The Analogy That No One is Talking About

Following the Richard Nixon disgrace of a Presidency, a little known Georgia Govenor became the 39th U.S. President. Out of nowhere, Jimmy Carter came to power in 1976 with a mandate to reform and restore the country's reputation, and hope was seemingly restored.

Flash forward 4 years later. In 1980 the U.S. was in one of the worst recessions in history, interest rates were at 20%, and the economy barely had a heartbeat. Gold had its best bull market in history, hittting $850/ounce, for over a 1000% move higher (My father was smart enough to buy a bank CD that locked in a multi-year interest rate of 12% + but also bought gold right at the top, only to see it drop in price for the next 20 years).          

Obama and Carter were two relative nobodies just 18 months before the election. Both were democrats, both faced a terrible economy, both were untested newcomers. Carter was overwhlemed by the challenges and couldn't leave Washington soon enough. Obama is smart...really smart and he seems to be surrounding himself with smart people.....however...

Guess who one of these "smart people" is? None other than Paul Volcker, Carter's Federal Reserve Chairman. Volcker is on Obama's short list for the same position once again, this time almost 30 years later. Volcker gets great credit for turning the economy around in the 1980's, but he first took interest rates to 20% in order to subdue inflation and strengthen the dollar. Yes...it worked. But for 2+ years it sure didn't feel like it was working. Unemployment was at 11% and the average American felt that they they were experiencing a Depression. At the time, Carter blamed Volcker for his loss to Ronald Regan in 1980.

They say that history repeats, and that those that don't learn from it are destined to make the same mistakes. Is Obama being set up as a patsy for an economic environment similar to Carters? I hope not.

But....if interest rates begin to rise significantly....if the US dollar breaks to new all-time lows...if the economy continues to suffer...and if gold and silver continue to hit new highs....

If it walks like a duck and quacks like a duck, odds are its a duck.     

Kip       

It's The Economy...Stupid

 This now famous line was attributed to George H Bush's mishandling of his re-election bid, when Bill Clinton's victory turned Bush into a one term President. The economy was in the dumps in the year leading up to the election and Bush seemed oblivious to the recession that the country was entering. 

Just a year ago anyone paying attention would have told you that the big election issue in 2008 would be the war in Iraq. Then, Bear Stearns went under in the Spring, and 90% of all mortgage co's followed. Once Lehman filed for bankruptcy in September, and the stock market dropped 40%, "Its the economy....stupid" became the central theme of this election as well.

It's obvious, from Barack Obama's landslide victory, that Obama and the Democratic party are the big winners of the recession of 2008.

YES WE CAN!

Our new President-elect delivered one of the most passionate and compelling acceptance speaches in history early Wednesday morning, and the whole world celebrated with him. I cannot remember seeing a sight quite like the global party that his victory brought on, but its clear that the theme of his speach, "Yes we can", resonated with hundreds of millions everywhere. Whether or not his Presidency lives up to the hype (and I truly hope that it does), this is a moment in time that we will not soon forget.

I am an optimist, and like most of you I'm sure, wish our first African American President great success. Unfortunately, I fear that Obama may regret running for the highest office in our land when it becomes clear to him just how bad of shape our economy is in. The just resleased jobless claims and bankruptcy numbers indicate that this recession is just getting started, and that its going to be a doozy. Because our economy is consumer driven, there is simply not a lot that can be done until the debt cycle that we are going through completely unwinds. Did anyone really believe that the banks would take that 700 billion and start lending again?? As Donald Trump said on CNBC, "lending has completely dried up, and not even the largest of co's can get the financing that they need to grow their business. If Fortune 500 co's cannot get funding, then there's no way that the average person is going to get any of this money...tax payers money that was promised to us!".

Here's the major problem facing us for the next 12 months plus. We live in a debt based society that uses borrowed money as it's engine of growth. Without freshly issued debt, our economy MUST contract and it must do so until the excesses are purged from the system.

This is why I continue to believe that this recession will be the worst of our lifetime. The major driver of our economy is on life support and stocks by any long term valuation measures are still expensive. At this point all the government can do is make things worse. Seriously, when is the last time you can remember the government taking action and making great decisions? Maybe Obama will be different...but we're talking months before anything he can act on would begin having an affect.

If this sounds really depressing, just remember that it doesn't have to. The opportunities to prosper, even now, are as great if not greater than they have ever been (especially if you are an entrepreneur). This is why a recession serves such a major purpose. It gives us an opportunity to buy "real assets" at bargain basement prices so that when the economy begins to prosper once again, everything that we bought low...we can eventually sell high.

MARKET UPDATE

The stock market lived up to "buy the rumor sell the news", as the euphoria from the election faded. Reality is sinking in, and any rallys will be short lived. On Friday we will get the latest employment numbers, and they will be as ugly as anything we can imagine. Let me make this point as clearly as I can: If you are long this market...if you believe that the stock market is headed higher...you are going to have a very tough wake-up call in the coming months.

If you are more of an active investor, you can continue to buy SDS when the market gets overbought on these sharp bear market rallys. Besides gold and silver stocks, which will be huge winners over the next several years, everything looks expensive here.

Yes we can....as long as we're prepared for what's coming.

Kip

www.wmitoday.com

www.vraletter.com

President Obama

At the risk of some personal embarrassment, I'll be shocked if Obama loses today. Every poll that I respect has him winning in a landslide, so it looks like we will have a democrat in the office for at least the next 4 years. In my opinion, this is not so much a vote for Obama as it is a vote against the presidency of W.. Obama has also run what may be the best campaign in history. How many of us, just 8-10 months ago, thought he would beat Hillary??

For those that might be concerned about having a democrat in the highest office, think back to Bill Clinton's 8 years. Love him or hate him, the stock market and the economy were very strong...we even ran a budget surplus for the first time in over 20+ years. History shows that the stock market actually fairs better under a democratic President than a republican one, which is a real surprise to most people. Robert Rubin, who gets most of the credit for Clinton's pro-business and economic policies...along with balancing of the budget...is Obama's top economic advisor. Rubin is fiercely opposed to high taxes, so don't assume that a vote for Obama is a vote for higher taxes on business and the wealthy.  

This is not an endorsement of either candidate, just the facts. I will say that its too bad that Ron Paul left the libertarian party to run as a republican, but don't forget about our good friend and VP of the lib. party, Wayne Allyn Root, who will be providing a keynote address at WMI's Wealth Conference Nov 21-24.

(Time Magazine article: http://www.time.com/time/politics/article/0,8599,1856139,00.html)

Whatever you do, exercise your right to vote today!

MARKET UPDATE:

The bear market rally continues, and hit my first target of 9500 at the open today. There is still room for it to move higher, but at this point NOTHING is telling me that this is the birth of a new bull market. Economic recessions that begin as the result of debt and credit issues last far longer than any other, and once the Obama euphoria wears off, I believe that the next move in the stock market will be lower, and likely by a great deal. Way too many market gurus are calling this a market bottom, and investors are still fully invested and holding on to their 401k equity positions. This is simply not how bear markets end, and in my educated view, this one will be no different.

There will be excellent bargains to be had when the bottom is finally reached, but I continue to believe that we will see 7000 on the Dow Jones before this is all over.

Kip

Our Financial Engine...

Its common knowledge of course that the US no longer makes anything...not really anyway.We import all of that "stuff" now. Soon, we will have the Big 2 instead of the Big 3, and you can pretty much write-off anything that is manufacturing related...

So, what's been driving our economy for the last 10 years? Well, approx. 38% of our domestic GDP comes from the financial industry, and while I don't know exactly what percentage is pure profit/earnings related, it’s safe to say that this represents at least 50% of all corporate profits. So, Wall Street, banks, hedge funds, insurance and credit card co's, etc., have been the life-blood of our economy for at least a decade.

I think you can see where I am going with this. Because derivatives turned out to in fact be "weapons of mass financial destruction (just as Mr. Buffet predicted in 2004), we've now lost our engine of growth. We've lost Lehman, Merrill, AIG, Bear, Fannie, Freddie, Countrywide, WAMU, and 90% of all mortgage co's...all in less than 9 months...it’s still hard to believe this has actually happened. In fact, it's clear that most people are still in denial about what this is going to mean long term. TheWall Street Journal polls economists each quarter about the economy, and as a group they are looking for mildly negative growth this year and a positive GDP in 2009.....say what?? Folks, what's going to happen when these same economists realize that 2009 will bring a negative GDP of at least 3%, and possibly 5%? And that 2010 might not be any better?

This short term, bear market rally will fade soon, and next to feel the pain of this massive deleveraging process will be hedge funds, insurance co's, credit card issuers, commercial real estate and corporate debt. If you think I'm being too bearish, tell that to the 700,000 or so that have already been laid off...and this is before we have even officially entered the recession. Stay smart…stay prepared.

Kip

The Perp Walk!

This bear market has lots of people scratching their heads, especially the so-called gurus of capitalism and self-proclaimed Masters of the Universe (by the way, this is a great time to go back and read Tom Wolf's classic from the 1980's, The Bonfire of the Vanities, Wolf's semi-fictional work on the lives and mindset of Wall Streets super elite). 

I speak with a diverse group of people on a daily basis about the shenanigans that allowed this derivatives and leverage implosion to take place; the very wealthy to the not yet wealthy, the well-educated book smart types to the cleverly street smart, and the optimists to the pessimists. One of the comments/belief systems that seems to unite all is: "These guys are getting what they had coming to them for a long while, but why aren't any of them going to jail?"  

And here's the rub. There have been no indictments, no charges filed, no serious investigation, and most importantly.....no "perp walk"!  

I believe that complete confidence in the system has been lost, and that until we see the perpetrators in handcuffs and sent to long prison sentences, along with significant changes in the way the game is allowed to be played by the "elites", that investors (globally as well) will simply put their hard-earned money somewhere else....some place that they can actually see it grow and have faith that it won't be robbed in the middle of the night.

Market Update: As predicted, the FED cut rates by 1/2 point yesterday, and global rate cuts will be next. We likely have some more room to run on this bear market rally, but as I said yesterday, if you have some positions you want to unload you may want to use this rally to take some money off the table. 

For the last 4-5 years I have been saying the following: "80% of the country is upside down financially. This means that if 80% had to either pay off their debts or file for bankruptcy tomorrow, they would be forced to file for bankruptcy". This is not the definition of a strong middle class, and without a strong middle class, a country cannot prosper in the long-term.

Kip Herriage

www.wmitoday.com

www.vraletter.com

www.kipherriage.com