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StockBlade: The Big Picture

October 30, 2008 8:26 PM

business-sunset.jpgIt is easy to get caught up in huge swings in stock prices. It is money and important. However, sometimes people need to step back and look at the forest, not the trees and look at the big picture. While it is clear that we need to clear 9380 on the Dow to have any more upside here short term, the question remains, will it last? I strongly say no.

If you recall, when the market was far higher, about 1300 on the SP, i said one day ” I do not care if the market goes up another 1,000 points, they are wrong”. While the markets can and will be wrong for a very, very long time, sometimes you have to step back.

Here are the facts:

1. Consumer debt is at all time highs, $900 billion in credit card debt alone

2. Consumer incomes are falling (real incomes have fallen since 2000)

3. Disposable income came out today and recorded the biggest drop in history

4. The economy will get far worse before better

5. The rising dollar will hurt manufacturing and global trade which has held much of the large cap profits

6. Housing is no where near a stable bottom, let alone rising

7. The massive fiscal and trade deficits will restrain the ability for future responses to downturns

8. Baby Boomers are coming of age and will need to sell the market for cash

9. State pensions are underfunded by many trillions (not reported as public companies are required to do) and will eventually cause another panic if not corrected

10.  Social Security and other federal long term obligations dwarf the current financial crisis by a magnitude of at least 20, probably far more.

While I have long said that I would prefer not to be all doom and gloom, these problems are very real and cannot be ignored forever. The economy cannot expand without real gains in incomes, and real incomes cannot increase without a net increase in goods produced, IMO. This notion that we have transformed into a service based economy is the biggest economic hoax in history. I have said this since the beginning of time.  Economic “experts” have strongly said otherwise, and I have strongly said they are wrong.

If you examine what is likely in a free trade environment, I would suggest that most all of the benefits of trading with significant unequals would occur in the first few years, possibly a decade. After that, a serious economic decline should begin. The reason for this is simple. The first few years of trading with economic unequals results in a huge surge in disposable income as prices drop because of cheaper imported goods. Real incomes enjoy a pop higher because of the reduction in cost of imported goods- until wages fall. This “benefit” should gradually decline over time as  wages increase in the third world trading partner countries,  and more importantly, manufacturing begins to deteriorate and reduce wages and benefits to compete globally. This erosion should lead to lower wages and benefits for workers over time. This is exactly what has happened and could have easily been predicted.

While I would argue that we do need some level of trade with these countries, to make the case that it should be free trade regardless of the consequences is foolishness. It should have been limited trade. But that cat is already out of the bag and this will likely be very difficult to correct. If we stopped trade now, or put significant restrictions on trade, I believe we would see another financial panic. So we have to be very careful on the response to our massive trade imbalances. This concerns me, as i believe if the Democrats take over and enjoy huge majorities, they may be tempted to reverse our trade policies. Swift action in this direction would likely also see a swift action in the financial markets - to the downside. And the move would probably be very severe.

The only reason we did not see the economic decline earlier was because of foolish monetary policies that created asset bubbles. They were fake economies created with paper and leverage.They weren’t real. While most will blame Bush for this, this started way before President Bush. Unfortunately, it came to bear while he was president, so the general populas will cast the blame on his door.  While I do strongly argue that this is complete nonsense, he could have stepped in and dramatically changed course. But you have to keep in mind that the leading economic minds have said that this free trade with unequals, such as China and Mexico, was in our best interest and the economy was better for it. Therefore, to blame Bush for real incomes dropping since, well, the day he took office,  is foolishness. This began 15 years ago, or longer.

The reason for this post is to remind readers of the big picture, regardless of daily market action. Several months ago I made a post that said Briefing.com and their President, Dick Green, was 100% wrong on the economy and the market.  I made the case that he, and most others, simply did not understand what was going on. I have been proven correct on this issue thus far. Unfortunately, I believe I will continue to be correct, possibly for many years. This is not a long term investing market, it is a suckers and uninformed bet. This is a traders market as I have said for over a year.

Lastly, the Talking Heads need not insult my intelligence that a “depression has been priced in”. Not even close. If a depression were priced in the Dow would be at least 6000 probably far lower. It has priced in at the low a recession, not a depression. I highly doubt it has even priced in a severe recession, which I believe is coming.  What we have in place is a tradeable low, nothing more.

A far more common sensical view would be this. If the U.S. and Europe did not have free trade agreements with unequals, would they be in economic peril? The answer is rather obviously no. They may have sluggish economies, maybe, but peril would not be an issue. it would be a cyclical downturn, not fundamental.  However, while this near financial collapse was not the direct result of global free trade, it was without question an indirect result. World financial leaders attempted to “prop up” their economies via debt and leverage and keep everything the same “as it ever was”. The problem was it wasn’t the same -  real incomes said otherwise. That game has ended and we are now seeing the result - or some of it. I would argue not all, possibly not even close.

Written by Tom@StockBlade.com · Filed Under General Market Comments 

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