrously, a Surprise Rally to put all those long futures in the money. Just a coincidence?

    Exhibit B: the Members of the NYSE have been going a record net long for months, even as the market has been tanking. You would expect that people as savvy as the Members would not be buying record-amounts of stocks as the market sinks this much. But they did, and now they are massively underwater on them all. Not nearly as many as before, thanks to the Surprise Rally. Just a coincidence?

    Exhibit C: The Specialists have been perversely adding net-long positions to their book, and the market caught them all wrong-footed big time. Now they are getting back in the pink, thanks to the Surprise Rally. Just a coincidence?

    Exhibit D: who has been taking the other side of all those put options that were paying off so big? Well, now they got their money back! Just a coincidence?

    Exhibit E: The shorts were sitting on a record level 7.5 billion shares in short positions. That many shorts is a juicy target to anyone contemplating manipulating the market. Remember that shorts MUST buy the shares at some point in the future, and the best way to make them buy is to bankrupt them if they don't. You do that by pumping the market if you can. Now they are being eaten alive, as the Surprise Rally produced a short squeeze that tightened around the necks of the shorts. Just a coincidence?

    Exhibit F: Too many people needed the market back up. The insurance industry, the Equities Cult industry, the government (tax revenues), the retirement industry, foreign powers, foreign citizens, domestic speculators, etc. If ever this called for the Put Protection Team, this is it! Just a coincidence?

    Exhibit G: All that previous selling-off of shares that caused such a long, large swoon in the averages, has also produced a hoard of cash from that selling. That cash balance is not earning squat in any other mainstream investment. So where to put it? "Ooh! Ooh! Quick! I gotta show some quick profit! What do I do? What do I do?" they frantically ask. "Hmmm," you can almost hear them think. "How about right back into the same market we just got out of, because it was such a lousy investment?" And they all naturally thought that was a great idea. So they bought. Just a coincidence?

    Exhibit H: The Treasury floated a cool $16 billion last week, the Fed itself bought up another $5 billion in government debt, all the M's in the money supply got goosed up, and the banks themselves increased their nominal loan book by $25 billion. $25 billion! Just a coincidence?

    So is it just coincidence that, out of nowhere, the market has one of the biggest Surprise Rallies of all time, putting some money back into the pockets of these depressed insiders and Too Big To Fail Entities? Let's take a look at the Coincidence Meter. Wow! It's red-lined!

    But it's just another symptom of the pandemic, despicable corruption of America. You can't swing a dead cat without hitting a corrupt jackass, in or out of government, these days.

    - It is axiomatic that borrowing money to spend today means less spending in the future when you pay back that borrowed money, unless income rises. So let's look at the income statistics. Nope. Not rising that fast.

    It is also axiomatic that a lifestyle that finds current income to be so inadequate that borrowing is deemed mandatory will be even more so tomorrow, when current income is reduced by tomorrow's promised "one of these days" debt payoffs.

    Everybody agrees that sometime "in the future" spending will have to be reduced to pay back the debt. So why is it that nobody wants to believe that the "low-spending future" is now? Why is it that the very idea of the awaited arrival of the low-spending future is so preposterous as to be dismissed out of hand? And if not now, then when? By what financial alchemy will the economy be saved, again and again and again, by the consumer going farther into debt to buy the global output of goods and services, while the consumer is at the same time paying off the old, record-level debts?

    - Durable goods orders fell a whopping 3.8%. Well, duh. Seven trillion dollars of wealth has been wiped out in this country alone, unemployment is rising, the dollar is weak and getting weaker, steel (thanks to those damnable protective tariffs) that goes into these durable goods is more expensive, and we are getting hit with the Triple Whammy of higher taxes, higher fees, and higher costs. And you thought that everybody was going to rush out and buy more durable goods and houses and stocks and a mind-boggling cornucopia of consumables? Check with your doctor; your medications need adjusting.

    - Profits are down. Sales are down. Revenues are down. Half the states are cutting spending and/or raising taxes. Hell, the SP500 even slashed dividends by 2% last week, and you think that THIS is the time to buy stocks?

    - A collector's item of the future will probably be books on current antique prices. They are the height (or depth, depending on your viewpoint) of the greedy, childish consumerism that has, in turn, consumed America. As such, they will probably be invaluable to future historians. Imagine, old ratty dolls worth thousands! Likewise mismatched, old, cracked pottery and dishwares. Broken toys. In all of history they were just old stuff in the basement, dusty curios and hazily-recalled mementos of dead forebears. But now they are deemed invaluable! Tip o' the day: immediately sell "collectibles" of any kind, taking whatever cash you can get.

    - I am now convinced that we are not only seeing the end of the bull market, but we are seeing the end of the world as we know it. To expect that capitalism and free enterprise will always conquer the overwhelming panoply of bizarre manifestations of too much credit-created money, too much socialist government and too much stupidity in America is too, too rich. That we lasted as long as we did, behaving as irresponsibly as we have, is merely testament to the poor performance of the rest of the world.

    The stock market will almost certainly never again, for as long as you are alive, rise to the levels seen, because there has never been an instance of the same bubble occurring twice in succession. There was only one South Seas Bubble. There was only one Tulip Bubble. There were two Stock Bubbles (the Twenties and the Nineties), but they were seventy years apart, so they were obviously not in succession. I'm not even sure that there WILL be a stock market when it is over. I'm not even sure that the dollar will survive. The Roman denarius didn't, and we are on the same glide path that they took.

    - The website Daily Reckoning noted that "there's a scarcity of transactions taking place in the economy." In economic-babble, low velocity. They go on to note that "Existing homes sales skidded 11.7% in June. Meanwhile, durable goods fell 3.8% last month, and orders for core capital goods dropped 5.2%."

    And since all multipliers seem to be around five or so, the ramifications of contractions of these magnitudes is alarming. As in an alarm going off in your head, going "Bong bong bong! Wake up!"

    - There are similarities between Japan and the USA, as many point out. One is the similarity of the cause of our problems. Namely, hu-freaking-mongous debt. But that is pretty much where the similarity ends. Japan has a towering trade surplus, and thus has actual money coming into their economy. Japanese citizens save a huge fraction of their income. With more money coming in than going out, they are putatively "making a profit." The USA saved Japan's bacon up to now, buying all that stuff we love so much, so that the Japanese could show a national, notional "profit."

    The USA, on the other hand, is a gigantic net debtor with towering trade deficit, and has unbelievably huge amounts of money going out of the economy. We save little to nothing. We are the Welfare Queen of the world, gobbling a surfeit of consumables with one hand, signing credit-card slips with the other, and lecturing everybody else about how being a big, fat, stupid gluttonous pig is so healthy.

    So who is going to save the United States, the welfare queen of the world? What is supposed to save us? We do not have one, single, solitary asset to turn to advantage, whereas the Japanese had a good one: "We make some money and save some, too!"

    And now the other deadbeats, like Africa and South America, are wanting yet another wiping clean of their debt, as they spent most of what we already loaned them (again) and stole the rest (again). We are the biggest debtors in the whole world by a long shot, and now they want us to again wipe THEIR debts clean and again let THEM walk away from THEIR responsibilities and again force the USA to borrow even MORE money and then give them some MORE loans that they will default on? The mind reels! It's beyond Kafka-esque! It's literally surreal!

    The persistent failures of the IMF and World Bank, coupled with the fact that we don't have any money to lend anyone, is more than enough justification to just abolish the damnable IMF and World Bank, and send the losers who run them to some gulag someplace where we will never have to hear from them again. Without them there would be zero episodes of untold millions of people being inflicted with IMF-induced misery and devastation.

    - A quick perusal of the statistics pages in the back of the Economist magazine shows that every industrialized "Western" economy, except Japan, has inflation in consumer prices. It also shows that every single one of them is still expanding their money supplies at big multiples of those inflation indices. The latter guarantees increases in the former, reverberating through many unhappy days in the near future.

    In a side-bar, the Economist dryly noted that "The dollar-based food index has surged by 11% since mid-June, to its highest in three years."

    And contrary to what the current lineup of media and government dim-bulbs say, inflation is never "tame" unless it is zero. Or below.

    Ned Schmidt calculates that not only is the Median CPI running at 3.4%, but that it is increasing. He goes to lengths to warn that housing and the dollar will be crushed when this inflation starts roaring. That the US economy will take a mighty whack to the head - ouch! goes without saying.

    Perhaps this has something to do with why the Germans have such visceral antipathy towards inflation, especially anything as torrid as 3.4%. At that rate of inflation, very bad things will happen to an economy. And the more so when the lies, damned lies and statistics of the government and their minions who report this stuff is shown to be what it is, namely the aforementioned lies, damned lies and statistics.

    - Paul Kasriel of Northern Trust Corporation published an interesting article on the website. He says that for the first time since WWII, the year-over-year change in the net worth of citizens and non-profit organizations has gone negative. He provides a graph showing the nominal size of the change in net worth, and for the last few years of the Nineties it was increasing at around $3,700 per year. In the last two years, net worth has decreased by about a thousand dollars so far.

    He goes on to predict that net worth will decrease back to the levels of 1998. In that case, judging by the graphs, about another nine grand or so of net worth has to be wiped out. Uh-oh. If this much damage has been done by a lousy thousand drop in net worth, think what the damage will be when it is nine times greater. And, with my keen eye for discerning what appear to be obvious long term trends in squiggly lines, I think Mr. Kasriel was being too optimistic. His own testimony is that net worth broke out of its' 35-year trend-line in 1995. It looks like, oh, about fifteen grand drop in net worth would get us back to that trendline.

    And what was the cause of all that rise in net worth all these years? Stock market gains (and house price gains I assume). And what was the fuel for all that rise in the inflation in stock market and house prices? Credit-creation by the Federal Reserve. It's the only place where money can appear out of thin air.

    See how the Fed creates these bubbles? And see what the ultimate penalty is for allowing the Fed to do such a thing in the first place? To date it is only rising unemployment, simmering inflation, rising debt, a government so large and intrusive that it is suffocating the citizens, and seven trillion bucks down the drain.

    That's why it is a wonder that Greenspan was allowed to get away with it. "Everyone in the school knew that the Home Economics teacher, Mr. Greenspan, and his students were incubating anthrax, but nobody ever said anything about it. All the parents and other teachers, interviewed before the calamity killed everyone within a thousand miles, thought he was such a nice man." Ugh.

    Mogambo Sez: For the last four years the tactic of shorting every rally has paid off. With a success rate of 100%, one would be foolish to stop now. As for the obvious market-rigging and manipulations of late, Gordon Graham over at Elliott Wave International noted, "There ain't never been and will never be a government official or politician that will act contrary to the social mood." And that means more of the same. The American populace, who see government manipulations and lying as "good," and business lying and manipulations as "bad," the "social mood" is in deep, pervasive psychosis. And note: very few psychotic imbeciles end up as millionaires.

    The Mogambo Guru Lives!

    Richard Daughty is general partner and C.O.O. for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher of the Mogambo Guru economic newsletter, an avocational exercise the better to heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning, and other fine publications

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