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H. L. Quist's
Contrarian Market View
H. L. Quist's
Contrarian Market View
Amidst the rioting and chaos of the G-20 meeting in Toronto, President Obama was attempting to convince the Europeans that they should resort to a new round of Keynesian deficit spending. Somewhat surprisingly, the Euros have had their fill of stimulus and more debt and they now sense the light at the end of the tunnel is a train that is about to leave the track. The EU contributes 20% of the world's GDP. Higher levels of debt and slower growth are a formula for a train wreck and the Euros are desperately trying to minimize the damage. They now acknowledge that their Socialist Economic Model has failed, but the Captain of our ship is resolute. Damn the torpedoes and charge, charge, charge ahead.
As CMV has well-documented, John Maynard Keynes was a fraud and his economic model failed in the 1930s Great Depression, in the 1960s Great Society, and the Carter Malaise of the 1970s. History, hopefully, will soon record the final demise of the Keynesianism model after the Obama administration's "New Deal II" ends. Then the survivors can drive a stake into this blood-sucking Keynesian Dracula whose promise of an ever-lasting nirvana has drained all the source of capital from the system.
CMV has often compared the 1980-1982 deep recession to the 2008-2009 time period. After significant tax cuts in 1982 the US GDP grew as follows in comparison to 2009-2010:
First QT 5.1%
Second QT 9.3%
Third QT 8.1%
Fourth QT 8.5%
Third QT 2.2%
Fourth QT 5.6%
First QT 2.7%
Second QT ?*
*The Second Quarter GDP and Corporate Earnings should be positive reflecting the momentum prior to the reversal outlined by CMV in the May issue. The Second Half of 2010 could be negative given events stated in July's CMV.
Americans were told by President Obama that government spending would produce a "multiplier effect" and that $1 of spending would produce $1.50 of growth. Not only has there been no real growth the multiplier has been negative. The Federal debt has now ballooned to over $13 trillion and the budget deficit is so alarming the President has ordered that there will be no budget for Fiscal Year 2011 until after the November elections. His Budget Director, Peter Orsag has resigned, possibly fearing the worst. The President's strategy? Raise income taxes and initiate a Value Added Tax (VAT)! Look for negative GDP numbers in 2011 if he is successful.
Here are some notable economic statistics and trends for June:
Consumer Confidence 52.9
Personal Savings 4.0%
Purch. Mgrs Index 59.0
Construction Spending -0.7% (est)
Unemployment 9.5% *
Factory Orders 0.5%
Consumer Confidence 63.3
Personal Savings 3.8%
Purch. Mgrs Index 59.7
Construction Spending 2.7%
Factory Orders 1.2%
* Unemployment rate fell because 652,000 people gave up searching for a job and are not counted
CMV's conclusion looking forward near term is:
Deficits and Debt will rise exponentially
Lower Nominal GDP
Lower Capital spending and Risk Investment
Increasing Dis-inflationary Pressure
Continued Loss of Confidence in the President and Congress
With the Fed funds and discount rate near zero the only course of action available to this administration is to tax, print money and devalue the dollar. The result? Massive inflation and the prospect of hyperinflation after the "Double Dip" Recession.
Hidden in all the clamor over the rush to prevent another financial crisis in the future is the neglect to recognize how we got to this point in the first place.
After the stock market crash of 1929 and the start of the Great Depression in 1930, the suffering American public demanded an investigation into the cause of the financial collapse. After several attempts to find the always elusive truth, an assistant attorney for New York County, Ferdinand Pecora, was given broad subpoena power to call witnesses and he called the key Masters of the Universe to testify. The hearings exposed a wide range of abuses by the banks and their affiliates of underwriting speculative securities to pay off bad bank loans as well as "pool operations" to support the price of bank stocks. As a result, Congress passed the Glass-Steagall Banking Act of 1933 to separate commercial and investment banking so that banks could no longer deal in all forms of securities. In addition the Securities Act of 1933 and the Securities Exchange Act of 1934 were also passed as a watchdog for speculation that had run amok. Glass-Steagall kept the banks out of high risk trading until its repeal on November 12, 1999.
Who was the strongest proponent of getting the banks back into the highly leveraged and speculative game? None other than the nation's number one banker-in-chief, Alan Greenspan, who insisted that the banks had to have the ability to trade and expand their derivative positions. The bill to repeal the Act was co-sponsored by Phil Gramm (R-Tx) and Jim Leach (R-Iowa) and signed by President Bill Clinton. It's CMV's opinion that the collapse of our financial system would NOT have been near as severe if commercial banks had not participated in trading highly leveraged subprime debt and derivatives.
So here we are 77 years later in search of a solution to the same problem. By the time that you read CMV the Financial Reform Act of 2010 (the Dodd-Frank bill) probably will be law.
Will it be a cure-all? No.
Will it give more power to the government to seize or liquidate a financial institution? Yes.
Will it limit the power of the banks to make risky investments and limit trading of derivatives? Yes.
Will it limit economic growth? Yes.
But the perception (amongst investors and bankers) is that these institutions will be able to navigate around the law successfully which is evidenced by the fact that when an agreement was reached the shares of bank and brokerage stocks were up 2.7% on a day that the market was flat. CMV forecasts that the new law will be tested within the year.
Conspicuously absent from the discussion about the new law was the collapse of Fannie Mae and Freddie Mac. It's no wonder given that the key player in reform, Barney Frank, was the point man in the failure of the "evil twins." It was Frank's insistence of increased quotas for subprime loans and his aiding the cover-up of the "cooking of the books" at Fannie that has burdened the US taxpayer with what will become a trillion dollar black hole. Reform should include the banishment of all of those in Congress who played such a critical role in the collapse.
The Business Roundtable
The Business Roundtable (BRT) is an association of chief executive officers of leading US corporations now chaired by Ivan Seidenburg who is also the CEO of Verizon. The BRT had allied itself with the Obama Administration very early in the game even supporting Obamacare, climate change legislation and other issues that normally big business would have condemned. You may recall that The Myth Buster spoke disparagingly about the "sellout" by General Electric, Wal-Mart, Pfizer and others who were seeking "sweet heart deals" from the Administration in exchange for their support of the President's policies. The BRT has now discovered (surprise, surprise) that they've been played for a "patsy."
In a speech delivered recently to the Economic Club of Washington, Seidenburg said that he had become "somewhat troubled by a disconnect between Washington and the business community." Apparently the BRT realized they had been had when the House passed a $14 billion tax on companies that operate overseas! In response, the BRT fired off a 54 page report describing literally hundreds of "actions and decisions" that Washington has taken to hurt the economy. The BRT may have discovered finally that they are not only a target for additional tax revenue but they are capitalist dinosaurs who could become extinct in a collectivist state.
Companies represented in the BRT have a cash horde of $1.5 trillion in their coffers. Few of these companies are willing to invest this capital in new equipment, expansion and new hiring given the "uncertainty" in Washington. "Double Dip" is not a treat at Baskin-Robbins.
The Man Who Would Be King
This was a 1975 movie starring Sean Connery as Daniel Dravot, Michael Caine as Peachy Carnahan, and Christopher Plummer as Rudyard Kipling.
Your writer has often used popular movies, myths and fables to poignantly illustrate the folly and fallacies of political characters. It is particularly enjoyable to read another writer's use of this technique at such an appropriate time. Bret Stephens, writing for the Wall St. Journal (Global View) effectively compares Barack Obama to "The Man Who Would be King."
Taken from Rudyard Kipling's short story this film feature a young Sean Connery as Daniel Dravot and Michael Caine as Peachy Carnahan, two trouble-making soldiers of the British Raj (circa 1860s) who set out on an insane and improbable adventure to become kings in a remote section of Afghanistan. (An area that could easily be the hideout of Osama bin Laden today.) Their mission was as improbable as that of Mr. Obama. Stephens says of the President:
"...his parents improbable love; his own improbable journey; America's improbable hope; ...yet Mr. Obama would never come near the White House had his story been any more probable."
Carnahan and Dravot endear themselves to the villagers in Uneb by leading them to military victories over their hated enemies. In one scene that your writer vividly recalls from the movie (after 35 years) Dravot takes an arrow directly in his chest while leading his rag-tag army of Kafiristanis. He neither falls nor does he bleed from his probable fatal wound. The ignorant natives believe that Daniel must be a God since he doesn't bleed and they fall on their knees and hail him as their king. Seizing the opportunity Daniel tells the natives that he is the son of Alexander the Great and is then endowed with all the gold and riches left by Alexander in 328 BC. What he didn't reveal to his new faithful was the steel armor that protected him under his flowing native robe.
Peachy and Daniel, however, ultimately exhibit the frailties of mortals. Ego, greed, and lust drive Daniel to demand a bride who then proceeds to bite the king on his neck and he bleeds. The priests rant, "neither God nor Devil, but a man!" and the ruse is revealed. It didn't matter that Peachy and Daniel were successful in bringing order and justice to the warring tribes. Gods are held to a different standard.
"Just so in what was the cult of Obama. He was supposed to stand above partisan politics as the ultimate uniter. He was supposed to eschew the temptations of executive privilege and authority, as a believer and in the sanctity of the constitutional principle. He was supposed to make America beloved again in the world, as the embodiment of a biracial, transcultural identity. He was supposed to make the oceans recede and the planet heal, as a champion of environmental good sense."
"No mortal politician would have been expected to fulfill even a fraction of these promises and by that measure Mr. Obama has not disappointed. But it says something about the expectations that Mr. Obama once evoked that he should now be crucified on his Cross of Hope."
In a bit of irony, Peachy was caught by the monks who then crucify him. After surviving for a day, the monks cut Peachy down and he makes it back to civilization with Daniel's head and his crown still intact.
Stephens concludes his piece cryptically:
"When its (Obama's political career) history is written, the marvel will be how quickly he seduced a nation and how quickly he lost it. There really is no marvel at all. He is, or was, the man who would be king."
The Audacity of Hope is not only fading it has, as this writer forecast in his last book, become the Mendacity of Hope. As the Nation awaited the President's message from the Oval Office to address the oil spill, expectations were that he would be "royal" and demonstrate that he was a man in charge. Instead, the man who would be king was robotic, awkward and unsure of himself. His body language foretold a pending doom. The left suddenly choose to begin to distance themselves from the exalted one.
The Huffington Post: "Profoundly under-whelming...A feeble call to action." Robert Reich (former Secretary of Labor) "Vapid...a man who had electrified a nation in prior speeches had this time put it to sleep."
Just as the Business Roundtable Executives have come to their conclusions, small business owners and ordinary Americans believe that the President's objective is to destroy capitalism and replace the Nation's business model with collectivism.
THE CMV RECOMMENDATIONS
Since January 1, 2010, the CMV Recommended list has tracked the S&P 500 both registering a 10% gain by the middle of April and declining to a -5% return at the end of May. With the sharp decline in the S&P 500 at the end of June however, the CMV has appreciated 3% while the S&P 500 index has fallen 8%. CMV expects this divergence to widen. If you need assistance or advice given the potential for a Major Market decline, please call (602) 840-4117.
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-- H. L. Quist