How Bad Can It Get

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How Bad Can It Get? by David Stanowski

11 October 2008

91% of the American public are not satisfied with the way things are going,at this time, according to a Gallup poll. In fact, people are more dissatisfiedthan at any other time in the history of the poll. Why now?

After many years of denial about our festering political and financial

problems, when the credit markets started to melt down, the public finallynoticed that something is terribly wrong. As long as easy credit wasavailable to fund ever increasing binges of consumption, most didn't care!Partisans make the claim that this all happened over "the last eight years";i.e. it's all George Bush's fault, but anyone who has studied the historicaldata knows it began long before that.

Many measures of household financial strength, as well as real householdincome peaked between 1965 and 1970, and have been declining eversince. One of the key reasons for the present crisis was Nixon's decision tostop converting the U.S. Dollar into gold in 1971. This opened the door to

the unprecedented creation of credit over the last two decades.

Most of the media are blaming the current financial problems on "WallStreet greed"; but that is only part of the story. It was the collapse of theresidential real estate bubble that set off the avalanche. Wall Street playeda roll in this by inventing ways to repackage and sell off mortgages, butthey weren't building, financing, and selling houses.



The fundamental cause of this crisis is the Federal Reserve System, andthe fractional reserve lending that it facilitates at commercial banks, whichplaces little limitation on credit creation without the discipline of gold.The real estate industry has been "giving money to" politicians for decadesto get more and more credit pumped into their industry through a variety of

corrupt schemes.

Wall Street certainly played a big role in the current troubles, but the worstoffenders, Congress and the real estate industry, have been able to pointthe finger at George Bush. His administration has done a pitiful job ofdealing with the crisis, but they are hardly the ones that caused it.

The Conventional Wisdom is that the government must "do something",but almost any interference in the markets, as the private sector tries tosort out this mess, will make the losses deeper, and force the resolution totake longer.

Now is one of those times when political analysis must play a prominentrole in how investments are selected. Those who let wishful thinking andideology blind them to what is really going on, and what most likely willhappen, over the next few years, will suffer unnecessary losses!

The political rhetoric of the current presidential campaign makes it almostimpossible to deal with the real problems we face. Ron Paul is the onlynational politician who has demonstrated a grasp of the underlying causesof our current woes, and a clear idea of the constructive changes that arenecessary. He knows that the answer is to simply stop doing what we havebeen doing; borrowing and spending too much, and then let the markets dotheir thing to sort out this mess.

There are very, very few people who actually want to see John McCainbecome president. He has shown little evidence that he has anythingapproaching a coherent set of ideas and principles, and he would certainlybumble through any attempt to "solve this crisis". Most of his support isbased solely on the fact that, if he is elected, he would keep Obama out ofthe White House.

Those who are fully aware of Obama's past influences envision him turningAmerica into Cuba or North Korea, especially with the strong Democraticmajority that he will have in Congress. Whether we will see the Hammer &Sickle flag flying over an Obama White House, or not, one thing that isfairly certain is that we will have to endure a Second New Deal when hetakes office. This is a man with many government solutions in search ofreal or imagined problems. There isn't a free-market bone in his body.



By the time FDR took office, in 1933, the stock market had already hitbottom in July 1932. This meant that many of his True Believers hadalready lost all their money and assets. When Obama takes office, inJanuary 2009, many of his True Believers will still have something to lose,so they may lose faith when they realize that the Second New Deal will not

save their wealth.

The U.S. economy was ready to start a rebound in 1933, but the New Dealprograms kept taking resources from the private sector and killing off eachrecovery attempt, which dragged out the Depression for at least another 12years. A Second New Deal should have the same effect.

Obama's Second New Deal will probably feature draconian anti-free-marketpolicies, so investments must be positioned accordingly. In the New Deal,FDR declared a "bank holiday", and closed all the banks, and froze thedeposits. Eventually, he raised the top income tax rate to 91%, and

confiscated all the gold. Anyone who "illegally" retained their gold wassubject to a fine of $10,000 (about $200,000 in today's Dollars), and/or 10years in prison. How about that for an investment dilemma?

Investors have to be prepared for similar measures in any kind of SecondNew Deal including such things as currency controls; i.e. limitations ontransferring money out of the U.S. Those who have the means andinclination may even want to consider taking a long "vacation" in anothercountry if things get too repressive.

Be prepared!

Why aren't the multitude of bailout plans working?

Because wealth is being destroyed at a faster rate than the federalgovernment is creating new credit. They are trying to re-inflate theeconomy, by creating credit for banks and businesses; they are notactually printing money.

Here is just one example: The Bloomberg World Market Index made its highon 31 October 2007. From that point through 13 October 2008, this indexshows that there has been a loss of $26 TRILLION in stock markets aroundthe world; that's $26,000 Billion! $7 TRILLION of that loss is in the U.S.markets. About $2 TRILLION has been lost in U.S. retirement accounts.

Stock market action this week has pushed worldwide losses to well over$30 TRILLION! When you throw a $700 Billion bailout, i.e. 0.7$ TRILLION, ata $30+ TRILLION problem, it can disappear pretty fast!





However, the losses on stock markets are only part of the story. The U.S.residential real estate market has lost at least $2-3 TRILLION since its topin 2005, the commercial real estate market is now following suit, the lossesin the domestic credit markets are running into the TRILLIONs, and lossesin commodities are catching up fast. And, don't forget the $500 TRILLION inoff-exchange derivatives that have to be marked to market, and eventuallyclosed out!

This is actually quite a lot of money that is going up in smoke!

How much further can the markets drop?

As of this week, the first year of this bear market in U.S. stocks hassurpassed the first year of the 1929 bear market! In that case, the stockmarket lost 92% of its value before it bottomed in 1932. Those who areexpecting some sort mild bear market and recession in the aftermath of themost overvalued stock and real estate markets in history, are notbeing realistic.



If this bear market merely equals what happened between 1929 and 1932,the DJIA could potentially drop to about 1,200! The Stock Market: theBeginning or the End?

In addition, this country currently has 18.6 million vacant houses, withanother one million under construction. This means that in a few monthsthere should be at least 20 million vacant houses, and this is withoutconsidering how the weak economy is bound to shrink the number of

households as people begin to move in with each other. There is a lot ofdownside potential in this market, too.

Several people have asked me whether I think we can recover from thisfinancial crisis.

There is no question that the markets will stop declining at some point, butrecovery usually implies a return to old highs, which is very doubtful for avery long time. Stock market cycles don't point to a bottom until about2012. Until then, the main trend should be down, punctuated by someexciting rallies.

The real estate market has many years of excesses to work off, so it is notunreasonable to look for a bottom in this market near 2012, too.

The economic health of the U.S. probably peaked between 1965 and 1970,and has been in decline ever since. There is little chance that we will everreturn to these levels without a massive structural change in our



government. A true Constitutional Republic with a small federalgovernment would portend great things for the future, but anything short ofsome sort of revolution is unlikely to cause this to happen.

It should also be noted that our economy peaked in the days of cheap and

abundant oil. With the probability that we have reached the point whencheap and abundant oil is a thing of the past, a strong economic reboundis even more unlikely.

Finally, when the economy was ready to recover in the 1930s, America hadthe strongest industrial infrastructure in the world, and it was ready to toolup and rebuild. Today, much of our manufacturing capacity is gone. Wehave mis-allocated our capital into real estate for years, and all we have toshow for it is millions of vacant houses. How can we possibly use them torebuild our economy?

John McCain doesn't posses the common sense to trust the free markets,so any kind of last minute shift that puts him in the White House would notbe a sign that we were in for a quick rebound in the economy.

Of course, a President Obama will have plenty of ideas on how thegovernment can fix things, so this will delay any real rebound for years.The Japanese did not want to let the markets sort out their financialproblems, when they started their decline in 1989, and their economy andmarkets have been struggling for 19 years! The most likely outcome, with aPresident who has a government program for every problem, is many yearsof little or no growth, too.

Many people will label this conclusion as pessimist or negative, but whatgood does it do to look at the world through rose-colored glasses when itcreates a distorted image? In order to protect and grow your money, youhave to understand what is most likely to happen.

If this scenario plays out as expected, the biggest losers in the comingyears will be those who have most of their wealth in stocks and real estate,and who don't move into safer investments. The Conventional Wisdom isthat the buy-and-hold approach always works in these markets, so just rideit out.

Many are saying that if you just hold on for a few years, all of your losseswill be recouped, and you'll be making money once again. Of course, whatthey don't tell you is that if you bought the DJIA on 03 September 1929 at381.17, it didn't reach this level again until 23 November 1954; a merequarter century later! And that understates the recovery time involved,because it ignores the interest that could have been earned over this 25-year period, AND the fact that many companies in the DJIA went bankrupt



and were dropped from the average.

Real estate investors may face a similar situation, as they wait many yearsfor a declining economy to adsorb the overpriced and impractical homesthat were built during the bubble.

Everything in this article may be totally wrong, but what will happen to yourinvestments if it isn't?

Is Your Money Safe?

Do you think that we will see thesekinds of references in the mainstream

media after Obama is elected?



DISCLAIMER:

THIS CONTENT IS FOR INFORMATIONAL and

EDUCATIONAL PURPOSES ONLY, and is NOT

INTENDED AS INVESTMENT ADVICE! The information contained in this article reflects

an analysis of market trends and conditions, and

nothing contained in this article, or on this

website should be interpreted as, or deemed to be,

a recommendation to any investor, or category of

investors to purchase, sell or hold any security.

Any investment decisions must in all cases be

made by the reader, or by his or her investment

adviser. Nothing contained on this website is

intended as a solicitation for business of any kind,

or for investment.



As a matter of law, INVESTMENT ADVICE may

only emanate from members of the government-

created monopoly of federally-registered brokers

and investment advisers. The author falls into

neither category.

In contrast, what you just read is simply

INFORMATION, that was obtained from what

are believed to be reliable sources. It is ALWAYS

wise and prudent to undertake investment

positions only after considering a wide variety of

information and opinions, on the subject, and

after consulting with those who are authorized to

give INVESTMENT ADVICE, if so desired.

Although consultation with "experts" may be

helpful, everyone should do their own DUE

DILIGENCE regarding ANYTHING that mayaffect their financial well being.

The author is an active participant in the

markets, and may trade the securities that are

discussed in this article, both before and after

publication, and/or may have a long-term position

in such securities. In other words, the author

usually has a financial interest in the subject of

the articles on this web site.

For more information on the Economy:

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David Stanowski lives in Galveston, and is a financial analyst, investor, thepublisher of TheFinancialHelpCenter.com, and the Founder of theGalveston Founders Party.

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How Bad Can It Get