Tough Medicine: Reflections from the Beach
By James J Puplava CFP, August 13, 2002
Vacations as Planned
Judging from what I have seen at this island resort, you would never know that the economy has weakened. Just finished dinner at one of this island's largest hotels. The lobby was bustling with happy vacationers and Mary and I had to wait 15 minutes in order to get seated. I thought that was surprising given the fact that it was 7:30 when we arrived. Talked to hotel personnel about this summer season. According to my waiter and the cashier in the gift shop, it's been a very good year. Business began to boom beginning in May and hasn't stopped since then. There was a bit of worry and anxiety about the future though. Hotel bookings for September show a dramatic drop off. The cashier said it is similar to last year when business came to a standstill. Looking at the newspaper section of the gift shop, all copies of Investor's Business Daily were sold out. So they may be on vacation, but they are still watching their money.
Today's action in the market may be the end of the bear market rally. We got our summer rally as predicted. But this rally was of the bear market type rather than a change in the primary bear trend. This has been confirmed by the absence of volume. The rally that began after the July 24th nadir occurred without supporting volume. Volume peaked back in early July on heavy downside selling. The fact that stock prices rose and volume declined point to the rally taking place because of the absence of sellers rather than a surfeit of buyers. The fact that volume picked up on the downside shows where the real trend lies. The next leg down in the market should be hard down. We will know this by tomorrow and the trends of this week. However, from what I have observed, the short-term trend has played itself out and we should once again test the July lows, if not breach them to even lower lows as the bear market begins its next leg down.
I was rather amused by all of the day's reporting. Wall Street is in big trouble. They were counting on a second half recovery. Greenspan just a month ago told Congress that the economy was in great shape. The mantra throughout this year's downturn has been the standard second half recovery. Its not going to happen. So Wall Street shifted the story to Fed rate cuts. They may come if the Fed gets European cooperation. But the Fed's credibility is at stake. A month ago the Fed told us we were in great shape. If they would have lowered rates today, they would have lost face and credibility with the world. Even worse, it would have looked like the Fed was panicking. They got us in this mess by allowing a recovery to turn into a boom and a boom to turn into a mania. Now they have managed to create another bubble in real estate that will also come crashing down. The Fed is currently inflating the money supply at an annual rate of $2 trillion. The new motto at the Fed must now be "Inflate or die." I've never seen this kind of money creation in my 23-year career in the business. It is actually frightening to think of what they are doing. At this rate of monetary inflation, they are going to turn the U.S. into another banana republic.
It's Business, Stupid!
The reporting on the President's gab fest with business leaders and Wall Street's reaction to the Fed meeting goes to show the rate of economic illiteracy in this country. One reporter complained that the President was meeting with business leaders large and small. The reporter thought it looked bad given all of the corporate scandals. It never occurred to this reporter that it is business that creates the bulk of jobs in this country. When businesses are laying off workers or when they aren't investing in new capital equipment, it might be helpful to listen to what they have to say.
The press, the financial community, and the citizenry of this land are looking for the government to do something big so the will be no pain. The problem is the patient is sick and needs time to recover. We just went on the largest spending and borrowing spree in this nation's history. There is simply too much debt and malinvestments out there that needs to be cleansed. The best thing the government can do is get out of the way and let the healing process begin. The last thing we need is heavier taxes, more regulation, and more government programs. That is what Herbert Hoover did as a result of the 1929 stock market crash. He ended up turning an economic downturn and a stock market crash into a Great Depression. The "New Deal" began under Herbert Hoover contrary to what you been told. In fact, Roosevelt's economic advisors admit that the New Deal had its roots in Hoover's presidency. So the last thing that the President should do is do another Herbert Hoover or else he will end up just like him.
Yet, that is exactly what many are calling for him to do. Many on the left are calling for major tax increases. Tax rates are already at 42.6 percent, including the Medicare tax. Hoover raised taxes to over 60 percent and Roosevelt raised them to 94 percent. That pretty much did in the economy. However, that is exactly what liberals and many on the left want to do. Higher taxes and new social spending was advocated at a recent gathering of the Democratic leadership in Las Vegas. Just watched Michael Moore, best selling author of "Stupid White Men" on Donahue. Moore believes taxes should be raised as high as possible to around 75 percent and the wealth redistributed. I think I will send him a copy of Rothbard's "The Great Depression."
Everyone Has a Hand Out
If the left wants higher taxes and more government spending, Wall Street wants more money. They want the Fed to lower interest rates even lower, as much as a full percentage point. They also want the Fed to print more money. The fact that the money supply has grown by over $1 trillion over the last year and that it is now growing at an annual rate of $2 trillion doesn't phase them. They also ignore the implications that this country is taking in nearly $1 trillion from overseas to support our trade and capital deficits.
On Main Street, they simply want the government to do something. It seems we have lost our self reliance. On the way to pick up a copy of the director's cut of "Pearl Harbor," I listened to the Suze Orman show in my car. A caller, a young mother with her baby crying in the background, was distraught and didn't know what to do with their debt situation. Her husband, a seasonal worker making $52k a year, may be out of work shortly. The problem, according to this mother, was the couple's $45,000 in credit card debt. Suze's solution for the distraught mother, "File for bankruptcy." That pretty well sums up this country's problems: too much debt.
Unfortunately, until this debt has been cleansed from the system and all of the malinvestments have been washed out, there will be no recovery. There is not a thing that the President, Alan Greenspan, or any Senator or Congressman can do about it. We just went through the biggest debt and spending orgy in this nation's history. Unless the government plans on giving us free money, this debt will have to be paid back, or defaulted and cleansed from the system to make the economy healthy again. It may not be what the patient wants to hear, but sometimes the truth needs to be told to the American public. You can't go on a debt and spending spree and then look towards the government to bail you out. Sometimes we need to own up to our mistakes as painful as that might be. It helps to build character and wisdom in the process. It was something that this nation used to have a lot of and I hope it still does.
Tomorrow, I plan on a single-handle sail. Should be interesting. Never done this before without my crew. Till next time: fair winds and clear skies.
Reporting from the beach,
© 2002 James Puplava