The markets are dirty; always have been, always will be. Some issues being discussed in the October 2, Vice President debate I have to take at face value because I am not an expert in those fields. When Governor Palin promises to “get rid of greed and corruption on Wall Street,” I immediately recognize it as a boast like unto "a chicken in every pot and a car in every garage." (1928 Presidential Campaign Slogan from Herbert Hoover). In Palin's promise to fix is the acknowledgement and possible validation of my opening statement.

There are a lot of lies being told and impossible promises being made by both candidates, most of which I can only guess at. But the one promise I am absolutely certain is impossible to keep is the one Palin just reiterated "to not allow the greed and corruption on Wall Street anymore." After that, I laughed out loud and turned off the TV. A dubious proposal to rid Wall Street of "greed and corruption" won't lead to any real economic results - it's the opposite of what we need.

A quote from the movie Wall Street comes to mind, "Well ladies and gentlemen, we're not here to indulge in fantasy but in political and economic reality... Greed is good!"

How the fact that wall street is dirty, politicians are dirty and the people are dirty impacts finances can be seen in the glaring lack of trust (aka confidence) that causes financial panics. It is the root of fear. It is behavioral finance 101 (criminal vs. civilized panic). The fact of the matter is that from a global perspective, stock acquisition has been rising - but not in the U.S. Per the Distribution of Wealth in America (2007), 85% of public shares of corporations are held by 11% of the population (the world distrubution has an even greater disparity). As those people lose confidence in our ability to be honest and keep order, their interest out-migrates. All people prefer honesty and order, and right now it appears that the LSE is place to trade.

The economic news over 6th Nov, 2008 has been just horrible:

• After the close yesterday, Cisco (CSCO) said orders in October fell off a cliff - down 9% from the year ago period - and forecast a 5-10% drop in revenues for the current quarter.
• Retailers this morning reported one of the ugliest months of all time. Here are October same store sales for some select retailers:
• Neiman Marcus -26.8%
• Abercrombie & Fitch -20%
• Saks -16.6%
• Gap -16%
• Nordstrom -15.7%
• JC Penny -13%
• Kohl’s -9%
• Macy’s -6.3%
• Target -4.8%
• Casino operator Las Vegas Sands (LVS) said that they will be in violation of their debt covenants at the end of the 4th quarter which “raises substantial doubt about the company’s ability to continue as a going concern”.
• General Motors North American President Tony Clarke speaking to auto parts suppliers in Detroit last night said the next 100 days will be critical for the auto industry.

US Government Bank For Consumers: A government operated and funded bank that would never fail because it has the unlimited funds of the US government's ability to print money; this is what is needed. Such a bank can be directed by government officials to make loans even when private banks refuse. Depositors would not have to worry about the bank going bankrupt.

What is needed - and what would arrest the slide in U.S. housing prices - is a renewed general confidence in protective regulations, and tax incentives for investors to buy troubled assets and to make equity investments in banks.

Understanding just what brought the economies of the United States, as well as the rest of the world, to the brink of depression is important. But even more important is the realization that the regulations that could have prevented this have been systematically dismantled, such that none of the regulatory bodies charged with safeguarding the public, the capital markets or the systems and institutions we rely on were adequately empowered, properly managed or diligent enough to do their jobs.

Just this month, the U.S. Chamber of Commerce’s Center for Capital Markets report highlighted a number of places the recently much-maligned U.S. Securities and Exchange Commission (SEC) came up short during the crisis.

While the report is enlightening in detailing problems and in proposing practical solutions to internal operations and procedures, the study doesn’t go far enough. An extreme makeover of our economic house requires a brand new regulatory foundation.

As a 30-year veteran of Wall Street, having owned an exchange seat and a broker/dealer and having run my own hedge funds, I know a great deal about regulation; including what works and what doesn’t. Trading derivatives, stocks, futures, bonds and pooled-securities also gives me a unique perspective. The good folks follow the path, but I’ve seen plenty who look at the path and look for ways around it. Why? Because they know "thar’s gold in them thar hills."

And, in the words of Pink Floyd: "We’ve got to keep the loonies on the path."

Presidents, Prime Ministers and daily news anchors declare our situation "the worst economic crisis since the Great Depression." People believe it. Companies layoff millions.

The big bailouts and stimulus will have a "turbo lag" that will eventually get the economy reving up. Obama will force the economy to heat up with increased money supply (inflation). Obama will run his second election campaign on his economic success story and continue pumping up the economy in the second term. The economic crisis will not be forgotten and Social Security/Medicare will be the next crisis. The government will be forced to further devalue the dollar to bailout Social Security and Medicare. So, expect another bubble to get started in a few years with a Dow peak even higher than the last and expect it to crash just as hard (in the year 2030) unless the Fed gets more powerful tools to smooth out the bubbles.

The Baby Boomers have already bought their homes, cars, recreational vehicles, appliances and vacation homes. The spending spree is over for at least five years until the smaller "Echo Boom" begins to bid up prices. (See charts in Harry S. Dent's book, The Great Depression Ahead.)

We now know that some stimulus works because "cash for clunkers" and "home buyer tax credits" stimulated increased buying of cars and houses. This showed that it is possible to avoid another depression.

There may be a 30-40 year cylce on Wall Street as a result of so many money managers silmustaneously losing their jobs in 1930. After that the survivors of the crash passed the torch, then the next money managers had to learn the same lessons again the hard way in 1966. The top money managers of today are learning the hard lesson all over again. One effort to prevent this cycle will be the use of money managers that never die or retire or forget the past lessons. Look for the adoption of virtual money managers, the computer versions of Warren Buffet and Peter Lynch. Virtual managers will then be adopted by all the big corporations and the next stock market bubble will be the biggest and final top at the time when computers are smarter than humans and Kurzweil's technological singularity occurs. Since the human population will then be in decline the stock market will crash permanently to zero (between the year 2040 and 2050).

How much have the bailouts cost? Counting the money that has either been spent or promised in the form of loan guarantees, the figure now approaches a hard-to-fathom $8.5 trillion. For perspective, that’s more than the government spent, in inflation-adjusted dollars, on the Louisiana Purchase, the entire New Deal, and the Vietnam and Korean wars—combined. The bailouts have been coming at such a feverish pace that it’s hard to keep up, but they include everything from outright purchases of $500 billion in mortgage-backed securities to guarantees on $388 billion of Citigroup and General Electric debt. Just one of the bailouts, of insurer AIG, cost $150 billion.

Where does the money come from? Technically, it comes from the federal Treasury. But there’s a problem. Even before the current financial crisis erupted, the U.S. was spending hundreds of billions more than it was collecting, leaving a budget deficit of nearly $400 billion dollars. So to pay for all the additional financial commitments the government has taken on in recent months, the Treasury has had to borrow hundreds of billions more. To do that, it has been selling bonds on the global bond market.

How exactly does that work? Once a week, the Treasury Department, working through a syndicate of banks, conducts auctions for bonds—which come due in anywhere from 30 days to 30 years. The Treasury deposits the proceeds of the bond sales to its account at the Federal Reserve Bank of New York. Then the government turns around and lends the bond revenues to Citigroup, AIG, and the other bailout recipients. It’s this process that people refer to when they say the Treasury is “printing money,’’ because the funds are essentially created out of nothing. Everything is done electronically, however; no physical bonds or cash actually exchange hands.

How much have we borrowed? A staggering amount. The national debt currently stands at $10.6 trillion and is rising fast, since the Treasury is currently borrowing roughly $550 billion per quarter. About half the debt is money the government owes to itself—some of the biggest buyers of Treasury bonds are the Social Security Trust Fund and other entitlement programs. The remainder—the so-called public debt—is owed to individuals, institutions, and foreign governments. The federal debt is now so large that taxpayers must pay $412 billion in interest every year—the third largest expense in the government’s $3 trillion operating budget.

Can we afford that? Yes, at least in the short term. The national public debt is about 39 percent of the annual U.S. output of goods and services, or gross domestic product. That sounds like a lot, and it is. But it’s actually in line with the debt-to-GDP ratio of the past two decades, and far less than during World War II, when the debt-to-GDP ratio topped 100 percent.

Who’s lending us all this money? To a large extent, the rest of the world—especially China, which as of September owned $585 billion in Treasury bonds. The next largest foreign creditors are Japan, with holdings of $573 billion, and Great Britain, with $338 billion. Foreign oil-producing countries own $182 billion of Treasury debt. These countries have one thing in common: They’re major exporters to the U.S., which gives them a lot of U.S. currency that they want to invest. They invest much of those reserves in Treasury bonds.

What if China says ‘no more’? It might cause a momentary shock, but other countries would likely pick up the slack—thanks, ironically, to the financial crisis. With loans going into default at a record pace, bond buyers trust only the most creditworthy borrowers. The U.S. has never defaulted on its bonds, making it the world’s debtor of choice. “The Treasury, at this point, is viewed as the safest harbor in the world,” says University of Pennsylvania economist Marshall Blume.

What is the effect of all this borrowing? It could enable the U.S. to spend its way out of the recession. If the U.S. invests its money wisely—and that’s a big if—then all that borrowing could, as Bill Gates said recently, “bring us out of the downturn better off than when we went in.” Many experts say that investments in green technology, education, and infrastructure could lead to improved productivity and drive economic growth. But there is a serious downside: Every dollar invested in Treasury bonds is one less dollar of investment available to the private sector. And the private sector has been the source of most of the innovation that drives profit growth and creates jobs.

Are there other risks? Yes. All that borrowing by the government, coupled with all the loans that the U.S., in turn, is extending to corporations and consumers, dramatically increases the world’s supply of dollars. With so much currency in circulation, there’s the risk of inflation, which is what happens when too much money chases too few goods. Prices rise, workers demand higher pay to keep up, and a hard-to-control inflationary spiral begins. But that’s a worry for another day. “There are extreme circumstances when a larger national debt is accepted as the lesser of two evils,” says Robert Barbera, chief economist at the Investment Technology Group. Most economists agree that this is one of those times.

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China in the catbird seat Now that China is America’s largest creditor, many observers worry that it could soon effectively have a veto over U.S. policies. Some analysts have noted, for example, that the U.S.’s ability to get tough with Iran is hampered by the fact that Iran is China’s ally; if the U.S. goes too far, according to this theory, China could punish the U.S. by halting its bond purchases. But most experts say such a move could hurt China as much as it would hurt the U.S. China’s economy depends heavily on exports to the U.S., which buys $321 billion in Chinese goods every year. By disrupting America’s economy, China would only be crippling its own. “It’s not in China’s interest to create financial instability,” says Bank of America market strategist Gerald Lucas. Indeed, the precarious world economy gives both countries a strong incentive to work together. “China and the U.S. still need each other,” writes Washington Post columnist David Ignatius, “perhaps now more than ever.”

Bailouts and stimulus are not the cause of the stock market and housing market crash, they are the medicine applied to the wound, which eventually will heal.

The idea that the Global Crisis is financial in origin is a catastrophic misunderstanding that is continuing to prevent the creation of a solution. Wall Street, global media and governments are filled with fools who mistakenly think that sub-prime paper was the origin of the problem. These people have a fundamentally flawed view of reality. They fail to understand that the growth of the industrial world over the last 100 years was only possible because of cheap energy from oil, not because of "brilliant" financial geniuses and "talented" leaders. The US property bubble and it's collapse was entirely due to forces driven by energy and the complete failure of governments to use the energy from oil to build an energy-sustainable world before Peak Oil caused the current catastrophic crash in global energy markets that is forcing a Power-Down from the unsustainable days of essentially free energy from oil. The longer the world stumbles along thinking that the problem is with financial markets, the deeper the energy crisis will become and the harder it will be to start to re-build fundamental infrastructure that could eventually bring back the possibility of new growth. The world will have to learn how to adapt to the new paradigm of NO GROWTH because global oil production will no longer support it. Massive debt taken on by the US and other nations during the current crisis will likely cause the collapse of many nations, including perhaps the US, unless the economists start to understand that the economy is supported by energy, not the other way around.^[1]

The bear is definitely growling today, and everybody knows why. It’s because according to the Obama Administration, the automakers are suffering not only from a lack of cash right now, but also a lack of working ideas to fix that problem. And he’s not willing to help them out unless they’re first willing to meet him halfway.

While the majority of the American public might be less than thrilled about giving any money to any other major institutions - that would include the Big Three, financial institutions, and probably the U.S. postal service which is now claiming that it too, is bankrupt - the markets still aren’t happy about the news.

And let’s face it… They have good reason not to. Because if General Motors (NYSE: GM) and Chrysler fail, then that’s a high number of lost jobs… lost jobs on top of the already high unemployment rate, which of course, is never a good thing.

But my guess is that President Obama isn’t going to let that happen. He’s just playing hardball right now, to his credit. I don’t like the idea of the government lending money to companies like it’s the national banking headquarters, but if it’s going to, then it should do so on terms that are more favorable towards the country, it’s people and it’s financial future.

So if I’m right and Obama does eventually give the Big Three what they want, does that mean stocks will jump back into their bull rally again within the next few days? That this is just an ordinary pullback on an otherwise reliable extension upwards? Or were all the critics right and the rally we’ve seen was nothing more than a dead cat bounce?

Nobody can predict the future of course, but here’s Jim Stanton’s take on what’s going on… Expect More Ups And Downs This Week

“The S&P gapped higher on last Monday’s open and continued to move higher after taking out the highs of the first 90-minutes. By the closing bell on Thursday, it had rallied over 8%, though Friday involved some profit taking.

“Last week took the indexes up to important levels. As I suspected it might, the Nasdaq 100 tested its January high by getting within 6-points of it. For their parts, the Dow and S&P 500 closed on either side of their 50% retracement levels off their January highs.

“Longer term, the charts are what I call “out of sync”, which means that they are not tracing out similar patterns. The Dow and S&P 500 went low enough to set up longer-term buy signals, but the Nasdaq Composite and the smaller cap indexes didn’t appear to go low enough. The strongest index has been the Nasdaq 100, which never even traded below its November lows.

“Intermediate term, the trend is up and we’re going to play it that way unless some sell signals get triggered on the pullback. Short-Term Outlook

“The Obama administration and the auto makers could not come to an agreement over the weekend, which has pressured the global markets lower overnight. This may wake up the bears and we could get a decent pullback, which could retrace anywhere from 30% to 50% of the March rally.

The Markets are up yet again today, eradicating the losses 2009 dealt us so far. Automatically, that should be good news, right?

Not quite so fast though, according to many economists and market analysts, who are calling this a mere bear market rally. And DeAnne Julius, chairman of London think tank Chatham House is lacking in any fuzzy feelings as well. She says that there’s a decent chance (40%) that the economic downturn will last a total of 5 years.

Speaking at a G20 breakfast seminar organized by BBC News, the premise of her speech - that recovery depended on plans implanted to restore banking lending - wasn’t anything we haven’t heard before. It was just her conclusion that was a little bit alarming.

If you’re inclined towards positive thinking, then you’ll be happy to know that few other officials are predicting any such extended recession. The International Monetary Fund has published its belief that the global economy will shrink further this year by 0.5% or 1%, but will then grow between 1.5% and 2% in 2010.

And critics of Julius’ comments point out further that she is putting too much expectation on the upcoming G20 Summit. Jim O’Neill, the chief economist of Goldman Sachs, said that whatever decisions were made at the meetings next month would not be enough to affect economies for such a lasting way, especially since budget decisions would remain under control of national governments and central banks.

The Great Depression was not the first and only depression in the United States. A number of really BAD depressions occurred in the century prior to it. The Great Depression was so "great" due to the massive attempts by FDR to spend our way to prosperity.

Had the government refused to raise taxes and massively increase spending and had they loosened up credit lending instead of tightening it via the newly formed Fed, the Great Depression would have been no more worse than its predecessors.

Similar arguments can be made for stagflation of the '70s and the current crisis. Long term prosperity will be realized by cutting taxes (freeing up more money for credit and investment) AND cutting government spending (and letting the free market decide what social programs and infrastructure need to be built).

Government intervention in the economy always delays the recovery and worsens economic crises.

A contrarion opinion: Conservatives have long said the "New Deal" didn't work and the US economy did not recover until WWII. This is revisionist history similar to saying the holocast never occurred. Let us look at a key statistic to decide whether the New Deal worked or not. Unemployment in 1929 was at 3% until the crash of 29. By 1933 unemployment had risen to 24%. As New Deal programs took hold this rise in unemployment was halted and reversed as unemployment dropped to 9% in 1941 before the US entry in WWII.