Easthampton Burning?

Easthampton Burning?

Eric Fry, Reporting From Laguna Beach, California… | 3 November 2008

• The Dow piles on more gains, but where to from here?


• Comparing dead-cat-market bounces with previous crashes,


• A sneak preview into post-meltdown America and more…

Somebody changed the channel.

For the last two years, every time your editor walked into the local branch of the Bank of America, all the television monitors that stretched along the bank’s walls displayed Bloomberg TV, a financial news station. But today, when he strolled into the bank to make a deposit, Bloomberg TV had been replaced. A home improvement show had taken its place.

Apparently, the management decided that stock quotes are bad for business… or maybe just plain depressing. So why not change the channel? If only investing were as simple. Many of us would have reached for the remote months ago. We would have preferred to watch almost anything other than falling share prices. "Hey, I haven’t seen THIS Mexican game show before!" we might have said to ourselves.

Unfortunately, we cannot change the channel. If we don’t like what we see, we can either leave the room… or continue watching, while hoping that the story line becomes more entertaining. The story line became slightly more entertaining yesterday, as the Dow recouped another 189 points of its recent catastrophic losses. Investors were grateful for each and every one of those points. Triple digit performances have become almost blasé on Wall Street these days, but the performances have rarely included a plus sign.

Yesterday’s gains lifted the Dow’s week-to-date performance to a stunning 9.6% gain, the best one-week advance since 1982. [[And typical only of severe bear markets!: normxxx]] Of course, these numbers do not include today’s trading action, which could dramatically alter the final tally. But just for kicks, let’s say that today’s trading action produces no change, and the Dow finishes the week with its 9.6% gain. This impressive one-week advance would rank as the Dow’s third best YEARLY gain of the last eight years.

In other words, the stock market has rarely risen 9.6% in a single year, much less in a single week. So how much more can investors expect…and how soon can they expect it? The answers to these questions are utterly unknowable, of course, but history does provide some interesting insights.

First, the good news. Stocks always have a (reasonably) sustained bounce after a severe selloff. After the U.S. market crash of 1929, for example, stocks rallied a whopping 48% from the post-crash low to the recovery high six months later. Now the bad news: Those post-crash bounces don’t sprout roots and blossom into new bull markets. On the contrary, these illusions of recovery deceive investors into believing that a new bull market is underway.

Let’s Consider A Couple Of Troubling Precedents

Let’s imagine that you bought the Dow Jones Industrial Average in 1929, AFTER it had already fallen 42% from its high. (Why 42%? Because that’s the amount that the modern-day Dow just fell.) How do you think you would have fared? Do you think you would have made money very quickly or very slowly? The answer is "both"— you would have enjoyed a quick bounce. But if you did not sell into that bounce, you would have lost 80% of your capital during the next two years. If you had held on, however, you would have recouped your original investment… 22 years later!

You think that’s bad? Check out Japan’s Nikkei Index, using the same assumptions. If you had purchased this index after the first 42% drop from its record high in 1989, you would have made a little money during the first two months. But woe to you if you did not sell! Your purchase would STILL be under water to this day…almost 20 years later. In fact, you would be nursing a loss of more than 60%!

So what’s the point of this discussion? Merely to emphasize that the recent past is not necessarily prologue, but the ancient past might be. Only a fool would dare to predict that share prices will collapse like they did during the Great Depression. But only a greater fool would dare to rule out the possibility.

We Americans have entered a very precarious chapter in our financial history.

Hopefully, we will emerge from the current crisis with nothing more than a few scrapes and bruises. But we probably will not be so lucky. Serious, debilitating financial injuries are entirely probable. Life here in the States could become noticeably less comfortable for a while…and share prices could continue to reflect this new reality. So why not err on the side of caution? Why not insist on buying ridiculously cheap stocks, if you buy any stocks at all? And why not insist on receiving relatively assured very high dividends, if you attempt to receive dividends at all?

We’re just asking questions? We wish we knew the answers.

We have no idea what will actually happen; we only know what MIGHT happen…and that’s why we are a bit worried. We are worried because the American economy is poorly prepared for any serious economic weakness…as the inimitable James Howard Kunstler explains below. On Thursday, October 16, the VIX Index hit an all time high of 81. Put simply, the markets are a'buckin' and a'kickin' like we’ve never seen before. With such unpredictability, it is difficult to know where to invest, if at all.


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Easthampton Burning?

By James Howard Kunstler | 4 November 2008

In the typhoon of commentary that’s blown around the world a step behind the financial tsunami that’s wrecking everything, two little words have been curiously absent: "fraud" and "swindle." But aren’t they really at the core of what has happened? Wall Street took the whole world "for a ride" and now a handful of Wall Street’s erstwhile princelings have shifted ceremoniously into U.S. Government service to "fix" the problem with a "toolbox" containing a notional two trillion dollars. This strange exercise in financial kabuki theater will shut down sometime between the election and inauguration day, when the inaugurate finds himself president of the Economic Smoking Wreckage of the United States [[and the US government runs out of credible cash creation/borrowing power: normxxx]]. What then will happen?

I have thought for some time that things could get dangerously out of hand in America, despite our exceptionalist notion that we are immune to the common plot-lines of history. For starters, inauguration night will seem more like Halloween, as those two little words fly in to haunt the new president. So, a large and looming question is: Who will be appointed the next attorney general of the U.S. (to replace the human sash-weight currently occupying the office), and how soon will the federal marshals be scouring the wainscoted hallways of Goldman Sachs, JP Morgan Chase, not to mention a thousand Greenwich, Connecticut, hedge fund boiler rooms, with man-sized nets?

A storyline is already emerging to the effect that these birds really didn’t quite know 'what they were doing' in grinding out that multi-trillion dollar basket of alphabet securities sausage (a theme on Sunday’s 60 Minutes broadcast) [[some did; most didn't: normxxx]]. Nobody will buy that line of BS, though— and certainly not in the courtroom where, for instance, Mr. Hank Paulson may have to answer the question of why his own firm of Goldman Sachs set up a 'special unit' to short its own issues— selling short issues to its own customers? [[They didn't; it was just 'lying there': normxxx]]. It will be edifying to see how they answer.

In the meantime, however, millions of Joe-the-Plumber types will have gotten their pink slips, slipped helplessly into foreclosure, watched the repo men hot-wire their Ford pickups, and eaten down the kitchen cupboard to a single box of Kellogg’s All-Bran (which had been sitting there for eleven years and is thoroughly infested with weevils). They will be watching the official proceedings in the federal courtrooms with jaundiced eyes as they hunch in their tent and cardboard box cities, in the rain, sipping amateur-brand raisin wine bartered for a few snared rock doves. How long before the hardier ones among them venture out to Easthampton with long knives and matches?

It will bring little satisfaction though, and the disappointment could lead to a more inchoate outbreak of civil disorder that would be more like a free-for-all of vengeance and grievance. There will be a great outcry for the new government to "do something!" Perhaps that will finally bring the troops home from Iraq— only for them to find that the Homeland has become a kind of Iraq…. but with NO surplus!

If the financial system completes its self-destruction— and that’s looking more and more like a real possibility— there will be several pretty awful consequences. One is that the United States may be forced to declare bankruptcy by repudiating its own debt [[or, much more likely, limiting redemption: normxxx]]. All those who took refuge in U.S. Treasury bonds and bills will be like folks who sought shelter from a tornado in their out-house. That would go hand-in-hand with a massive currency inflation that is likely to follow the current phase of compressive liquidating deflation— in which every possible asset is being sold off for less than its face value. That process is largely self-limiting due to the finite supply of real salable assets.

The trillions of dollars injected into the system while this is happening must eventually snap-back as people shed the last fungible article and compete for necessary commodities like food and fuel with dollars that are suddenly plentiful but nearly worthless. At some point, the government may have to summon up a new currency. I don’t think it will be anything like the "Amero" which the paranoid fringe incessantly mutters about as part of their fantasy in which the U.S., Mexico, and Canada all join up to become one country. But any "new dollar" would probably have to be 'backed' by gold [[ but Hitler's "New Order" backed their "New Currency" with "labor units"; ie, the "equivalent" of 'a mark's worth of labor': normxxx]].

As we discover ourselves to be a much poorer nation, as one of my correspondents put it: "the bogus risk-swapping economy must be replaced by a net value-added economy." That means actually making things, growing things, and rebuilding things, and that can only begin to happen if we do not stupidly sucker ourselves into a war with other nations who are liable to be extremely ticked off at us for destroying the entire global economy, including their own, while also competing with us for that dwindling supply of resources that are not equitably distributed around the world.

This means especially oil. I hope you’re enjoying the temporarily cheap prices at the gas pumps, because this is purely a function of the compressive deleveraging that is going on right now, as contracts and positions held in energy markets are being dumped by everybody and his uncle to raise cash to meet margin calls. My guess is that oil and its byproducts will become much more difficult to get in just months ahead— not just more expensive, but literally not available at any price [[except, of course, on the always ubiquitous 'black market': normxxx]]. The current falling price of oil has little to do with the real supply and demand fundamentals. It’s simply a function of the markets being in near-total disarray.

We’re running on current inventory, and running it down. In the background, all kinds of peculiar and terrible things are happening. The entire apparatus of allocation and distribution is being thrown out of whack. The smaller tanker operations are going bankrupt. The "less-developed" nations are heading back to the 17th-century level of daily life without electricity. The oil exploration and development projects that were planned for hard-to-get oil netting $100-a-barrel minimum— in places like the deepwater Gulf of Mexico, Siberia, Central Asia, and elsewhere— are being shelved.

The bottom line of all this is that we in the U.S. could find ourselves in a situation of shortages, hoarding, and rationing. This would pretty much kill off whatever remains of the previous shuck-and-jive economy— hamburger sales, theme park visits, NASCAR weekends— while it makes obvious the failures of our suburban living arrangements (and drives the value of housing out there closer to zero). My pet project of restoring the American passenger railroad system might seem pretty minor in the face of all this, but it’s at least a place to start that will accomplish several things: allow people and things to get places without cars and trucks; put many thousands of people to work at many levels doing something of direct, practical value; and be a small step in rebuilding confidence that we are a society still capable of accomplishing something.

[Joel's Note: If it does come to this, and we certainly hope it doesn’t, wouldn’t it make sense to at least have a little bit of gold under the mattress?]