Christmas Shopping Can't Turn
Economic Slide
The holiday shopping season is off to a rocky start. This will have a
trickle-down effect from retailers to wholesalers to manufacturers in the
coming months as retailer profits weaken and shelf stock stagnates. But what about the stock
markets?
The markets used to reflect the state of the economy. Now they merely reflect the debt-driving
support coming from Washington politics. This is a recipe for disaster.
Fortunately for Main Street America, the average citizen has abandoned the markets following
the 2007-2008 meltdown. Trading volumes in the market are down to less than half the volumes
recorded prior to the meltdown. The increased support ($85 billion per month) coming from the
printing press of the Federal Reserve, is the main driving force in the market surge today.
There are some secondary factors as well, like the 'margin debt cycle'. Right now, investors in
the market are really playing with other people's money and futures to the sum of $401 billion.
This is, literally, 'hot money' in the market. It can come out more quickly than it went in
which makes the average investor even more at risk than in previous eras.
David McAlvany, CEO of McAlvany Financial Group, has charted the markets' 170% rise from
the March 2009 lows. "If you have a gain, take it now," he warns. "While the borrowing to invest
may make the market seem like an absolutely sure bet in upside terms, another way of looking at
the situation is we have $400 billion that can be removed very quickly and that is enough to
precipitate a major decline, up to 40% worth of value." (1)
McAlvany has another beef with the market value. "Aggressive inside trading that is a conflict
between corporate executives selling their personal holdings and the companies buying back
those shares to boost earnings (per share) and manipulate those numbers to essentially beat the
highly-anticipated 'Wall Street expectations is not truly ethical.'"
The last worry that McAlvany noted is a factor that Rant has long promoted--over-valuation of
stocks. "There are only two times in the last 100 years when the market has been so over-valued.
Those occurred in 1929 and 1999. Both times there were big crashes behind the over-valuation."
The only difference is the active role taken by the Federal Reserve in this market. Without Fed
support the market would be vastly lower than it is now. There would be much higher volatility
risk in the markets. Perversely, the worse the economic picture is for Main Street the better the
market will do because of Fed policy. This is the disconnect that makes reliance on the market
numbers so unreliable as a gauge of the economy.
When the Fed finally has to end its printing press run, the removed support will create a bubble
of unprecedented magnitude.
McAlvany's position received support from Marc Faber, publisher of the Gloom Boom and
Doom Report. "We [America} are again in a massive financial bubble in bonds, equities and
other asset prices that have gone up dramatically. We are in a gigantic speculative bubble."(2)
Faber sees little value in stocks. "The rise in price does not mean the stock has good value. You
have to be very careful in this kind of exponentially rising market."
Still Faber remains on the side of rising market values. "As long as the Fed keeps printing we can
add another 20% to the market price. Still, if you are a long-term investor I think the future will
be very disappointing."
The market expects no end to the bull run as long as the Fed supports the push with its printing
press. In fact the very weakness of the economic recovery is proving to be a boon, not the drag it
should be.
Take ConocoPhillips, the largest U.S. independent and natural gas producer. In three of the last
four years CP has cut its workforce. The cuts equaled a 15% increase in profits. But the question
lingers about where the customers to drive those increasing profits will come from if fewer and
fewer people are working.
Iconic Walt Disney has fired hundreds of workers and closed offices under the directorship of
CEO Robert Iger while increasing profits by 162% from 2005 through 2012. But what is the
final price going to be if the average American family cannot afford to support the Disney
product because of part-time or non-existent jobs?
Americans should be leery of the market price when the value is not there. They will be more
and more conscious of the value factor as time passes as we are seeing with the poor Black
Friday numbers. At the point the consuming majority determines price does not match value, the
dollar will collapse. Shortly thereafter the political system will collapse.
The death knell is being hastened by the Fed activity and the politics of no shame in Washington.
The only real speculation left in financial circles will be whether or not the markets drop below
the lows hit in March 2009 and challenge the devastating lows last seen in 1933.
"I have sworn on the altar of God eternal hostility to every form of tyranny over the mind of
man."--Thomas Jefferson
(1)--Newsmax, 11-26, 2013, "Stocks Can Plummet Up to 40%"
(2)--CNBC, 12-1-2013, "America is Gigantic Speculative Bubble"
Also used for facts background was Black Friday economic reporting by Commerce Department,
12-2-2013 and for opinion Moneynews report 12-2-2013, "Bull Market Shows No Sign of Death
With Support From Yellen"