Stock Market

Economics and Government and Psychology and Social Issues and Stock Market28 Feb 2014 01:45 pm

While most of our attention is focused on our “losing jobs” to China, India and many emerging or third world nations, we may be missing the more important ways in which our basic economic structure is changing. In many ways it appears that our Industrial Free Market Economy is being transformed into a economic system based on Financial Instruments.

Over the last number of decades we have been referred to as a consumer based economy in which the health of the economy was dependent on the increased velocity of money being fueled by strong and generally increasing expenditure and consumption. Recessions or down turns in the economic health of the nation was accompanied by drops in consumption and expenditures. The economy “contracted” at these time periods with businesses laying off workers in response to a drop in revenues and profits as consumption stagnated or decreased.

In a society in which its economic system is dependent on the consumption of goods and services there was always a need for people to be employed and for wages to increase to support their being able to continue to consume, invest and make major purchases to stimulate the economy.
Since the beginning of the industrial revolution modern societies have found an increasing need for the vast majority of citizens to fulfill three roles, that being consumer, worker/producer and soldier. The woman’s movement almost doubled the pool of possible workers and with two pay checks per household as compared to one, allowed for a sharp increase in both production and consumption.

The rising populations throughout the industrialized societies impelled its economic and political leaders to support their consumer cultures by trying to monopolize the natural resources of the globe. A surplus of oil, foodstuffs, natural gas, minerals, potable water, etc. were all needed materials and essentials to keep the consumer based economies humming and expanding.

Many so called underdeveloped nations were somewhat opposed to their surrendering these resources or not having them be the main benefactors or their economic value. The wealthier industrialized nations felt they were the proper stewards of these precious and valuable commodities and felt other nations should trust in their proper management and global dissemination.

According to the industrial nations those envious of the industrialized nations must be subdued and forcibly assisted in becoming better and more moral nations. In this manner constant protection and advancement depended on forming the most formidable of military forces which then required the role of soldier to become paramount, rivaling both the roles of consumer and produces in their importance for the continued success and functioning of the consumer culture.

The industrialized world was led by “free democratic” societies who felt their way of life threatened by the existence of totalitarian, communist and even egalitarian socialistic societies. Such political and economic diversity was not tolerable for a social economic structure that was dependent on both the increased access to and dominance of food, energy, and industrial materials and technologies by the elite industrial nations. The equating of freedom and free trade made military might and superiority not only palatable but a moral imperative. Freedom and fighting for freedom became synonymous, and the possibility of freedom without war became a somewhat mocked and unrealistic ideal.

Protecting our freedom and way of life, from the morally bankrupt and evil despots led many to “proudly serve” in the military and to support our governments policies and political agendas. These people viewed themselves and their nation as the true bastions of freedom, justice and moral righteousness.
One of the true ironies of our sense of progress and the ideal of an ever expanding worker/producer consumer culture, is the role of technology and its impact on our lives. While it is true that every advance in technology creates jobs, it is also true that most advances in technology replace more jobs and human labor than they create. Machines and inventions have almost always increased production and made businesses less dependent on human labor, or at least reduced the number of man hours necessary to produce the same number of goods.

Increases in production via technological advances has been astounding often in a geometric progression. Likewise, the areas in which technology dramatically increased production is finding itself in not only almost every area of manual labor but also in the service economy.  While the possibility of our being able to create a fully automated society freed of human labor is still up for debate, the fact that each passing day the need for a smaller and smaller percentage and number of people working is a unavoidable reality. The old truism that automation only replaces unskilled labor and jobs unfit for human beings is no longer  accurate in any sense. In fact you could say that the last decade saw more highly skilled jobs, such as surgeons and systems analysts, being replaced by robots and computers that can deal with huge reams of information, microscopic precision and nanotechnology.

Modern technology, robotics and artificial technology are overcoming human error, limitations and vulnerabilities. In many industries we can produce in a matter of hours what we most likely will consume in months or even years. As technology becomes more gifted (as workers and producers) our role as workers and producers becomes more and more unnecessary and obsolete. While this is rather easy to fathom, it is harder for most people to recognize that our role as a consumer is likewise becoming increasingly unnecessary since the last recession.

Despite rather anemic growth in consumption accompanied by rising unemployment and falling wages the stock market and corporate profits are positively booming. Those working in the sweat factories abroad are now making maybe $200 a year rather than the $100 a year they used to make. These people are replacing jobs in the industrial nations that made anywhere from $18,000 to over $40,000 a year. So while the decreased wages are cutting down on overhead, they are also greatly reducing the pool of disposable income available to buy products that should be necessary for corporate profits and stock performance.

How are corporations able to make record profits if the consumers of their products and services are unemployed, making less money, and have less disposable income available? Add to this conundrum the fact that banks have drastically cut back the number of loans given out during this entire meteoric rise in corporate profits and the stock market. Well if people have no money to spend, and they can’t borrow it, where are these record profits and stock prices coming from?

During the time which we now refer to as the Great Recession we were told that our entire financial system was in crisis and the threat of total collapse was imminent. The stock market and financial systems survival was accomplished through a massive injection of money into the marketplace via bailouts, loans and ample money printing.

While the economy continued to struggle and unemployment rose, the financial and stock markets began to show signs of not only stabilizing, but regaining the majority of losses. While the financial press continued to debate the existence of “green shoots” and whether we’d have another recession, the stock market had already doubled since its low and the housing prices were beginning to inch back up. The “jobless recovery” has never really ended while the stock and financial markets are at new all time highs. As I mentioned at the beginning of this post, these new highs and corporate profits have been accomplished despite and maybe even because of a struggling economy.

In an industrial consumer economy there is a ceiling of how high profits can go in a high unemployment and low wage environment. Without jobs and expanding disposable income (higher wages) consumer spending is bound to slow down if not contract. Yet, one of the biggest and longest stock market runs in occurring in a stagnant or low growth economy where over 95% of financial gain has been acquired by the top 1% of the populace.
These facts seem to point to the fact that we no longer live in a consumer based economy and instead are experiencing the birth of a new economic model. Let’s look at some of the reasons this new model could be referred to as a financial instrument model.

The financial crisis was averted and the stock market rebounded when the Federal Reserve and other Central Banks began printing money and thereby “injecting liquidity into the marketplace”. The stock market was buoyed by relatively free money being used to buy stocks which had come down sharply in price. Troubled banks, financial institutions, and corporations were bailed out or give huge near zero percent loans to help them pay off their debts and stabilize their businesses.

While these extreme measures were implemented to avoid a catastrophe, the money printing, loans and bailouts have continued. In essence the financial behemoths which were declared too big to fail, have been receiving free freshly created money to use in any manner which they find beneficial.

Since many of these businesses are banks and other financial institutions which make no tangible merchandise or products, they have used this money to purchase financial instruments which are making a solid yield, repurchasing their own stock, and investing it in the financial world of stocks and bonds.

Many of the troubled financial institutions were saddled with bad loans and mortgages that were “under water” and had no hope of ever being paid off. The Federal Reserve took it upon themselves to purchase billions of dollars of this unserviceable through financial instruments such as mortgage backed securities to take these burdensome debts off of the books.

The transfer process was/is quite simple. The Fed would electronically create “print” money and use it to buy bad debt such as unserviceable bank loans. The debt purchased by the Fed would be transferred from the banks to the tax payer by being added to the
national debt.

The businesses and non financial corporations receiving newly created money via low interest loans and bailouts mainly chose to follow the path resulting in maximizing their short term financial gain. So, rather than lower their profit margins by increasing their overhead through building factories, hiring workers, increasing worker pay and expanding their businesses they mainly did the same as the banks and make most of their profits through stock buy backs, investing in financial instruments, and actually reducing overhead by closing factories, cutting wages and benefits, and when possible passing on expenses to the government (taxpayers).

Measures which were taken to avert an economic meltdown have now become business as usual. Money printing and financial instruments have become the way money is made by the top fraction of one percent of the populace. As long as money is being electronically created and injected into the marketplace via the coffers of the 1% there is little need for a consumer to spend his dwindling pennies on products and services. Every dollar printed just adds to the pool of money available and if that money is placed directly into the hands of the wealthiest their relative worth skyrockets as the relative wealth of everyone else plummets.

Is a Post Industrial Financial Instrument Economy sustainable? Are the financial elite going to eventually meet resistance or truly need the consumer, worker and soldier?

With each passing day advances in automation, nanotechnology, robotics, artificial intelligence, surveillance, and military technology are making the roles of worker, consumer and soldier increasingly unnecessary for the acquisition and securing of wealth. Through debt, taxes, suspension of entitlements, destruction of worker rights and protections, the loss of privacy, and the legal erosion of our basic inalienable rights and freedoms we are losing any recourse we may have had to defend our role and purpose in this new global economy as well as any way to insure our economic self-determination.

The stock market is currently enjoying its longest stretch, some 60 months, without a correction of 20% or more. The longer this goes on the more it supports the possibility that we have truly entered a new economic paradigm in which automation, perceptual management and financial instruments have replaced the old rules and dynamics of an industrial based economy. While I personally think this economic paradigm coup is premature and ill fated, and the coming stock market crash will be historic in nature, I am unwilling to totally discount this new financial instrument based economy succeeding now or in the near future.

In such a world where the common man becomes superfluous at best and a burden at worst we may look back at Brave New World and 1984 as comparatively rosy views of the future.

Jim Guido


Economics and Stock Market31 Dec 2011 02:35 pm

Everyone Loses: Stock Market 101

Since the 1970’s the percent of people and stock trade activity which is involved in mutual funds and index funds in particular has mushroomed. While the frequent day traders have become more active, the typical non-professional as well as professional trader still engages in the buy and hold strategy advocated by market experts since there has been a stock market.

The goal of this post is to point out that the buying and holding of index funds in particular is seldom a winning proposition and very likely a sure way of slowly losing almost all your assets. Let me use this year as an example. I will attempt to use enough math examples to prove my point without traumatizing or boring those who are math-o-phobic.

Any fund that adjusts itself on a daily basis is almost inevitably going to lose value over time. This is true of all index funds and to my knowledge a great deal of mutual funds that deal with the bundling of several stocks.

Okay this is how it works (or doesn’t work for the investor). For convenience sake I’ll use nice round figures.

Let’s say that I have $100,000 invested long in the Nasdaq 100 (top 100 technology companies). Long means the standard way of trading in which I’m hoping for the market to go up. On my first day the Nasdaq rises from 2000 to 2060 an advance of 3%. To make the numbers big enough to quickly show what happens let’s say that I owned a fund such as RYVYX an ETF which doubles the movement.

So, in effect the market went up 6% and after one day I made a quite impressive $6000. Let’s say the next day the market gave back all it had gained and the Nasdaq returned to 2000. The drop from 2060 to 2000 comes out to a 2.9% drop. So, while yesterdays gain was 3% a drop of only 2.9% gets us back to even. Yet, while this sounds like you actually would have made a little money or stayed the same the actual math will show that you surprisingly lost some money.

Since you started the day at 106,000 you lost 5.8% of 106,000 which you get by multiplying .942 of 106,000 which comes out to 99,852. So during your two day round trip you actually lost $148.

Rather than give you a host of mathematical examples let’s take a look at what happened this year. The Nasdaq 100 began the year at 2218 and ended the year at 2278. This means that the Nasdaq 100 went relatively nowhere this year and if you owned an ETF or mutual fund on this index you would expect a modest gain of 2.7%.

In the example above I used a fund which doubled the movement of the index. Well if you wanted the maximum amount of potential gain you can own funds which triple the move of the index such as TQQQ for the Nasdaq 100. In owning the TQQQ then you would anticipate a gain of near 8.1% for the year (2.7 x 3). Yet, the actual performance of this ETF is quite different.

TQQQ ended last year at $73.94 and closed yesterday at $67.99. Therefore instead of gaining the expected 8.1% the fund logically would produce by its tracking the Nasdaq 100 it actually lost a hair over 8%. This means that due to how the index fund tracks the fund on a daily basis that the markets ups and downs caused the fund to deviate significantly to the downside.

In essence if you started the year with $100,000 you would currently have about $92,000. So while the market went up and you should have gained over 8%, you actually lost $8,000.

Now, as many of you know you can buy index funds which “short” the market. So, instead of you making money when the market goes up, you make money when the market goes down. The ETF SQQQ is the short version of the TQQQ which means that it should do the exact opposite.

If you owned the SQQQ for the entire year you would expect that since the market went down 2.7% that you would have lost 8.1% for the year. So, your $100,000 would be right near $92,000.

Well, let’s look at the actual numbers for SQQQ. The SQQQ ended last year at $31.18 and ended this year at $19.69. Okay, so $19.69 is only 63% of of $31.18. So instead of losing an expected 8% you would have in fact lost 37% of your money. Your $100,000 would have shrunk down to $63,000.

Okay, to review, despite the fact that the market went up a mere 2.7% for the year you would have lost money through the buying and holding of index funds whether you played the market to go up or down. These popular index funds were a lose/lose proposition.

Many studies suggest that over 80% of investors lose money. These studies fly in the face of market “experts” who claim that statistics show that despite setbacks even dramatic ones, that those long term investors who patiently buy and hold will typically find their money double every 8 to 10 years.

As you can see from the above example, which is more common than uncommon, the long term buy and hold approach may not be a wise one for most investors.

There are probably those out there who may object that the above example does not include the “dollar cost averaging” strategy of “experts” who advocate investing money into stocks at set intervals. The logic behind this is that pouring money into stocks when they are cheap (stock market has gone down) will just give you more shares and have your money earn more as the market recovers.

I became suspicious of this tendency for everyone to lose in the long term holding of index funds a few years ago. And over the past year ago I’ve factored in the use of “dollar cost averaging” on a monthly and quarterly basis without seeing any significant benefit to ending or even easing the steady erosion of wealth of index investing.

I’m not saying that successful index investing is impossible. I’m only pointing out that the practical and mathematical reality of this style of investment is rife with obstacles and complications, and that investor caution is more than warranted.

Jim Guido

Economics and Government and Politics and Social Issues and Stock Market16 Aug 2011 12:10 pm

Anyone who has ever taken out a loan knows the importance of interest rates. Whether the loan be for school, home, car or business  “a good rate” can make all the difference. Even though much has been made of the high debt load of the US our historic low interest rates hovering near zero have made it serviceable. If interest rates were to rise even a little bit, our debt load would quickly become unmanageable.

Almost immediately after the S&P downgraded the US from its AAA rating the markets began to plummet. In essence that was like the entire nation getting a lower credit score and a signal that higher interest rates for our national debt were on the way. All eyes were on the Fed to see how it was going to respond. The Fed surprised a lot of people and said little in direct response to either the market, quantitative easing or the integrity of US debt, instead the Fed pledged to keep interest rates at near zero till at least 2013.

Historic low rates and floods of easy money have been behind the stock markets meteoric rise over the last two years despite a moribund rebound in the consumer economy. The Fed’s assurance of low interest rates through the middle of 2013 along with the rising of the debt ceiling through the same time period should give an all clear to the stock market if the European financial systems can avoid a meltdown.

Though the pledge of low interest rates may reassure the wealthy that debt won’t kill the flow of easy money, it will force many safe investors on a fixed income into the risky casino of the stock market. The certainty of low interest rates means that those with conservative safe investment and retirement portfolios may not be able to live or survive on the interest alone, thereby resulting in their putting larger portions of their retirement and pension funds into stocks in search of income to maintain their life style or avert the possibility of their outliving their savings.

For a more in depth analysis of the ways in which the Fed and our economic policies are making life miserable for retirees read the following:


The market pundits and media could put up a rather convincing argument that the recent “crash” has already “priced into the stock market” a European financial meltdown and the prospect that “we’ve already entered a double dip recession”. Any data or announcements which indicate that Europe and the US economy are not as bad as recently advertised could result in a market rally and the official proclamation that the “economic soft patch” is over and the recovery is back on track. In that case a quick and strong market surge could begin which along with the dashing of any hopes of higher interest rates for those on a fixed or limited income, could entice/force those who have been risk aversive back into the stock market.

Then, soon as any recession data returns or another round of financial issues surface the stock market will tank even quicker and stronger than the last few weeks, resulting in a return of the bear market begun in 2007/2008. In this very likely scenario those coaxed and forced back in the stock market will be devastated. This means that not only will granny lose her last pennies, but those who missed out on the last stock market rally and who have been coaxed back in by the Fed’s last move will once again see half or more of their savings/investments evaporate.

Making matters worse is the likelihood that the last two year rally will prevent them from selling as the market goes down, for they won’t want to miss the next rebound. The problem is the rebound may not come this time. The same thing happened during the last great depression. The stock market crash of 1929 was not when most people lost their money, but after the rebound in the early 30’s followed by the real prolonged crash of the market.

So, those on a fixed income will lose their remaining money either through not receiving interest they are depended on, or in the stock market where they are attempting to make modest gains to supplement their lack of interest. Those who aren’t retired but are below or near where they were before the stock plunge of the 2008 recession, will either continue to stay out of the market or get in and get mauled in the next leg down in this bear market.

The transfer of wealth from the many to the few is about to pick up momentum. The coming deflationary depression will accomplish much of the same as the depression of the 30’s. A few entities will win the great game of monopoly and but up every thing at much lower prices. The great majority of people will be wiped out and be struggling to get by for decades while the handful of winners make the current billionaires look like paupers.

The common man will have no recourse. Very little of the money which was taken out of their paychecks for social security and medicare will be returned. Workers rights through the decline of unions and collective bargaining will be hard to rekindle. The great war machine of the military-industrial complex will continue to centralize power and wealth, and make most forms of protest or political discussion illegal and punishable.

Those who own debt such as the Fed and other central banks will not likely ever be repaid, but when the smoke clears they will own most assets, real estate and businesses around the world. At some point they will probably give up the ghost of trying to get loans paid off and find some way to forgive all debt. This has been done numerous times throughout history and even has a name for the occasion (Jubilee). After all is said and done money is an abstraction, but ownership is true wealth, and those who own the debt own the assets behind the loan.

Could I be wrong. Of course, I could be wrong. Yet, from a historical point of view this script has played out a number of times, and we all know the folly of thinking “this time is different”. The only way it will be different is if we make it different. Yet, at this moment I do not see any sign that we have the courage or insight on how to alter the unfolding script.

The combination of technology and globalism make it possible that this depression could be the most intense and severe of any on record. Will we end up in a return to Feudalism, or in a world similar to Brave New World or 1984? Perhaps.

Each previous global empire has fallen, and each previous monopoly game has resulted in new societies being formed in which the game begins again. Yet, sometimes there can be lost decades or even centuries before a revival. The scariest thing of this monolith is how efficient is its ability to monitor, survey, and shape perception.

Yet, the obvious question most of you are asking is what can be done? Well, we have missed a myriad of opportunities over the last few decades. Since the coming deflationary depression is weeks or months away from taking hold of the global economies there is almost nothing to do in  terms of prevention. The snowball is already careening down the hill, and the best we can hope for is not to be in its direct path.

Okay let’s take a look at what you can do in the short and long run to help yourself not only survive but actually improve your situation in the coming economic tsunami.

If possible get out of debt or at least continue to pay down your debt
On a political level stand up for the rights and freedoms of the little guy
Let Godzilla and King Kong do battle, but don’t get to close, or choose sides
Get out of the market and go to cash

To expand on the above points I’ll just say the following. People who own your debt own your possessions, rights and control your future.
On the level of regaining our rights and freedoms read my post 2nd Bill of Rights, or Google FDR’s second Bill of Rights. This would be a good start in terms of making sure that all citizens are treated with respect and dignity and not punished if they are not gifted, ambitious or ruthless. There is safety and power in numbers so embrace the little guy even if he’s a tad flawed or obnoxious.
Since so much wealth and power is at stake as the titans clash, it is best to get out of the way when untold trillions of dollars get lost and ownership goes to the last man standing.
Probably the last of my four recommendations is the most important. During a deflationary depression a great portion of money disappears as unserviceable debt gets wrung out of the economy.
In deflation wages and prices plummet kind of like what is happening on a relatively small scale in the housing market. During this time the buying power of money increases dramatically, whereby a thousand dollars today will buy 6 to 10 thousand dollars of goods then. A person worth $200,000 who keeps his money safe and out of risky investments will be able to live the life style of a person with assets over a million today. In other words as the money pool shrinks the relative worth of those not losing money skyrockets.

Let me address two other popular options often given to people looking to be winners during a severe economic downturn. One recommendation is to take advantage of a falling market and to short stocks. The second is to own gold, which is and has historically been viewed as real money.

An investor “shorts” a stock or the market when they feel the stock price is going down and not up. Since stock markets often go down faster than they go up, a good timer of the market can make substantial amounts of money in a very short period of time. Yet, shorting the market is highly dependent on smaller time frames and money made can be wiped out completely if the market has a rebound within the context of its overall decline.

Yet, even a vigilant and talented market timer can be thwarted by new rules and bans which are often enforced during “volatile” and turbulent markets. History has shown that the majority of market timers who have shorted the market have lost much more than they gained, and that during prolonged market declines bans and rule changes regarding shorting have made it almost impossible for the little guy to beat the odds.

I’ll have to admit that gold does have an allure, and one does feel a bit good about supporting a form of wealth and value that is tangible, and not completely arbitrary like fiat paper money. Yet, when I think about it and look at the historical record an investment in gold doesn’t seem as good as advertised. First, gold is both a commodity as well as “real money” and all commodities go down in a deflationary depression. Now, one could make an argument that gold goes down less than other commodities and largely be defended by historical record. Yet, during a deflationary depression the value of money is actually increasing so why hold have gold which is decreasing in value?

In answering my own question I could state that gold, having tangible real value, is an insurance policy against an arbitrary thing like the dollar. I could also state that since gold has real value one could always use it commercially even if the dollar were to fail. These arguments are valid in some contexts but fall short of supporting me recommending buying gold right now for the following reasons.

First, though gold is tangible and real, in dire times I distrust its functionality. I cannot picture a time in which my dollars would be worthless, but I could go into a local grocer and he would give me basic food stuffs in exchange for a fraction of an ounce of gold. When we all are in need, we need to barter need for need. If I were to getting tangible things to prepare for such an environment it would be amassing things like can goods, water, etc. for which I could barter. In a  depressed world of need, what can someone do with a bit of gold?

Second, if we use history as our guide we would notice that the ownership of gold was prohibited during the Great Depression of the 30’s.  The government banned private ownership and demanded all gold be handed in to banks which would give you something like $35 an ounce even though its stated worth was much higher. Now some people hid their gold and did not turn it in, but of course, they still couldn’t use it.

In today’s world of global tracking and surveillance it would even be harder to hide one’s gold than it was in the 30’s. Yet, your hiding of the gold would be in violation of the law, and therefore punishable if found out.

Since gold and gold stocks will most likely go down in the coming deflationary depression, it would make sense to me to wait on the purchase of gold until the bulk of the deflationary depression is over and the stock market has bottomed.

Currently the US dollar’s role as the reserve currency of the planet is viewed as being in jeopardy. Foreign nations threatening to stop using dollars as the currency of commerce are met with quick and strong political, economic and often military reaction by our government. Our political and economic leaders are very determined to keep the dollar’s role as reserve currency intact.

Many of the countries threatening to decouple themselves from the US dollar are increasing their storehouse of gold, and making efforts to replace the dollar with gold bullion. The nations most determined to get free of the dollar are or are quickly becoming our enemies and their actions and ambitions are labeled as terrorism. Therefore, it would not surprise me in the least if the US were to once again ban the ownership of gold for all US citizens and if they treated anyone who disregarded this ban as a terrorist or at least an abettor of terrorism.

In my post Communists, Terrorists, Charity and Compassion  I discussed a recent case in which something called the liberty dollar was being used locally in a transparent and open way as a form of barter/commerce. As far as I had known it was a very small economy agreed upon by a small number of merchants and was never misrepresented as actual US currency. So, in essence what you had was some actual silver being used similarly as gold advocates propose gold being used if our economic situation were to continue to worsen. Well, as you can see by the quote below the government came in and treated this practice as a form of terrorism.

“Attempts to undermine the legitimate currency of this country are simply a unique form of domestic terrorism. While these forms of anti-government activities do not involve violence, they are every bit as insidious and represent a clear and present danger to the economic stability of this country”
-Anne M. Tompkins, U.S. Attorney, March 18, 2011 [von NotHaus trial]
Wouldn’t the government respond to the use of personal un-minted gold in the same manner?

One last thought before ending. Even the most doom and gloom conspiracist always talks about how the everyone including the Fed, central banks, government and financial elite are opposed and afraid of a deflationary depression.

The fact is that the majority of mega-wealth and power that these entities wield was created during and because of the Great Depression. Many of these same entities are well positioned to have another quantum leap of wealth an power due to an increase in the percentage of ownership in assets around the globe.

I find it hard to believe that the Fed and the financial elite are afraid or opposed to increasing their marketshare in their businesses or the percentage of global wealth they hold. The trend has been more and more money in fewer and fewer hands, is their a better or more complete example of how that takes place than in the aftermath of a deflationary depression?

Do we truly believe that those who most stand to benefit by the financial demise of the lower 99.9% of the populace are really working and making decisions on our behalf?

Jim Guido

Economics and Social Issues and Stock Market28 Jul 2011 03:16 pm

I am fascinated by the number of people who continue to debate whether or not we are going into a “double dip” recession, and who forever talk about and question the overall “strength of the recovery”. This debate runs opposite but parallel of the debate we had some years back when people asked if there was a housing bubble with some claiming that the housing market would never go down.

In terms of the housing and stock market bubbles we went from denying its possibility to almost instantaneously being deeply mired in a historically severe recession for months. I remember reading articles proclaiming the health of the economy and real estate market in newspapers and magazines and within a few weeks having the same periodicals bewailing our being mired in a bear market for months. Even this year I continue to find articles which continue to push back the origination of the housing and economic downturn further and further back.

All of this is done with no mention that their publications had previously characterized much of that same time period as part of a raging bull market, adamantly denying and showing statistics demonstrating the health of both housing and the economy. Time periods with graphs documenting the continued rise in house sales and prices have been replaced with current graphs stretching well back into the same years showing dramatic declines in house price and sales.

Now, the entire discussion regarding the possibility of a double dip recession is just as bizarre as the roaring bull market articles during the housing and stock market busts. The earlier recession that almost was never admitted has mushroomed into a lengthy one of some 18 months and is now unanimously viewed as ending in June of 2009 by all mainstream economists.

The stock market bottomed a few months before the official end of the recession in March of 2009. Historically it is normal for the stock market to begin its rebound in slight anticipation of the general economy. So, if the recession ended in mid 2009 how can we be in danger of a double dip recession in mid 2011.

Almost everyone who has any even the most casual knowledge of the economy has heard of the business cycle. The standard business includes periods of growth and decline, of expansion and contraction. The time in which the economy contracts is referred to as a recession. In typical length of a recession is typically 3/8 or about one third as long as the period of economic growth.

Over the last few hundred years there have been a few rather lengthy business cycles which have raised the overall average up a tad. What this means is that is not unusual for a business cycle to complete in less than four years. Since the average business cycle lasts between 4 and 5 years, the average recession, therefore, lasts between 12 and 15 months.

With the above information in mind lets take a look at the concerns about a double dip recession and a fear of the strength and sustainability of the recovery.

We are now entering the 26 month since the end of the last recession. Even if we were to begin to be in a recession right now and it lasted the standard length (1/3) of the period of economic expansion our current business cycle would have ended after a 3 year life span. Though this is a bit short for a business cycle it would not be unheard of. Short business cycles have a tendency to be a little bit bubbly with quick frenetic growth followed by a sharp contraction.

The purpose of the above paragraph was to point out that it is impossible to have a double dip recession after two years. By definition a double dip recession would have to occur a business quarter or two (3-6 months) after the previous recession, not over two years later.

Now lets address the second piece of crap being hurled at us by the economic media and that is the concern regarding the “strength and sustainability” of the recover. Okay, since the recession concluded over two years ago I would consider it foolish to question its sustainability. The recovery has already lasted much longer than the recession and is nearing the typical expansion time frame for the average business cycle, not much question that it has survived and lived an acceptable life span.

Two paragraphs back I mentioned that most short or truncated business cycles have sharp bubbly inclines and rather intense downturns. So, lets now look at the “strength” of this recovery. From a financial and stock market perspective this current business cycle has been one of the strongest cycles on record.

The economic glory years of the 90’s were led by the great technology boom which revolutionized and continues to revolutionize modern life. When we think of change and the future we still think of the global possibilities offered by the internet and related communication technologies. When one thinks of technology one has to look at the Nasdaq and in particular the Nasdaq 100.

The Nasdaq 100 bottomed at 1019 in March 2009. Since then the Nasdaq and Dow have had meteoric rises which are truly amazing. In as little as 21 months the Nasdaq 100 stood at 2400. Which means in less than two years the 100 stood was 235% higher than it as at its low. Though the Dow and S&P did not double during this time frame they incurred gains that haven’t been seen in over 60 years.

At the end of 2010 corporate America were able to declare record profits. And while the pace has slacked off, the profits of corporations continue to rise. Therefore, according to the stock market and corporate America one can not doubt the “strength” of this recovery. Hell, this hasn’t been a recovery, it has been an epic boon for corporations and the stock market demonstrating almost unparalleled strength.

I know many of you reading this are almost screaming at the screen, “wait a minute, I haven’t seen any improvement or growth. It still feels like we are in a recession.” Some of you are even going further noting, “how can we have high unemployment and a decrease in the standard of living and not be in a recession, or at least be in a slow and stagnant recovery?”

Well if you take some time to read my other posts on the economy you will fully understand how we can be in a financial and corporate boon while the standard of living of most of us is in escalating decline. Here is the short answer.

Giving you a job adds to a corporations expenses and such overhead eats away at their profits. In addition, due to inflation the cost of materials and energy needed to produce goods is rising and therefore increased production would also add to their overhead.

So, those of you still reading this may wonder how a company can manage record profits in spite of the fact that expenses of production and materials have risen significantly over the last couple of years.

Here again is the short answer. Corporate America is not dependent on you as a consumer of their goods, in fact most of their profits do not depend on revenue through sales and business expansion. Their profits are mainly generated through financial instruments that not only are not dependent on a strong economy but are maximized when the economy is struggling.

First, most industries don’t even need cheap labor, they can pretty much have the majority of their products made by automation and their business run by computers. The only need they have for workers is for you to have enough money to buy their product. Yet, now that they do business throughout the world, they now have over 7 billion potential customers, and they can thrive even as their customers are poorer. Like Walmart, they make money on volume of sales rather than high prices.

Second, and more importantly is that as long as the economy stays weak the interest rates will stay low. With low interest rates they can borrow money at almost no additional cost and buy stocks, foreign bonds, CD’s, etc. for a substantial profit. It’s a version of flipping that was happening in the real estate market. Here you can purchase (borrow) a million dollars at .1% interest and flip it by investing that same money in something in which they will give you 3, 5 or even 8% for the exact same time frame.
This scam can continue as long as interest rates stay lower here than in other nations. In this new economy the majority of us aren’t needed as consumers nor workers. We are just observers and non-participants of the greatest transference of wealth ever recorded.

Will it ever end? Probably, just like the housing bubble ended though their were plenty of flippers.

How will it end? Another financial crisis will likely be the culprit.

The current debt ceiling debate is more drama than reality. Fleecing the average American of his remaining resources and services is the common goal of all the plans on the table.

Yet, at this point there is no true motive to truly reduce debt, because cheap debt has become the best and most efficient way of making money in our country. More debt at low interest rates is the goal, not the problem. The problem is debt with high interest rates because then you actually have to pay off your debts without being able to make more money with that debt in other debt markets.

The only thing preventing interest rates from climbing are the underlying deflationary tendencies of our struggling economy. If this economy were to actually begin to expand the debt bonanza ends and the big boys will start to really feel the pain. In the meantime their continued record profits are dependent on our being patient with our decelerating standard of living. It depends on are still choosing sides between Democratic and Republicans and viewing each other as stupid or mean spirited.

Even when this business cycle goes crashing down like the previous one, another economic phoenix will rise out the ashes with even less people participating in its wealth and glory. The only way we will be able to participate is if we demand it and stop believing in false prophets spouting forth change, hope or reform. The other way to participate is to become one of the soulless shysters who has no problem owning everything while the masses suffer.

Jim Guido

Economics and Social Issues and Stock Market09 Apr 2011 05:27 pm

I have lived a frugal life, making little but spending even less. I never incurred debt other than a mortgage and I paid that off as quickly as possible. My wife has been a good bread winner and “went without” a number of years to help us stay out of debt and save for the future. Though we saved we still are far from being able to retire comfortably even if we were to receive the majority of what we paid into social security.

Our long term retirement plan has suffered due to a lengthy restriction on the average person’s ability to save money. The game has changed drastically over the last few years as we see our relative wealth diminish on a daily basis.

A little over a decade ago my wife and I felt we were in great shape. We had paid off our mortgage in about 1/3 of the time it was suppose to take, saving us hundreds of thousands of dollars. (When we realized that the interest on our 30 year mortgage would have caused us to pay over $400,000 for a 130,000 home we payed it off as quickly as we could, thereby, paying about 150,000 instead of 400,000).

After paying off our mortgage we continued to put all we could afford into savings and retirement plans. Soon, we got to a point where through the miracle of compound interest we could basically stop saving and just let our “equity” build through interest. During my life bank and CD rates generally ran between 5 and 8% with peaks of near 18% and lows down to about 3%. Due to this historic range we made our plans based on expectations of averaging a modest 5% per year.

Around this time our son started college and we did our best to pay for his education without borrowing money or taking money out of our nest egg. Yet, towards the middle of his college years and since it has been impossible to save money due to the historically low and historically prolonged low interest rates. This has caused our nest egg to stop growing and linger at a range far below what we need to retire on.

Like many American’s our retirement needs have kind of forced us into taking money out of CD’s and money markets and into the stock market. Statistics show that over 80% of the people who actively invest in the stock market lose money. Considering this recent fact of the stock market of the last decade or so, we have done well to stay at or slightly above the flat line.

Wealth is relative, and a hundred dollars today is worth far less than a hundred dollars of a couple of decades ago. Therefore, due to inflation, unless you’re net worth is increasing you are becoming poorer. Yet, in today’s economic environment we are dealing with more erosion to our wealth than standard inflation.
When trillions of dollars are being printed and entered into our economy we either get our portion of that money or we are becoming poorer. Since the Federal Reserve is not sending you a check every day they print money you can safely assume you are getting poorer.

The truth of the matter is very few people are getting any part of the trillions of dollars being poured into the economy. In theory, the printed money is supposed to go to banks and businesses who will use that money for loans and businesses expansions leading to more high paying jobs which will “stimulate” the economy and the additional wealth will “trickle down” to the majority of people in society.

The majority of newly printed money going to banks is not being lent out to the average citizen who is finding it harder and harder to get a loan. And the majority of businesses who are getting this money through bailouts or loans are not using it to create new jobs or expand their operations. Businesses are reluctant to increase production or raise inventories when consumers are in debt, bankrupt and in danger of losing their homes.

Well then, you may ask, where are these mind boggling amounts of money going? There are a number of huge corporations and billionaires who are reportedly hoarding or “sitting on” cash. Yet, despite a slow growth economy with a high unemployment rate how are corporations claiming record profits?

Here is one possible explanation. Okay, lets start at the beginning. If I am a bank or a large corporation I can borrow money for shorter durations at anywhere from 1% to as little as 1/4 of 1%. Even for loans of a year or more I can borrow it at ridiculously low interest rates.

Now, I can take that money, and use it up by expanding operations and hiring workers, or I can use that money to buy other nations bonds that are paying 5% for the same amount of time that I’m borrowing it at around 1%.

Okay, so if I expanded my business and hired additional workers I would increase my overhead and would be in danger of losing money or failing if the economy didn’t pick up or if people chose to pay off their debt instead of buying my products. So, unless the entire economy picked up, I would probably stand to lose money and not be able to pay off my loan even considering its low rate. And, if most people except the biggest corporations are being denied loans then I can be reasonably assured the general economy is not going to bounce back, and I will not get a return on my investment.

Yet, if I take a loan for 1 million at 1% and I use it to buy a bond for the same duration earning 5%, than I can use the 50,000 of interest to pay off the 10,000 of interest I got from the bank, and claim the remaining 40,000 as profit. Like a good shampoo, you can lather and rinse over and over again. As, long as there are countries with higher interest rates than the US I can borrow money from the US and buy other nation’s or even businesses bonds and make a sizable profit.

Summarizing this process so far, by borrowing money at low rates and buying financial instruments with higher interest rates I can generate a significant profit margin. During this time I can keep operations relatively flat, keeping overhead down by producing the same amount of products with the same number of workers. So, despite no actual growth in business I can make greater profits.

Yet, for a corporation willing to do this, the good times don’t end there. Shortly before I announce my excellent rise in profits to the media, I can increase the number of shares I own and sell those shares soon after the market’s positive response to our business growth. I can explain this growth through some obtuse combination of increased foreign consumption, stealth growth in the local economy, and some good news in “the pipeline”.

In a world of low interest rates, mounting consumer debt, and the practice of trying to avert recessions and financial crises through the endless printing of money, it becomes possible and even logical for businesses to seek to remove consumers from the business equation. For those of you skeptical that what I’m describing is happening, I would encourage you to look back at the performance of the stock market on days in which the Fed made statements inferring that low interest rates were continuing or that data came out showing a need for low interest rates.

My theory also could end the confusion of you market watchers who have been baffled by how often the market skyrockets on the day real poor economic data is reported. Interest rates will stay low as long as the economy struggles. Oddly enough a true economic recovery would probably destroy the impressive stock market rally that has been occurring over the last two years since the “economic crisis” was “solved” by the beginning of bailouts and “quantitative easing”.

Yet, even if my theory is a bit off or its use exaggerated, there is no doubt that the bulk of the money being printed is finding its way into the hands of a very small fraction of the populace, who already own a disproportionate percentage of our nations wealth. It is also safe to state that this money is not filtering down to the rest of us. In fact, it is safe to say that each day the gap between the rich and poor is widening, and that the American middle class is shrinking and we are fast becoming an economy which we would have previously considered to be third world.

We, the majority of Americans, are truly becoming poorer by the day.

In my next post I’ll combine these ideas with the previous two posts regarding people who scare me to describe why I think we need to look at systemic change that needs to look beyond the Democratic/Republican theater which is being used to distract, divide and confuse the populace.

Jim Guido

Economics and Stock Market27 Nov 2010 05:13 pm

Though the stock market has rebounded and the recession officially ended well over a year ago most people agree that the US economy is not in good shape. The remnants of the financial crisis and the “great recession” still linger as does a healthy amount of skepticism that things have actually improved.

Pretty much everyone is in agreement that the US is drowning in a sea of debt. Between consumer debt, government debt and residential and commercial mortgage debt it is pretty obvious that the entire economy is in peril of becoming bankrupt and unable to make their payments.

Likewise most people also agree that the job market is poor and too many people are unemployed or underemployed. Many point to the loss of manufacturing jobs to emerging nations as a root cause of the lack of jobs in the US.

The solutions to these problems fall into two camps. One camp focuses on the debt problem and feels that the consumer needs to act in fiscally responsible manner and pay off their credit card and mortgage debt. A majority of these people also feel that the government needs to curtail its debt and balance its budget. Often these same people claim that government is too big and too powerful and that its interventions only interfere with the free market system healing itself.

The other camp focuses on the poor job market and believes the US economy is in need of stimulus to get its economy functioning again. This crowd generally favors giving tax breaks to small and large businesses so that they have the funds to expand businesses, hire employees and successfully compete in the global economy. Many of this crowd also feels bail outs and stimulus packages may be necessary to stave off crises and create a business friendly environment enticing businesses to stay in the US and employ its own citizens. Leaders of this camp state that the only through printing more money can we have enough to pay off our debts while helping fund businesses to expand and hire new workers.

I myself have always been a frugal person who has viewed debt and the borrowing of money as reckless and not very smart. Yet, this does not prevent me from seeing the flaws in the paying down the debt solution offered by that anti-debt camp. Since wages in the US have not and show no signs of skyrocketing the only way for most consumers to reduce their debt is through saving their money and consuming less.

Economic experts are fond of saying that the consumer (through consumption) is responsible for 70% of the economy. Now, even if that percentage is a little high the fact remains our economy will have a hard time surviving if the consumer stops buying goods and services. By definition a consumer who is saving and paying off debt is one who is cutting back on the purchasing of goods and services. A contraction of money spent by the consumer will cause a contraction in the economy, which is by definition a recession.

Now some would say we need a lengthier recession in order to wring out the excesses if our economy (debt). These same people would state that this is the role of recession in the standard business cycle and that we just need to accept this fact. Yet, the problem with that logic is that our debt load is historically high and could take years if not decades to “wring out” of the system. In the meantime many people would lose their jobs, houses, go bankrupt, and suffer if not starve.

Also during this time of fiscal responsibility it would be hard for any new jobs to be created in a consumer service based economy. In an environment where the majority of Americans are cutting back on purchases, saving money and paying off debt who would want to open up a new or expand an existing business. In such an environment businesses close and lay off workers and anyone foolish enough to make what people aren’t buying will not stay in business long.

Likewise if the government were balancing its budget and paying down its mountain of debt the economy would continue to contract. A fiscally conservative government would not be able to stimulate the economy through giving money to businesses or consumers to encourage them to spend and create jobs.

The truth be told this has only been the case which our extreme debt crisis is only emphasizing. A fiscally responsible society in which its citizens saved their money and only bought what they needed would never be affluent or have enough jobs for its citizens. The majority of jobs that we have would never have existed if people only bought what they truly needed, or even lived inside their means. This is especially true of a modern society where automation and mass production reduce the number of employees needed to produce goods and services for people to consume.

The libertarian contention that a true free market capitalistic system based on supply and demand would cure all our ills including the lows of the business cycle are not rooted in the real world. Not only does it ignore human nature, the imbalances inherent in amassing capital and the complications caused by urban and global markets, but it just doesn’t take into consideration automation and the simple fact that we cannot provide 6 billion people with truly gainful employment.

Taking a look at the camp which advocates the printing of money and all other forms of stimulating the economy through fiscal stimuli, we find a host of new limitations to their solutions. First of all much of the bailouts are a continuation of the trickle down theory of economics which has greatly assisted in the creation of imbalances inherent in our debt laden society.

Since the 80’s the relative wealth of the majority of Americans has declined while an increasingly shrinking percentage of Americans are hoarding a larger and larger percentage of total wealth. An escalation or even a continuation of the rate of printing more money is likely to only enhance the gulf between the have’s and have nots.

The stated goal of expanding the money supply (printing money) is to stimulate the economy by making funds available for consumers and businesses to pay down their debt while providing businesses with the necessary funds to expand their operations and thereby hire employees.

Yet, many of the dynamics and repercussions of monetary expansion and bailouts only inflame the debt problem and make the monetary gulf amongst American’s more exaggerated. Let’s take a look at a few of the most obvious flaws and historical limitations of monetary expansion.

First it should be pointed out that we have been expanding the monetary supply for decades which has had the net result of depreciating the dollar and inflating the national debt through many different vehicles including the trade deficit.

When you add money to the overall pool of money in existence you are immediately making each dollar worth less. As the money supply grows each individual dollar losses some purchasing power. Imagine playing monopoly and you had $500 dollars and the bank totaled 10,000. In that case you would have one 20th or 5% of all the money available. In a game involving four of five people you’d be doing okay. Yet, if someone were to increase the banks total to 1,000,000 dollars your $500 would be far less impressive and you would now own about one two thousandth of the amount and no where near even one hundredth of one percent of the money available.

This is essentially what happens to our purchasing power as the money supply increases. The only people who immediately benefit from monetary expansion are those able to borrow money and those that lend the money. When the federal reserve prints money they and the banking system make money through the interest acquired by loaning the money out. Since the Fed is a private banking cartel which has a contract with our government we the taxpayers pay the interest that the government owes for the money being printed.

Currently we have interest rates at historically low levels whereby the money being printed is not very costly to a borrower. This allows wealthy people an opportunity to borrow a good portion of the money with little overhead. While this does present the opportunity for the wealthy to use this money for business expansion and job creation the reality is that the money is more often than not used for other purposes.

The money invested in business expansion could be used to build factories abroad where labor is cheaper and thereby not helping the US’s unemployment problem. Second, the money borrowed at low rates can be used to buy longer term US bonds or foreign bonds with higher yields. The borrower can then use a portion of the money borrowed to pay off the interest and use the higher yield of the bonds they purchased to generate a sizable profit.

The profit garnered through the higher yield bonds can be reported as earning by a corporation giving off the impression their business is improving and thereby entice investors to buy their stock which further increases their profits in a self perpetuating cycle of profit allowing corporate profits to surge despite low growth or even a decrease in earnings generated in their actual business.

Money printed by the Federal Reserve is money, we through our government, have to pay interest on. All printed dollars added to the money supply weaken the purchasing power of already existing money (by diluting the money supply) while increasing the amount of government, and hence, tax payer debt.

The goal of printing dollars is to stimulate economic growth. In an ideal situation you would gain more than a dollars worth of growth for every dollar printed. Yet, statistics have shown that this is not so. About two decades ago we created about a dollars worth of growth for every three dollars printed (borrowed). The relationship has deteriorated ever since and the last statistics I saw had us needing to print about $10 for every dollar of economic growth.

What the above paragraph says is that while printing money does in fact stimulate economic growth it causes a much more significant growth in debt. In other words for every dollar we print we are incurring more than a dollar’s worth of debt plus the interest owed to repay the Federal Reserve for their efforts.

The more money you print the less purchasing power the dollar has, which is what we mean when we say that the dollar is being devalued. What this means is the more dollars in circulation the more dollars you need to pay for the same item purchased before the money supply increased. This commonly referred to as inflation.

So while printing dollars may stimulate the economy it also causes inflation. Inflation causes a rise in the cost of living. So, unless workers wages are climbing faster than the rate of inflation, a rise in the money supply makes it harder for people to purchase things. Inflation making things more expensive has a tendency to slow down economic growth. So, in most situations one lowers interest rates to stimulate the economy. Yet, since our interest rates are already at historic lows (between 0 and .25%) we are unable to lower rates to stimulate our economy.

In essence we are currently trying to borrow our way out of debt. Yet, printing money causes more debt and makes it harder for people to pay off their debt. If things cost more people will have to spend more on basics such as food and shelter and use the rest to keep up with or hopefully pay down some of their debt. Inflation means more and more consumers will cut down on purchases and the number of people going bankrupt and having their homes go into foreclosure will increase. Businesses, likewise, will have a hard time paying off their debts and staying in business. Many of those not closing their doors will be forced to lay off workers in order to survive.

As the title of this post suggests we are in an economic Catch 22, where both cutting back on consumption and printing money (increasing debt) will cause more job unemployment and further contraction of the economy (recession or depression). At this point in time it seems that our policy makers are content to try and keep things afloat for as long as possible.

The best analogy I can think of is that we are in a skyscraper that is on fire. Without a means of putting the fire out we are deciding to try and out run the fire. Instead of jumping out the third story window, we are running up the stairs to higher floors as the fire chases up after us. Having no water we stack all the furniture we have to block the path of the fire allowing us to race up to higher floors hoping the fire burns itself out. Yet, the barriers we place in front of the fire (furniture = debt and inflation) is a known fuel for fires making it likely the fire will only quicken and strengthen. The higher we climb the less of a chance we have for a safe and successful leap from the inferno.

In sum having people focus on reducing consumption and reducing their debt will likely result in slowing down the economy even further resulting in increased unemployment, foreclosures and bankruptcy. While increasing the amount of debt through printing money and corporate bail outs will only increase the mountain of debt choking consumers and businesses. In such an environment business contraction and not expansion is likely and larger corporations can make money off money borrowed and if they do expand businesses it will be in countries or communities with cheap labor.

This post has gotten far too long, so in my next post I will explain why I think this Catch 22 exists and what should be done about it.

Jim Guido

Stock Market22 Jul 2010 08:10 pm

It is Thursday evening July the 22nd.

Those of you who regularly visit this site know that on a handful of occasions I’ve commented on the stock market. I enjoy numbers, patterns and sociological observation and, therefore the stock market is appealing. Also due to my love of numbers and patterns I’ve become a little of an amateur technical analyst.

According to a lot of technical indicators and longer term historical patterns I’ve been anticipating the market beginning a significant decline beginning by mid August and lasting at least through the middle of October. I see a lot of parallels between now and the same time frame in 2008 when I successfully called a similar decline.

Yet, due to the activity of the last month and the last two weeks in particular I feel that the decline may start earlier than I had been anticipating.

In fact, if the market starts up strong tomorrow the high may be reached during the day and the market may begin its fall before the close. If the market starts down and closes at its high or has a relatively steady climb up it may end the day at an important high.

My indicators point to a possibility of a steep fall either on Monday or towards the end of next week. I could very well be wrong, but the possibilities seem dire enough to warrant a warning and for anyone in the stock market to exit for the short term.

I strongly urge caution right now.

The wide swings in market action of the last month are often an early indicator of a change in trend or a big quick move. Now, the move could be up, but the risks appear too great for most people to take that gamble. Even if there is an initial strong up move I still am fairly confident that the averages will be lower in the fall.

This is more of a warning than a prediction. I’m only writing this because so many people I know got hammered two years ago when I saw the same thing occurring in the charts. Well, as they always say on Wall Street maybe “this time it’s different”.

Again I want to emphasize that I am an amateur and I’m not recommending any specific action. I’m only suggesting to those in the market to be vigilant right now and only wager what you’re willing to lose.

If anything happens to change my viewpoint I will write a market update. Otherwise I have a couple of other posts in the process of being written that are more in the general tenor of this site.

Jim Guido

Social Issues and Stock Market22 Mar 2010 05:14 pm

Some months back I pointed out that while the financial media was attributing the stock market rally to optimism regarding an incipient rebound in the economy, the rally was not behaving in a way to support that theory. In fact the stock market was rallying particularly strong on days when the financial rebound looked the most in jeopardy or some dire financial news was making the headlines.

I was not surprised when the market rallied on bad economic news because the reasons for the rallies were actually supported by a sluggish or stagnant economy. This is still the case and as I mentioned then the only way this rally ends is through another financial crisis or the economy truly begins to rebound and heat up.

The current source of corporate and investor profits is not in business expansion or in a rebound in consumer spending, but rather in low interest rates and easy money. This explains why the market rallies on bad economic news, for as long as the economy is stagnant interest rates will stay low and stimulus plans will be in the making. A rebound in the economy would cause a steep increase in inflation which would force interest rates back up.

A rise in interest rates would cause a substantial increase in the amount of money being spent by government, businesses and consumers on the massive debt they have amassed. With low interest rates corporations and investors can continue to make more money on investments and longer term bonds then they have to pay in interest on their debt. This profit through borrowing is the main driver in the year long stock market rally and the growth in earnings being claimed by corporations.

Corporate profits are growing due to technical financial reasons rather than business expansion and growth. A business which is borrowing money at historically low interest rates is able to claim earnings and profit growth by simply downsizing and hoarding the money.

When overhead goes down profits generally go up. So if your firing people, finding cheaper labor overseas and not using your profits to build or expand your business, you are able to claim substantial earnings growth. You can then use that positive report to coax investors to buy more of your stock which in turn gives you more cash to hoard and claim as profit and earnings. Not only that, but you can then borrow additional money at ridiculously low rates and make money by buying a stock market which is rising almost daily. The Nasdaq 100 is leading the way and has gone up over 90% in then last year.

A substantial portion of the money being infused into the market is borrowed money. Many investors are borrowing money to specifically use in the market. They use the profits from their trades in an ever rising market to pay off their loans and then borrow more money to put in the market to take advantage of this perpetually rising rally.

None of these profits are dependent on the economy actually rebounding,. in fact the whole chain of borrowing and investing is being driven by low interest (borrowing) rates, which in turn is dependent on a stagnant or sluggish economy.

This borrowing low and using the money for the purchase of higher interest bearing financial or rising stock prices is very similar to the “flipping” of houses mania that existed right before the real estate crash. Flipping as you recall was the purchasing of a home and then immediately selling the property for a profit in an ever rising market.

Like the real estate market, this current investment mania will end very badly. Yet, like the real estate fiasco, many of those who most abused the system will walk away wealthy and unscathed while then small investor while get crushed when the market crashes or once again have to pay for others mistakes through future bailouts or just paying off others debts as taxpayers. The hope is that the stimuli and cheap money along with the market rallies will finally succeed at providing the means and confidence to fuel an actual economic rebound. Yet, when the methods of benefiting from economic stimuli, bailouts and low interest rates are hoarding, borrowing and flipping stocks it is hard to imagine the economy being resurrected by these devices.

In fact, if my analysis is correct, the means of acquiring wealth in this environment is the largest obstacle and hurdle we face when trying to create an economic rebound. In this environment true business growth and expansion would force interest rates up resulting in not only the borrowing supporting corporate and investment profits from drying up, but make payment on their mountain of debt impossible.

How far can this rally go? I guess at least as high as a condo in Florida could have before the real estate crash. Are we there yet? I have no idea, but it won’t take long to see it when it happens.

Until that time comes just sit back and watch the stock market spike every time the Federal Reserve gives any indication that they plan on keeping interest rates low for “the foreseeable future”.

Jim Guido

Economics and Social Issues and Stock Market01 Jan 2010 12:10 pm

Since the recent economic downturn it has become fashionable to complain about the obvious excesses of our consumer culture. People are being told to save money and pay off their debt. Those with excessive debt are viewed as being reckless and harmful to the stability of our nation’s economic superiority.

Not that long ago US citizens were being told that buying and borrowing were the only true ways of having our economy and way of life defeat terrorism and keep our country strong.  Almost every day we were told that 70% of our economy depended on the American consumer. Consumption was both our right and duty as patriotic Americans. Staying out of planes and out of shopping malls would bring joy to the terrorists and help them defeat the US.

Since March the stock market is on its best run in history. The Nasdaq 100 best known as the father of the dot com bubble finished 2009 as its second best year ever, with over a 50% gain. Since March it has risen over 80% the sharpest rise ever on record.

The reasons for this rise according to the financial media are simple. First, the bailouts worked and the financial crisis has been averted. Second, the recession is over and the economy is bouncing back. Third, the “resilient”  American consumer has continued to spend.

So how is that the American consumer is simultaneously paying off its debts and increasing its consumption? The rebound in consumer spending is occurring despite the fact that the employment situation continues to look bleak and wages growth is stagnant.

Though the financial media claims the recession is over, polls show that the average US citizen still feels like they are living in a recession. I’ve already covered this apparent contradiction in a post entitled Stock Market Loves Bad Economy written less than two months ago.

Today I’d like to talk about what would happen if the US consumer truly began to pay off his debt, save money and reduce his purchases.

What would your purchases look like if the bulk of your expenditures were limited to satisfying your basic needs? First of all most purchases would be restricted to food, shelter, clothing and medical care. Second a lot of semi-essentials or things that are not needed on a daily basis could be borrowed from or shared with friends.

Think of how much you could save if you pooled resources with friends. We know the economic and environmental benefits or carpooling or taking public transportation. Yet, think of how much money you could save by sharing tools such as ladders, hammers, lawn mowers, etc. that you use on a weekly, monthly or occasional basis.

When I was a child we borrowed frequently from friends and neighbors and were glad to buy some items which we knew others would borrow from us. If our neighbor had a six foot step ladder good for many tasks, we might buy an eight foot step or an extension ladder which would successfully handle other tasks. It seemed silly to clutter the garage with two ladders and duplicate resources, and was both practical and neighborly to lend and borrow tools.

If a sharing relationship ever became too inconvenient you could always buy your own duplicate item, but for the most part sharing is both economically wise and socially reinforcing. It’s nice to be helpful or of service to others and to feel part of a practical caring community.

Now, even if we didn’t share we would drastically reduce our expenditures if we bought more according to need rather than convenience.  Eating at home and preparing simple meals is both healthy and inexpensive.  Buying clothes because of practicality and usefulness rather than fashion would save many people a lot of money.

Yet, we have barely scratched the surface of how much money we could save if we became conscientious purposeful shoppers who made the majority of the purchases based on need.

The next time you go down a non-residential street or to a commercial district such as a shopping mall, think of each store in terms of need. What in the store does anyone really need? How many stores are dominated by objects that people have no need for? What percentage of stores you see do not contain a single item which you could realistically say you would ever need?

When I personally have done this exercise I find relatively few stores that actually tend to my basic needs. I find that even shopaholics have to admit that the majority of shops they know would fall into the category of inessential in their lives.

I think it is pretty safe to say that many of the shops and commercial establishments in every town would cease to exist if people reduced their purchases to meet their needs, or even slightly above their needs.

Over the last few decades the percentage of jobs related to services has risen while the percentage of factory, craftsmen, professional and skilled labor positions has decreased. The vast majority of service jobs are far less essential and need based than are the others and hints at how hard our labor market would be hit if we began to live and consume according to need.

The simple fact is our economy would fall apart if people became thoughtful consumers and lived within their means. Our society is dependent on conspicuous consumption, without it, most businesses would fail or not even exist.

In a few previous posts I have pointed out in a variety of ways how dependent our profit based system of economics is on waste. Once again I’d like to write the logic chain which I think most succinctly depicts the limits and dangers of free market capitalism:

Profit = Surplus = Excess = Waste

In this post we have just noted another way in which the above chain is true. If we lived efficiently and need based, their would be no surplus and all profit would vanish.

The fact of the matter is our economic system is dependent on flagrant consumption and wastefulness.

Sharing, being honest, kind, charitable, conscientious, frugal, safe, and contented are human characteristics and qualities which are in opposition to and a danger to our economic system.

The question is how dangerous and destructive is our economic system to our humanity? How much harm does our economic system do to our sense of pride and self-esteem?

Many think that our economic system though flawed is the best option available. Many would go on to say that we can’t live without an economic system, and that our free market economy is the best and most humane system possible.

Yet, how can this be, when living according to one’s needs would actually destroy the economy and many of man’s best qualities are in opposition to the essential competitive nature of a free market economy?

Jim Guido

Stock Market16 Nov 2009 02:02 pm

If the economy stays bad and the dollar continues to erode yet not collapse the stock market will likely reach new all time highs before a major correction ensues. If the economy rebounds any time soon the stock market will plummet.

This may sound counter-intuitive or ironic but it probably isn’t. The Nasdaq 100 is up near 80% since March. All the major indexes are enjoying the strongest and swiftest rallies in the history of the market. When one looks at why the market is skyrocketing the answers are not for the reasons touted by most of the market analysts and the media.

The first part of the rally was purely a relief rally based on the fact that a financial tragedy did not occur in the spring. The first two months and 20 to 30% rise was somewhat typical of bear market rallies.

Our solution to the overwhelming debt and tumbling real estate market was to stimulate the economy through massive bailouts flooding the market with low interest loans and cash.

Those struggling financial institutions and businesses receiving bailout money did not put the money to work in the real economy. Instead, they took money from the loans and used it to borrow more money and bonds with higher interest rates than the loans they got from the government. This allows them to make a sizable profit on the money they received thereby allowing them to claim substantial profits for their businesses.

Getting loans at 0 to .25% and than buying financial instruments yielding 3 to 4% or even more is a simple way of making money.

The loan money was also used to buy stocks which had been hammered in the stock market decline of last fall and this spring. As long as interest rates stay low and the market continues to climb banks and corporations using these techniques will reap in huge profits for corporate heads and the top shelf of business officers.

This party of using stimulus money and continued use of financial debt instruments will continue as long as the dollar stays soft and interest rates stay low.

The Fed has led these individuals to believe that they will keep interest rates low as long as the economy flounders and needs assistance. This is why the market rallies almost every time the economic news shows a struggling economy with a stalled “recovery”.

If the economy truly began to recover then businesses would invest their money in business expansion and hiring new workers rather than stock, cheap loans and financial instruments. A growing economy would cause interest rates to rise. Any rise of interest rates would stop the current game and the current stock market bubble would pop.

If the stock market were to correct, the dollar would rebound due to the fact that people would be taking their money out of the market and going to cash. People going to cash seldom borrow more and these two facts put together would cause the the dollar to rebound.

The current stock market rally is not about a rebounding economy. but rather a product of low interest rates and a falling dollar. The current rally could end rather abruptly if any of the following happen:

1) interest rates rise
2) the dollar strengthens
3) the stock market corrects
4) the dollar decline quickens into a collapse

I do believe this bubble is about to pop and the game is about to end badly. Yet, I must admit I’ve always underestimated the durability of these bubbles. I was a year or so early with the popping of the housing bubble and a good two or three years early regarding the last top of the stock market.

One thing I can say with a high degree of certainty is that the real economy will not rebound or grow in a legitimate manner until this financial game and market bubble pop and let themselves truly unwind.

Yet, this market could indeed set new highs before the bubble pops. For the sake of well over 98% of the people in this country lets hope the bubble doesn’t inflate much further.

Jim Guido

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