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Thursday, September 22, 2011

IS THIS THE BEGINNING OF THE FEARED NEXT DEPRESSION?

The Dow Jones Industrials crashed 391 (-3.5%) today to 10,734.  It could have been worse, as the low was more than 500 points down.  The volume was 50% higher than the past three month average, so that's not good.  Europe was actually up today, and everyone seems to be blaming them these days, but Brazil was down almost 5%.  So, what's happening?  Well, let's look at some indicators.

The 30-year fixed-rate home mortgage loan dropped to a 60-year low of 4.09% last week, with the 15 year rate only at 3.30%.  Re-financing is on the rise, but the home market is still floundering.

Can we blame 9/11 and terrorists?  Here is how the USA has fared since that memorable date (from Forbes):

The terrorists have won the war, for the USA has spent $3.3 trillion in reaction to 9/11.  We way overreacted, and today, as the above graphs show, our defense budget is so far out of line that, when you think about it, that should be our saving grace, for, really, we don't need to waste so much money on, perhaps, a thousand really serious terrorists.  However, we now have a windfall opportunity to shift to renewable energy, global climate change remediation, infrastructure, education and reducing our federal debt.  Will this happen?  Nope.  Why?  The Military Industrial Complex and Republicans.  Is there a way around them?  Realistically, NO!


What is the relationship between the Dow and Gold?  As impressive as the rise in the price of gold might look above, it is nowhere near the record $2250/toz (inflation adjusted $850 in 1980).  However, some are predicting this peak will be exceeded next year.  Remember Watergate?  From all reports, President Richard Nixon's worst mistake was his abandoning of the gold standard in 1971 in reaction to countries in Europe demanding payment in gold.  Read Charles Kaklec's one pager in Forbes, where he laments the results after that decision:

  a.  unemployment increased
  b.  median family income would be 50% higher
  c.  a barrel of oil would today sell for $2.50/barrel
  d.  since 1971 there have been twelve financial crises, compared to only one after World War II
  
His solution?  Go back to the gold standard.  Steve Forbes and Ron Paul have both predicted such a return.  In case you are heavily invested, remember that, then, the price of gold will plummet.  According to at least one expert in survival of the fittest, call him Tom, when the world economy crashes, and society returns to how we lived during the time of the caveman, gold will also become useless.

Gold, incidentally, dropped $38/toz to $1744, so that is interesting, for there is normally an inverse relationship.  Oil was, though, economically consistent, dropping to $80/barrel (WTI) and $108/barrel.  This $28/barrel discrepancy, though, confounds me.

So what do all the above indicators tell us?  I don't know.  Let's see what happens tomorrow.  I'm hoping for a 735 Dow drop so that I can begin buying over the weekend.  Well, I might wait until Monday night to see if we are again heading into where we were less than four years ago.  Remember, the Dow was up to almost 14,164 on 9October2007 and crashed to 6470 on 6March2009:

By the way, for all it's worth, I don't think we are headed into the depths of 1929....unless:

  -  the Saudi Arabian (King Abdullah to the left) Kingdom falls into total chaos for the price of oil or
  -  Peak Oil strikes, suddenly sending petroleum rocketing past $150/barrel, staying there for a few years, or
  -  Global Warming catalyzes The Venus Syndrome (then, who cares about depression)
  -  Iran decimates Israel (the odds are higher, though, for Israel to strategically bomb nuke targets in Iran, which might improve the world economy) or
  -  Greece, Italy, Spain, Portugal and Ireland all default in the same month or
  -  any Republican is elected President of the USA next year (just joking) or

  -  a 7.5 earthquake destroys the Indian Point (nuclear) Energy Center (it does sit on an earthquake fault, and like Fukushima, is right at the coastline), with the fallout wiping out the population of Manhattan (38 miles away) or...

...meaning, perhaps, a double dip, but not much more, for what are the odds of any of the above actually happening?

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Hurricane Hillary very suddenly became a 130 MPH Category 4 storm, and will look ominous for a few days, but, as I indicated yesterday, should not make any landfall, will move further west, and, in a few days , encounter cooler waters, and not get close to Hawaii.


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