Daily Investment Interpretations

August 11, 2010

2010-8-11:  What a day! perhaps the best thing you can say about today's market action is that although the markets tanked, they didn't break below their recent trading ranges in the face of some pretty glum news. The NASDAQ Composite parted with 68.54 points (-3.01%) to finish at 2,208.63. The Dow plunged 265.42 points (-2.49%) to close  at 10,378.03, and the S&P 500 exfoliated  31.59 points (-2.82%) to end at 1,089.47. Oil closed at $77.55 a barrel, while Gold ratcheted up to $1,207. The VIX increased 2.97 to 25.34.
    Stock market futures are down roughly % tonight.
    Analysis: Fast-fading recovery now looks even weaker
    Paul Krugman has posted quite a bit today.
    In Paul Farrell's article, Reagan insider: GOP destroyed economy, Mr. Farrell quotes former Reagan budget director David Stockman as he takes on his (Republican) party for an alleged transition from the Republican principles of 40 years ago to their virtual antitheses today. Mr. Stockman cites four deformations of the national economy. 
Stage 1. Nixon irresponsible, dumps gold, U.S starts spending binge
    The first deformation happened when Milton Friedman persuaded President Nixon to go off the gold standard:
    "So for the past 40 years, America's been living 'beyond our means as a nation' on 'borrowed prosperity on an epic scale ... an outcome that Milton Friedman said could never happen when, in 1971, he persuaded President Nixon to unleash on the world paper dollars no longer redeemable in gold or other fixed monetary reserves.'
    "Remember Friedman: 'Just let the free market set currency exchange rates, he said, and trade deficits will self-correct.' Friedman was wrong by trillions. And unfortunately 'once relieved of the discipline of defending a fixed value for their currencies, politicians the world over were free to cheapen their money and disregard their neighbors.'"

Stage 2. Crushing debts from domestic excesses, war mongering
    The second deformation (according to Mr. Stockman) was "the extraordinary growth of our public debt."
    "Back 'in 1981, traditional Republicans supported tax cuts,' but Stockman makes clear, they had to be 'matched by spending cuts, to offset the way inflation was pushing many taxpayers into higher brackets and to spur investment.' The Reagan administration's hastily prepared fiscal blueprint, however, was no match for the primordial forces -- the welfare state and the warfare state -- that drive the federal spending machine.'
    (Former Fed Chairman Alan Greenspan has just stated his opposition to extending the Bush tax cuts, saying that although he supports tax cuts in general, he doesn't support paying for them with borrowed money. He also repeats that he supported the original Bush tax cuts with the proviso that they be accompanied by corresponding spending cuts, but that didn't happen.)
    "Yes, the GOP does have a welfare-warfare state: Stockman says 'the neocons were pushing the military budget skyward. And the Republicans on Capitol Hill who were supposed to cut spending, exempted from the knife most of the domestic budget -- entitlements, farm subsidies, education, water projects. But in the end it was a new cadre of ideological tax-cutters who killed the Republicans' fiscal religion.'
    "But then 'the new tax-cutters not only claimed victory for their supply-side strategy but hooked Republicans for good on the delusion that the economy will outgrow the deficit if plied with enough tax cuts.' By 2009, they 'reduced federal revenues to 15% of gross domestic product,' lowest since the 1940s. Still today they're irrationally demanding an extension of those 'unaffordable Bush tax cuts [that] would amount to a bankruptcy filing.'
Stage 3. Wall Street's deadly 'vast, unproductive expansion'
   
"Stockman continues pounding away: 'The third ominous change in the American economy has been the vast, unproductive expansion of our financial sector.' He warns that 'Republicans have been oblivious to the grave danger of flooding financial markets with freely printed money and, at the same time, removing traditional restrictions on leverage and speculation.' Wrong, not oblivious. Self-interested Republican loyalists like Paulson, Bernanke and Geithner knew exactly what they were doing.
    "They wanted the economy, markets and the government to be under the absolute control of Wall Street's too-greedy-to-fail banks. They conned Congress and the Fed into bailing out an estimated $23.7 trillion debt. Worse, they have since destroyed meaningful financial reforms. So Wall Street is now back to business as usual blowing another bigger bubble/bust cycle that will culminate in the coming 'American Apocalypse.'
    "Stockman refers to Wall Street's surviving banks as 'wards of the state.' Wrong, the opposite is true. Wall Street now controls Washington, and its 'unproductive' trading is 'extracting billions from the economy with a lot of pointless speculation in stocks, bonds, commodities and derivatives.' Wall Street banks like Goldman were virtually bankrupt, would have never survived without government-guaranteed deposits and 'virtually free money from the Fed's discount window to cover their bad bets.
'"
Stage 4. New American Revolution class-warfare coming soon
    "Finally, thanks to Republican policies that let us 'live beyond our means for decades by borrowing heavily from abroad, we have steadily sent jobs and production offshore,' while at home 'high-value jobs in goods production ... trade, transportation, information technology and the professions shrunk by 12% to 68 million from 77 million.'
    "As the apocalypse draws near, Stockman sees a class-rebellion, a new revolution, a war against greed and the wealthy. Soon. The trigger will be the growing gap between economic classes: No wonder 'that during the last bubble (from 2002 to 2006) the top 1% of Americans -- paid mainly from the Wall Street casino -- received two-thirds of the gain in national income, while the bottom 90% -- mainly dependent on Main Street's shrinking economy -- got only 12%. This growing wealth gap is not the market's fault. It's the decaying fruit of bad economic policy.'"

Warning: this black swan won't be pretty, will shock, soon
    "His bottom line: 'The day of national reckoning has arrived. We will not have a conventional business recovery now, but rather a long hangover of debt liquidation and downsizing.'"
    Paul Farrell's bottom line: ..."a historic class war. So be prepared, it will hit soon, when you least expect."

    I don't believe that Paul Farrell or David Stockman mean to say that the Democrats are better than the Republicans. Rather, they're saying that the Republican platform no longer embraces the fiscal prudence that characterized it 40 years ago.

    Today, Mr. Stockman has warned again about the deficit: Runaway train.

    Obama insiders out of touch on U.S. economy

2010-8-11 (Afternoon):  Had a dental appointment this morning.
    Global equity markets are off sharply today: Growth fears grip the globe, .Shiller on double-dip risk: It's now even money, and GDP revision: Look out below!
    Noted Yale economist Robert Schiller has just upped the odds of a double-dip recession above 50-50, and states that the Fed may not have the power to stop it. He's calling for a jobs-creation stimulus package. At the same time, it's being announced today that the second-quarter GDP figure, which yesterday's article, Wholesale data to deflate Q2 GDP, economists, suggests may have to be lowered from 2.4% to 2.0%, is now tipped at 1.3%!
    Like Robert Schiller, MarketWatch columnist Rex Nutting is singing Paul Krugman's song about a Washington that's fiddling while Rome burns: Fed can't do much more to avoid a double dip.
    The Obama Administration can't actually stimulate the economy between now and the November election, even if in doing so, they wouldn't face a firestorm of public protest. So the Democrats are forced to try to jawbone the public into thinking that the economy is recovering, albeit a little slower than had been forecast. 
    My investment advisory service is treating this as though it's a range-bound fluctuation that's taking the markets to the bottoms of their ranges... unless it's a game-changer, in which case, the markets could continue to fall.