Inflation Revisited

As if the economy didn't have enough problems, we now have to worry about massive inflation or even hyperinflation. Not that this is a new problem--it has been a problem for years. Peter Schiff talks about it all the time. But the question in my mind is: why? Why does the government support an inflationary policy?

I know that Schiff has a chapter in Crash Proof that discusses the government's rationale for supporting an inflationary policy. But for the average American trying to understand this and to put it into context, it doesn't make any sense. Why would our own government try to hurt its people? Why risk destroying the confidence of the entire American population, leading to outrage and possible uprisings if hyperinflation becomes a reality? I'm not an eternal optimist, but I'm not a conspiracy theorist either. So, in my mind, there must be some rationality behind the insanity.

The government's fiscal and monetary policies are outright reckless. I don't think anyone can justify them, other than the PhD economists who have no practical experience but sit around coming up with "brilliant" economic theories all day. Having a PhD economist in charge of government economic policy is equivalent to having a PhD military historian replace General Petreus to run the war in Iraq. Lots of academic experience; zero practical experience. How about putting someone in charge who built a business; deals with employees, stockholders, and customers? How does a PhD give you the experience and expertise to run anything? But I'm getting off track.

The problem is arrogance. These "brilliant" minds all think they've solved the problem of economic recessions/depressions forever. It's actually a simple fix: just print more money! That was the problem during the Great Depression right? If the U.S. had just printed more money in the 1930s (or "created liquidity" as the great minds would prefer to phrase it), then the Great Depression would not have been nearly as bad as it was. Or am I oversimplifying it? I tend to have that problem.

What about the 1970s? How come nobody refers to that decade when talking about the possible dangers that exist and potential consequences of our actions? So the 1930s can be used as an example, but what about all the other examples throughout history? 1920s Germany? Present day Zimbabwe? Do these examples just not apply because we're the big bad United States?

I'm not an economist, but I have a pretty good understanding of history. I also believe that it doesn't take a PhD in economics to see the dangers that loom. Like Ron Paul said, it doesn't take a genius to figure out that if you print more money it loses its value. The "brilliant" minds in Washington will have you believe that this is much too complicated a situation for the average American to comprehend. Let the PhDs, the politicians, and the talking heads handle it while drowning the taxpayer in debt and devaluing the currency we have to use to feed our families. Having a PhD means you spent a lot of time in school. It doesn't make you automatically right.

The Return

Finally back, after months of neglect from this investor. I have returned to my roots, I guess you could say, and concentrated on the technical analysis. Nicolas Darvas said he always made his most money when he was so far away from Wall Street that he couldn't listen to the "news" and rumors. Funny, I've done much better myself since I stopped watching CNBC and all the other financial television channels and just focused on the charts.

Hard to say where the market goes from here. It's hard to say where the market goes from anywhere, but the signals have been mixed lately. 4 weeks of declines, but on below average volume. Many stocks and indices breaking through their 50 day moving averages, but the 200s are holding up and some stocks still have promising charts. The Nasdaq has held true to the 1937 Dow pattern, unbelievably, so that points to a decline back to the lows sometime in the near future. The question is whether or not we have one more leg up before that happens. I prefer to have positions that will benefit either direction, for the time being. A good time for some type of hedging strategy.

From a fundamental perspective, it obviously still looks bad. The inflation trade will have to kick in at some point, but I have no idea when. Could be weeks, months, or years. The recent news about a surge in demand from China was interesting. Is their increase in consumer spending a benefit to their economy in the long run or will they get overextended like everyone else? My bet is on the former. They can certainly afford to spend money that they actually have. Meanwhile, the U.S. government continues to spend money that it doesn't have or, even worse, money that does not yet even exist.

1937, not 1929

I love all of these comparisons to the Great Depression. A very easy comparison for those of us who didn't live through it. Most of the idiots on television who so readily invoke that comparison have no understanding of history.

The real reason for this post is to actually make the comparison between present day and the Great Depression...in terms of stock market charts. That's probably the only true comparison worth using. From 1929 until 1938, a chart of the Dow Jones industrial average looks remarkably similar to a chart of the Nasdaq from 2000 to the present. From peak to trough, in 1937 and 1938, the sell-off in the Dow lasted the exact same length of time as the same movement from October 2007 through November 2008 (36 weeks, I believe). A new rally began exactly 12 weeks later (in 1938). It has now been exactly 12 weeks since we made new lows in November. For this astounding trend to continue, we would have to see a rally here very soon. Only time will tell.

One last note. I listened to a speech given by Congressman Ron Paul in Houston recently and he make a couple of interesting points. One was that he appreciated all the compliments he'd received for his intelligent insight into the economy and the weakness in the U.S. dollar. His response was that he didn't think it took a genius to figure out that if you print a lot of money, you get a decline in its value (that got a few laughs from the audience.) The other thing he said that I thought was worth remembering was that economists (in this case Austrian economists) are not very good at market timing. Mr. Paul remembered that a distinguished Austrian economist noticed problems with Fannie Mae and Freddie Mac's debt levels back in the late 1990s. It took another decade for those companies to collapse under that mountain of debt. Obviously, the massive increase in current government debt levels and the printing of money as a "solution" to our financial problems will lead to problems, including a heavy dose of inflation. Timing and reacting to that inflation is the difficult part. We know the what, we just don't know the when.

Journalists & Markets

I love how the business news writers always have a reason for a stock market movement. They can't stand to admit that something happens for either no reason at all, or for a reason they might not know about. For example, I saw a headline that said the stock market recovered on Thursday because of hopes regarding the bailout. That makes no sense whatsoever. The bailout is 4 months old. It's not news and how could anyone hypothesize that its prospects led to a stock market recovery on a Thursday afternoon? They don't know why the market moves the way it does, so why do they always have to try and rationalize it?

Markets don't care about the past, they care about the future. A revision of the jobs report for December is not going to have the slightest impact on the market, yet that's what the business journalists use as a headline. Another example is when they use a single company to explain the entire movement of the global market. Like when "they" said that a poor earnings report from Chevron led to a market sell-off. I read that headline and went straight to the Chevron quote: it was down less than 1% while the rest of the market was down over 2%. There's an explanation for you!

Having no connection to Wall Street or its ridiculous journalists has its advantages. William O'Neil recognized this and made a fortune. Before him, Nicolas Darvas had a similar strategy. He wanted nothing to do with market news or rumors. He just wanted the quotes. You can learn a lot by refusing to listen to any advice or news and simply watching the price and volume action for a stock or an index. Never believe that a journalist's explanation for the way a market moves is accurate. A journalist is a journalist (and not a professional trader or investor) for a reason.

The Falling Dollar

December 11th 2008 might be a date to remember in our nation's economic history. That is because it looks like the U.S. dollar index may have begun its fall from grace. A huge rally in the past few months finally stalled. Between October 21st and December 10th, the dollar traded in a narrow trading range vs. the Euro. Between 1.25 and 1.30. But, on Dec 11th, it rocketed up to 1.33. That may not seem like a big deal, but it broke the trend line and it was a huge move for a currency in one day. Plus, although I am no technical expert, the dollar index did form what many technical analysts like to refer to as a "head and shoulders top" that corresponded to the trading range from Oct to this week. In any case, with the Federal Reserve's printing of money, the end of the dollar rally is inevitable. Whether or not it has hit a true top, we won't know for sure for a while. But, like Peter Schiff says, time may be running out on the dollar and actions should be taken to protect yourself before it is too late. Gold has held up very well throughout this market crash and gold stocks have rallied big in the last few weeks. I don't think this is all a coincidence.

Stock Market History

I did a little historical analysis and this is what I found out:

Dow Jones, Oct 1929 - July 1932: down 85% in 2 1/2 years
Nasdaq, Feb 2000 - Oct 2002: down about 80% in 2 1/2 years

Dow Jones, July 1932 - Mar 1937: up about 300% in 5 years
Nasdaq, Oct 2002 - Oct 2007: up a little less than 200% in 5 years

Dow Jones, Mar 1937 - Mar 1938: down almost 50% in just 1 year
Nasdaq, Oct 2007 - Oct 2008: down about 40% in just 1 year

Dow Jones, Mar 1938 - Nov 1938: up about 50% in 7 1/2 months
Nasdaq, Oct 2008 - ?: ????????

Dow Jones re-tested its high in Sep of 1939 and then re-tested its low in April of 1942.

So, if history repeats itself (which it has to this point), we will see a furious rally in the near future followed by a slow re-tracement of the decline back down to where we are today (or wherever the bottom is). If history repeats itself, we will be back down to the current levels 4 years from now.

Not saying that history will be repeated exactly, but the similarities are amazing!

Politics

Back after a long vacation...and into the world of presidential politics and "bailout" schemes. O'Neil made the case in his books that gridlock was best for the markets (usually caused by having different political parties controlling either branch of the government). My first lesson in economics was when my Econ 101 professor made the case that the President has very little to do with the economy and that the Chairman of the Fed (Greenspan at the time) was the most powerful figure in the country with regarding to the economy.

I recently finished reading Peter Schiff's book about the coming economic collapse. While there are a few things in the book that are not well explained or a bit of a stretch, for the most part Schiff makes a strong case for his predictions. It could happen and a lot of it has already happened. Well worth the price tag and I highly recommend it.

When I vote for the President, I vote for national security, leadership, and who I want to be Commander-in-Chief. I don't vote based on the economy. The president never does anything significant in that area (yes, even Clinton for you liberals who think he saved the economy. He (and Gore) had nothing to do with the Internet boom). For an excellent commentary on the irrelevance of this year's election when it comes to the economy, see the blog "Austrian School" that I mentioned in a previous post.

If this "bailout" plan passes, massive inflation could be right around the corner. Nobody seems to realize how the price of oil and the status of the dollar are tied completely together. The dollar drops, oil goes up. The dollar strengthens, oil drops. The problem is that there is no logical reason for the dollar to be strengthening at this point. (Again, read Peter Schiff.) Oil and commodities are due for another run sometime in the near future (I believe Jim Rogers has predicted this). I'd be ready.