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The Democrats' Bane

Burning Giraffe

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The Democrats are about to experience unprecedented embarrassment, humiliation, and shame in the coming months, as the stock market and economy implode. The fact is, the United States government blew through over one trillion dollars in an irresponsible attempt to sustain state and federal bureaucratic growth. They bet that this recession was a joke, that the private sector would essentially recover on its own and that the government could simply cash in on the public panic. They were wrong; or, at least, it appears that way.

Paul Farrell, of MarketWatch, is predicting an imminent economic crash and the unnerving last gasps of the worlds capitalist engine. Frankly, I think this is all a mild overreaction to the coming disaster. I remain confidant that people from California to Berlin will overtake their governments and save themselves from one final attempt at global government and the solidification of centralized corporatist take over of the global economy.

Earlier economist Gary Shilling said price-to-earnings ratios are at a "nosebleed 22.5 level." The Dow was around 11,000. Money manager Jeremy Grantham recently said the market's overvalued 40%. That could mean a collapse to 6,600. Last week in Reuters' "Markets Could Be Derailed Again," George Soros echoed a "game over" warning with a "stark warning ... that the financial world is on the wrong track and that we may be hurtling towards an even bigger boom and bust than in the credit crisis."

Now Dow Theory's Richard Russell is warning the public of an imminent crash: "Sell ... get liquid ... by the end of this year they won't recognize the country."

A bigger meltdown than the credit crisis? Yes, Bush's team drove America into a ditch. But now Obama and his money men, Summers, Geithner, Bernanke, are digging the hole deeper. Soros says we have not learned "the lessons that markets are inherently unstable." As a result, "the success in bailing out the system on the previous occasion led to a super-bubble." Now "we are facing a yet larger bubble." Worse than 2008?

Absolutely.

The most frightening reason for our economic woes has nothing to do with big corporations or big government, with Wall Street or the Federal Reserve. The real reason is our fault, our problem, our bad. As most students of economics know, the health or illness of any economy is most easily predicted by its productivity and the world is simply becoming less productive. We've borrowed and borrowed and invested like mad, but because we are not capitalizing on our investments and because we are not increasing productivity at nearly the same rate that we are borrowing money from each other, the worlds' population has created a staggeringly nasty bubble of debt.

The OECD(Organization for Economic Cooperation and Development) laid out in 2009, a serious reminder that has gone ignored by nearly every government in the industrialized world.

Discussions about the current crisis often present events in a sequence, such as that the US sub-prime crisis in August 2007 triggered a major inter-bank credit crisis, which transformed itself into a general credit crisis, the latter having an impact on the real economy and overall business and consumer confidence. However, some commentators have made reference to other explanations, more linked to the evolution of economic fundamentals. Therefore it is interesting to investigate what was actually happening to some data concerning the real sector and especially productivity trends in the major OECD member economies before the 2008 financial crisis. An issue with productivity data, notably multi-factor productivity (MFP) which is a measure of technical progress, is that the data are available with some delay (typically 1-2 year lags). Nevertheless the statistics presented below make it clear that labour productivity growth was already slowing down well before the crisis. In particular, the Construction sector in the US, which in turn can be linked to the loose credit arrangements underpinning this sector, had displayed dismal and worsening productivity performances since 2002.

If this sparks any curiosity within you, I'd encourage you to click on the OECD link and read the rest of what they have to say and demonstrate.

The world is heading toward a crash. Yes, we can blame our governments, but in the end, this is our fault. We took ourselves out of the game and made others responsible for our finances. Now we are going to experience the nasty consequences of those lazy choices.

The Democrats that have been promising salvation and this President who promised us that his election would be the day that the world took a turn for the better, are going to flounder. Will their embarrassment be so severe that they refuse to go out peacefully? We shall see.
 

donsutherland1

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From the article you cited:

More proof: Earlier economist Gary Shilling said price-to-earnings ratios are at a "nosebleed 22.5 level." The Dow was around 11,000. Money manager Jeremy Grantham recently said the market's overvalued 40%. That could mean a collapse to 6,600. Last week in Reuters' "Markets Could Be Derailed Again," George Soros echoed a "game over" warning with a "stark warning ... that the financial world is on the wrong track and that we may be hurtling towards an even bigger boom and bust than in the credit crisis."

Now Dow Theory's Richard Russell is warning the public of an imminent crash: "Sell ... get liquid ... by the end of this year they won't recognize the country."

Several quick points:

1) This doom-and-gloom forecast that "by the end of this year" the American public "won't recognize the country" is absurd hyperbole.

2) While there may be more downside risk than upside risk in terms of market valuations e.g., analysis of historical data from past recessions and assumptions about near-term economic developments (including headwinds/risks), would place the S&P 500 around 1075 +/- 100 points at year end.

3) A crash constitutes at least a 20% decline in a short period of time (one or a few days). Unless Europe's debt challenges get out of hand, China's possible real estate bubble bursts with China dramatically scaling back its purchases of U.S. and European debt, or full-fledged wars break out in the Middle East (with Iranian retaliation against the Persian Gulf's oil infrastructure) or on the Korean Peninsula, a crash is probably not likely.

Could one see the S&P 500 fall to around 850 or below? There are some historic cases that would imply such a move. The most likely scenario for such an outcome would be a double dip recession ala 1980's recession being followed by the 1981-82 recession.

All said, just as some arguably seek headlines with predictions for excessive stock market increases, others do the same on the opposite side. IMO, the market will probably finish pretty close to what the historical figures suggest (possibly with the S&P 500 finishing 2010 within 5% of 1075 figure).

I haven't read Gary Shilling's comments, but if past commentary is relevant, I believe he is referring to market valuations against 10-year inflation-adjusted earnings. The mean figure has been just under 16.5, so against that measure, stocks would be somewhat overvalued. But even the historic mean would put the S&P 500 just above 900. In the meantime, earnings will likely continue to rise through the rest of this year, so the figure at the historic mean PE-10 ratio will likely be somewhat higher than it is now.

Finally, you stated:

They bet that this recession was a joke, that the private sector would essentially recover on its own and that the government could simply cash in on the public panic.

I am not aware of any political leaders in any party who suggested that the recession was a "joke" once the financial crisis hit in full fury late summer/early fall 2008. Furthermore, precisely because many political leaders understood that the private sector could not recover on its own and, therefore, "doing nothing" was not a viable option, both the $700 billion TARP and $787 billion fiscal stimulus measures were adopted, the former aimed at ending a panic/preventing a systemic financial system collapse (the financial system collapse was averted) and the latter aimed at shoring up aggregate demand (the IMF estimates that the fiscal stimulus added 1% to real GDP for 2009).
 
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Aunt Spiker

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In the words of Hoggle "Now, don't try to embarrass me, I've got no pride." . .. so they'd say :)
 
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